4QFY2013 Result Update | Telecom

April 25, 2013

Idea Cellular
Performance highlights
(` cr) - Consl Net revenue EBITDA EBITDA margin (%) PAT 4QFY13 6,061 1,673 27.6 308 3QFY13 5,579 1,473 26.4 229 % chg (qoq) 8.7 13.6 119bp 34.8 4QFY12 5,370 1,357 25.3 239 % chg (yoy) 12.9 23.3 233bp 29.0

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Telecom 38,386 11,092 0.7 124/71 301,329 10 19,407 5,916 IDEA.BO IDEA@IN

`116 -

Source: Company, Angel Research

For 4QFY2013, Idea Cellular (Idea) reported a strong set of results, beating our as well as market expectations on all fronts. The companys total network minutes grew considerably by 8.5% qoq, leading to a growth in network traffic to 143bn min. The average revenue per minute (ARPM) remained flat at `0.41 with non-voice revenues share inching up to 15.2% from 14.6% in 3QFY2013. Idea announced its maiden dividend of `0.3 per share (~9% pay-out), suggesting a strong cash generation outlook. We maintain our Neutral view on the stock. Quarterly highlights: For 4QFY2013, Idea reported a consolidated revenue of `6,061cr, up 8.7% qoq, on the back of a sharp qoq increase in minutes of usage (MOU) to 406min, up 5.7% qoq. The companys EBITDA margin increased by 119bp qoq to 27.6%. The EBITDA margin inch up was led by strong revenue growth along with almost flat network operating charges, qoq. The PAT came in at `308cr, up 35% qoq, led by strong operational performance and lower interest charges qoq at `224cr vs `242cr in 3QFY2013. Outlook and valuation: Ideas 4QFY2013 results underscore declining competitive intensity and low volume elasticity, which should support strong EBITDA growth for Indian wireless incumbents. Most operators, including Idea, have been rationalizing pre-paid tariffs as RPM and profitability improvement remains a key focus area across the industry. Going forward, we expect ARPMs to improve as Idea hikes tariff via reduction of promotional offers. This should offset the rising input and regulatory costs. With a hike in tariff rates expected going ahead, we have factored in a 12% yoy revenue growth for FY2014. We expect revenues to witness an 11.0% CAGR over FY2013-15. The capex guidance for FY2014 stands at `3,500cr. The consolidated net debt of Idea declined ~1% qoq to `11,092cr. Idea continues to have one of the strongest balance sheets in the sector with net debt/EBITDA of ~1.9x and net debt/equity of ~0.8x at the consolidated level but the company still remains surrounded by regulatory uncertainties with regards one-time spectrum fee, 3G roaming pacts cancellations and spectrum refarming. Currently, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 45.9 5.7 16.3 32.1

Abs. (%) Sensex Idea

3m

1yr

3yr 9.7 77.5

(3.5) 13.2 2.5 45.1

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenue % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2011 15,503 24.6 864 (9.4) 24.5 2.7 42.7 3.1 7.0 5.7 3.1 12.9 FY2012 19,541 26.0 723 (16.3) 26.1 2.2 53.1 2.9 5.5 8.3 2.5 9.7 FY2013E 22,458 14.9 1,011 39.8 26.7 3.1 37.9 2.7 7.0 8.7 2.2 8.4 FY2014E 25,122 11.9 1,310 29.5 27.0 4.0 29.3 2.4 8.3 9.7 2.0 7.4 FY2015E 27,663 10.1 1,571 20.0 27.2 4.8 24.4 2.2 9.1 10.4 1.7 6.3

Ankita Somani
+91 22 3935 7800 Ext: 6819 ankita.somani@angelbroking.com

Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Idea Cellular | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 Financial performance (Consolidated, Indian GAAP)

(` cr) Net revenue Operating expenditure EBITDA Dep. and amortization EBIT Interest charges Other income PBT Income tax PAT Minority interest Adj. PAT EPS (`) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

4QFY13 6,061 4,388 1,673 909 764 224 539 231 308 308 0.9 27.6 12.6 5.1

3QFY13 5,579 4,105 1,473 884 590 242 348 120 229 229 0.7 26.4 10.6 4.1

% chg (qoq) 8.7 6.9 13.6 2.9 29.5 (7.1) 54.9 93.3 34.8 34.8 34.8 119bp 203bp 99bp

4QFY12 5,370 4,013 1,357 784 573 227 345 106 239 239 0.7 25.3 10.7 4.5

% chg (yoy) 12.9 9.4 23.3 15.9 33.4 (1.3) 56.2 117.6 29.0 29.0 29.0 233bp 194bp 63bp

FY2013 22,458 16,453 6,005 3,478 2,527 949 1,577 566 1,011 1,011 3.1 26.7 11.3 4.5

FY2012 19,541 14,449 5,093 2,981 2,111 1,056 1,055 332 723 723 2.2 26.1 10.8 3.7

% chg( yoy) 14.9 13.9 17.9 16.7 19.7 (10.1) 49.4 70.5 39.8 39.8 39.8 68bp 45bp 80bp

Exhibit 2: 4QFY2013 KPI data for the mobility business

4QFY13 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) EoP EPM (`/min)
Source: Company, Angel Research

4QFY13E 0.41 386 159 120 0.11

Var. (%) (0.3) 5.2 4.8 1.1 2.8

3QFY13 0.41 384 158 114 0.11

% chg (qoq) 0.2 5.7 5.7 6.8 4.6

4QFY12 0.42 379 160 113 0.11

% chg (yoy) (2.4) 7.1 4.4 7.9 7.1

0.41 406 167 122 0.12

Exhibit 3: 4QFY2013 Actual vs Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 6,061 27.6 308

Estimate 5747 26.7 248

% Var. 5.5 85bp 24.2

Strong results
Ideas consolidated revenue came in at `6,061cr, up 8.7% qoq. The mobility segments revenue increased strongly by 8.7% qoq to `5,953cr, on the back of 8.5% qoq growth in network traffic to 143bn min. The MOU increased considerably by 5.7% qoq to 406min while ARPM remained almost flat at `0.412. While the challenges on voice ARPM continued, the share of VAS revenues increased to 15.2% from 14.6% in 3QFY2013. Ideas subscriber base increased by 6.8% qoq with the end of period (EoP) subscriber base standing at 122mn.

April 25, 2013

Idea Cellular | 4QFY2013 Result Update

Exhibit 4: Trend in MOU

425 400 2.7 7.0 5.7 9 6 3

(min)

375 350 325

1.4

(1.5) (6.9)

(5.3)

(3) (6) (9)

391

364

369

379

379

359

384

300

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 MOU (min)
Source: Company, Angel Research

qoq growth (%)

For Idea, 4QFY2013 saw the highest data adoption by its customers with a sequential quarter addition of 4.5mn data users, as the EoP base of data users grew to 26.2mn, now contributing 6.6% to service revenue. The data volume expanded by 13.8% to 11.4bn MB (10.0bn MB in 3QFY2013) and data realized rate improved by 9.5% to 33.9paise/MB in 4QFY2013 (31.0paise/MB in 3QFY2013). The active 3G subscriber base for the company stood at 5.1mn, leading to an overall 2G+3G data revenue growth of 24.6% on a sequential basis and data ARPU reaching `55.

Exhibit 5: Trend in ARPM

0.45 0.43 0.41 0.39 0.37 (2.5) 0.35 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 ARPM (`/min) qoq growth (%) 0.41 1.0 0.43 4.1 1.4 0.43 0.42 0.41 0.41 0.2 0.2 (0.5) (2.4) (2) (4) 0.41 0.41 2 0 4 6

(`/min)

406

Source: Company, Angel Research

April 25, 2013

(%)

(%)

0.0

Idea Cellular | 4QFY2013 Result Update

Exhibit 6: Trend in VAS share in mobility revenue

16 15 14
(%)

15.6 15.2 14.3 13.7 12.1 13.2 14.5 14.6

13 12 11

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 VAS share (%)
Source: Company, Angel Research

Thus, increase in MOU, stable ARPM and modest subscriber addition led to a 5.7% qoq increase in average revenue per user (ARPU) to `167. Data ARPU increased to `55 from `52 in 3QFY2013. The monthly churn declined to 4.3% from 6.9% in 3QFY2013, which is again coming back to comfort levels after last seven quarters. Decline in monthly churn represents rationality in promotions and discounts; lower churn level would play a significant role towards overall ARPM improvement.

Exhibit 7: Trend in ARPU

170 165 160 155 150 145 140 (0.6) (3.1) (2.5) 2.6 0.6 6.8 8 5.7 6 4 2 0

(` /month)

(2)

160

155

159

160

156

148

158

167

(5.1)

(4) (6)

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 ARPU (`/month) qoq growth (%)

Source: Company, Angel Research

EBITDA margin improves

For 4QFY2013, Ideas EBITDA margin increased by 119bp qoq to 27.6%. The EBITDA margin inch up was led by strong revenue growth along with almost flat network operating charges, qoq. During the quarter, the revenue from established service areas (ESA) stood at `5,327cr, up 8.0% qoq and revenue from new service areas (NSA) stood at `770cr, up 12.5% qoq. The EBITDA margin of ESA inched up by 100bp qoq to 31.4%. EBITDA losses of NSA decreased to `166cr from `179cr in 3QFY2013. EBITDA losses from the new circles would continue as the company indicated that near term EBITDA break-even in the new circles is not anticipated. In addition, EBITDA share from Indus increased to `169cr in 4QFY2013 from `156cr in 3QFY2013.
April 25, 2013

(%)

Idea Cellular | 4QFY2013 Result Update

Exhibit 8: Trend in EBITDA margin

50 40 30 20
(%)

45 29 25 30 29 26 31 30 27 30 29 26 31 30 28

10 0 (10) (20) (30) (40) Established service areas New service areas Indus Consolidated (26) (26) (27) (26) (22) 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

Source: Company, Angel Research

Exhibit 9: Opex breakup

100 80 60 25.3 15.8 4.7 13.7 23.4 20 17.0 0 4QFY12 1QFY13 2QFY13 3QFY13 SGA cost 4QFY13 EBITDA margin Access charges Network costs
Source: Company, Angel Research

26.1 16.0 5.0 10.9 24.4 17.6

26.8 14.2 5.2 10.6 25.3 17.9

26.4 14.4 4.9 10.6 25.5 18.3

27.6 14.3 4.9 11.9 23.6 17.8

(%)
40

License fee

Employee cost

Outlook and valuation

During 3QFY2013, Idea won back 1,800MHz spectrum in all its seven circles in the 2G auction conducted by the government in November 2012, for which licenses had been quashed by the Supreme Court. Idea has thus retained its pan-India presence. The bid price for the spectrum was `2,030cr and the allocated 5MHz spectrum is a liberalized spectrum contracted for a period of 20 years. Post the 2G auction, only four operators now have pan-India presence. Ideas 4QFY2013 results underscore declining competitive intensity and low volume elasticity which should support strong EBITDA growth for Indian wireless incumbents. Most operators, including Idea, have been rationalizing pre-paid tariffs as RPM and profitability improvement remains a key focus area across the industry. Going forward, we expect ARPMs to improve as Idea hikes tariff via reduction of promotional offers. This should offset the rising input and regulatory costs. With a hike in tariff rates expected going ahead, we have factored in a 12% yoy revenue growth for FY2014. We expect revenues to witness an 11.0% CAGR over FY2013-15.

April 25, 2013

Idea Cellular | 4QFY2013 Result Update

Idea incurred a capex of `1,328cr in 4QFY2013. The capex for FY2013 stood at ~`3,360cr vs a revised guidance of `3,000cr (excluding payment for spectrum). The capex guidance for FY2014 stands at `3,500cr. The consolidated net debt of Idea declined ~1% qoq to `11,092cr. Idea continues to have one of the strongest balance sheets in the sector with net debt/EBITDA of ~1.9x and net debt/equity of ~0.8x at the consolidated level but the company still remains surrounded by regulatory uncertainties with regards one-time spectrum fee, 3G roaming pacts cancellations and spectrum refarming. Currently, we maintain our Neutral rating on the stock.

Exhibit 10: Assumptions for KPIs

FY2012 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) EoP 0.42 374 158 112.7 FY2013 0.41 378 156 121.6 FY2014E 0.39 407 160 133.6 FY2015E 0.40 410 163 144.4 % CAGR (1.8) 4.1 2.2 9.0

Source: Company, Angel Research; Note: EoP refers to end of period.

Exhibit 11: One-year forward EV/EBITDA

109,000 96,000 83,000 70,000 57,000 44,000 31,000 18,000 5,000

EV (` cr)

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Apr-12

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

EV
Source: Company, Angel Research

14x

11x

8x

5x

Exhibit 12: Recommendation summary

Company Bharti Airtel Idea Cellular Reliance Communication Reco. Accumulate Neutral Neutral CMP (`) 305 116 96 Tgt. price (`) 325 Upside (%) 6.7 FY2015E P/BV (x) 1.9 2.2 0.5 FY2015E P/E (x) 19.4 24.4 14.9 FY2012-15E EPS CAGR (%) 11.8 29.5 17.4 FY2015E RoCE (%) 9.9 10.4 4.8 FY2015E RoE (%) 9.7 9.1 3.4

Source: Company, Angel Research

April 25, 2013

Aug-12

2x

Apr-13

Idea Cellular | 4QFY2013 Result Update

Company background
Idea Cellular (Idea), part of the Aditya Birla Group, is the third largest telecommunication service provider in India in terms of revenue. The company provides mobile services in all the 22 circles of the country and has 120mn subscribers. Idea had won 3G licenses in 11 out of the 22 circles in India and is currently providing 3G services in 20 circles (in seven circles by 3G roaming agreements). The company also holds a 16% stake in Indus Towers, which is a JV with Bharti Airtel, Vodafone and Idea.

Profit and loss account (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales Network operating expenditure % of net sales License and WPC charges % of net sales Roaming and access charges % of net sales Other expenses Total expenditure % of net sales EBITDA % of net sales Dep. and amortization EBIT % of net sales Interest expense Other income, net Profit before tax Provision for tax % of PBT PAT Share in earnings of associate Minority interest Profit after minority interest EPS (`) FY2011 15,503 4,013 25.9 1,773 11.4 2,475 16.0 3,451 11,713 75.5 3,791 24.5 2,432 1,359 8.8 396 963 98 10.2 864 864 2.7 FY2012 19,541 4,669 23.9 2,323 11.9 3,280 16.8 4,176 14,449 73.9 5,093 26.1 2,981 2,111 10.8 1,056 1,055 332 31.5 723 723 2.2 FY2013E 22,458 5,536 24.7 2,475 11.0 4,015 17.9 4,427 16,453 73.3 6,005 26.7 3,478 2,527 11.3 949 1,577 566 35.9 1,011 1,011 3.1 FY2014E 25,122 6,210 24.7 2,755 11.0 4,508 17.9 4,863 18,336 73.0 6,786 27.0 3,882 2,905 11.6 921 1,984 675 34.0 1,310 1,310 4.0 FY2015E 27,663 6,840 24.7 3,034 11.0 4,965 17.9 5,310 20,149 72.8 7,514 27.2 4,248 3,266 11.8 885 2,380 809 34.0 1,571 1,571 4.8

April 25, 2013

Idea Cellular | 4QFY2013 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Reserves and surplus Additional paid up capital Stock option outstanding Total shareholders funds Convertible preference shares Total debt Long term provisions Deferred tax liabilities 3,303 8,995 12,298 2 10,785 171 310 3,309 9,739 13,048 2 11,250 192 627 3,314 11,105 14,420 2 12,263 314 1,118 3,314 12,415 15,729 2 12,063 314 1,118 3,314 13,986 17,300 2 11,763 314 1,118 FY2011 FY2012 FY2013E FY2014E FY2015E

Other liabilities
Total liabilities

235
23,801 33,698

431
25,550 41,092

795
28,912 46,736

795
30,021 50,236

795
31,292 54,036

Assets
Gross block - fixed assets

Accumulated depreciation
Net block

11,213
22,485

14,104
26,988

17,582
29,154

21,463
28,772

25,711
28,324

Capital WIP
Total fixed assets

3,601
26,085

680
27,667

881
30,035

881
29,653

881
29,206

Long term loans and adv.

Investments

922
-

2,256
-

3,047
-

4,047
-

5,047
-

Goodwill on consolidation
Non compete fees

6
66

6
93

6
73

6
73

6
73

Current assets
Inventories

Current investments
Debtors Cash Loans and advances Other current assets Total current assets Less:- trade payables Less:-current liab.

1,020
556 458 1,098 1 3,198 3,578 2,826

98
823 152 1,539 2 2,705 3,142 3,936

1,028
960 143 1,086 1 3,290 2,687 4,771

1,528
998 333 1,932 1 4,865 3,265 5,276

2,028
1,137 758 2,305 1 6,301 3,588 5,671

Less:-provisions
Net current assets

7
3,578

7
3,142

9
2,687

9
3,265

9
3,588

Profit and loss account

Total assets

23,801

25,550

28,912

30,021

31,292

April 25, 2013

Idea Cellular | 4QFY2013 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from operations Depreciation Expenses (deferred)/written off Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade working capital Cashflow from operating actv. (Inc)/dec in fixed assets (Inc)/dec in intangibles (Inc)/dec in investments (Inc)/dec in net deferred tax asset (Inc)/dec in minority interest (Inc)/dec in profit and loss account (Inc)/dec in other non-current assets Cashflow from investing actv. Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cashflow from financing actv. Cash generated/(utilized) Cash at start of the year Cash at end of the year 632 2,776 3,409 6,705 (9,803) (922) 1,130 96 504 (28) (9,022) 2,926 (441) 2,485 168 290 458 187 673 860 4,564 (4,563) (1,335) 317 219 (5,362) 465 27 492 (306) 458 152 (594) 379 (215) 4,273 (5,845) (791) 491 488 (5,657) 1,014 262 99 1,374 (9) 152 143 (1,384) 1,083 (301) 4,890 (3,500) (1,000) (4,500) (200) (100) 99 (200) 190 143 333 (1,012) 718 (293) 5,525 (3,800) (1,000) (4,800) (300) (100) 99 (300) 425 333 758 FY2011 963 2,432 3,394 3,394 98 3,296 FY2012 FY2013E FY2014E FY2015E 1,055 2,981 4,037 4,037 332 3,705 1,577 3,478 5,055 5,055 566 4,489 1,984 3,882 5,866 5,866 675 5,191 2,380 4,248 6,628 6,628 809 5,819

April 25, 2013

Idea Cellular | 4QFY2013 Result Update

Key Ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS (Fully diluted) Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 0.6 12 104 0.7 13 85 0.7 14 65 0.8 15 65 0.9 15 65 5.7 7.3 7.0 8.3 8.6 5.5 8.7 9.4 7.0 9.7 10.7 8.3 10.4 11.8 9.1 0.9 0.7 0.1 0.7 1.9 7.0 0.7 0.5 0.1 0.8 2.0 5.5 0.6 0.6 0.1 0.8 2.0 7.0 0.7 0.7 0.1 0.8 1.9 8.3 0.7 0.7 0.1 0.9 1.8 9.1 2.7 10.0 0.0 37 2.2 11.2 0.0 39 3.1 13.6 0.3 44 4.0 15.7 0.3 48 4.8 17.6 0.3 52 42.7 11.6 3.1 3.1 12.9 2.0 53.1 10.4 2.9 2.5 9.7 1.9 37.9 8.6 2.7 2.2 8.4 1.7 29.3 7.4 2.4 2.0 7.4 1.7 24.4 6.6 2.2 1.7 6.3 1.5 FY2011 FY2012 FY2013E FY2014E FY2015E

April 25, 2013

10

Idea Cellular | 4QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Idea Cellular No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

April 25, 2013

11