4QFY2012 Result Update | Telecom

April 27, 2012

Idea Cellular
Performance highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT 4QFY12 5,370 1,357 25.3 239 3QFY12 5,031 1,345 26.7 201 % chg (qoq) 6.7 0.9 (146)bp 18.8 4QFY11 4,235 1,075 25.4 275 % chg (yoy) 26.8 26.2 (12)bp (12.9)

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Telecom 26,895 0.5 104/63 643,345 10 17,134 5,191 IDEA.BO IDEA@IN

`81 -

Source: Company, Angel Research

For 4QFY2012, Idea Cellular (Idea) reported a healthy set of numbers. The companys total network minutes grew strongly by 9.1% qoq, but its average revenue per minute (ARPM) declined by 2.5% qoq to `0.42/min, which the company said was due to marketplace battle and overcapacity. The worrying thing is that the current round of tariff wars is being fought among incumbents, with an eye on revenue market share. Although Ideas operating performance remains robust, it is surrounded by regulatory uncertainties, which could negatively impact its profitability. We maintain our Neutral view on the stock. Quarterly highlights: For 4QFY2012, Idea reported consolidated revenue of `5,370cr, up 6.7% qoq, on the back of 2.7% qoq growth in minutes of usage (MOU) and subscriber growth of 5.9% qoq with end-of-period (EoP) subscriber base standing at 112.7mn. EBITDA margin declined by 146bp qoq to 25.3% due to one-off provision created by the company for certain regulatory charges (revenue sharing) of ~`150cr, which resulted in increased license fee and WPC charges. Adjusting for these charges, EBITDA margin actually grew by 134bp qoq to 28.1% during the quarter. Outlook and valuation: Idea continued to deliver strong operational performance but the decline in ARPM due to marketplace battle reflects that there will be limited upsides in tariff rates in the near term. The company is continuously reporting net subscriber addition number higher than other incumbents, though in absolute terms net subscriber additions have been cooling off. This will, in turn, scale up total traffic on the network. With higher VAS share as a percentage of total revenue, stable ARPM and rising number of subscribers for 3G services, we expect revenue to witness a 13.28% CAGR over FY2012-14E. Idea remains surrounded by lot of regulatory uncertainties after the cancellation of its licenses in nine circles. To regain its licenses in the auction, the company will have to incur additional costs, which will, in turn, hamper the overall profitability of the company. Hence, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.0 6.2 15.3 32.6

Abs. (%) Sensex Idea

3m

1yr

3yr 50.7 35.8

(0.6) (11.9) (13.6) 17.7

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) FY2010 12,447 22.9 954 8.3 27.4 2.9 28.2 2.3 8.0 7.0 2.8 10.1 FY2011 15,503 24.6 864 (9.4) 24.5 2.7 29.9 2.2 7.0 5.5 2.4 9.9 FY2012E 19,541 26.0 723 (16.3) 26.1 2.2 37.2 2.1 5.5 7.8 2.0 7.9 FY2013E 22,558 15.4 1,064 47.1 26.4 3.2 25.3 1.9 7.5 9.5 1.7 6.3 FY2014E 25,326 12.3 1,565 47.1 27.5 4.7 17.2 1.7 10.0 11.8 1.4 5.2

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 | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 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

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

3QFY12 5,031 3,686 1,345 757 587 288 299 98 201 201 0.6 26.7 11.7 4.0

% chg (qoq) 6.7 8.9 0.9 3.6 (2.5) (21.0) 15.4 8.3 18.8 18.8 18.9 (146)bp (101)bp 45bp

4QFY11 4,235 3,160 1,075 657 418 85 333 58 275 275 0.8 25.4 9.9 6.5

% chg (yoy) 26.8 27.0 26.2 19.3 37.0 166.3 3.8 83.1 (12.9) (12.9) (12.9) (12)bp 80bp (203)bp

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

FY2011 15,503 11,713 3,791 2,432 1,359 396 963 98 864 864 2.7 24.5 8.8 5.6

% chg( yoy) 26.0 23.4 34.3 22.6 55.3 166.3 9.6 238.4 (16.3) (16.3) (19.6) 161bp 204bp (187)bp

Exhibit 2: 4QFY2012 KPI data for the mobility business

4QFY12 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) EoP EPM (`/min)
Source: Company, Angel Research

4QFY12E 0.43 368 160 111.6 0.11

Var. (%) (2.8) 2.9 0.1 1.0 (3.1)

3QFY12 0.43 369 159 106.4 0.12

% chg (qoq) (2.5) 2.7 0.6 5.9 (7.4)

4QFY11 0.41 397 161 89.5 0.11

% chg (yoy) 3.9 (4.5) (0.6) 25.9 3.4

0.42 379 160 112.7 0.11

Exhibit 3: 4QFY2012 Actual vs. Angel estimates

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

Actual 5,370 25.3 239

Estimate 5193 26.1 191

% Var. 3.4 (79)bp 25.0

Robust revenue growth

Idea reported a healthy performance for 4QFY2012. The companys consolidated revenue came in at `5,370cr, up 6.7% qoq. The mobility segments revenue also posted healthy 6.5% qoq growth to `5,315cr on the back of strong traffic growth, as Ideas subscriber base grew by 5.9% qoq with EoP subscriber base standing at 112.7mn. MOU during the quarter increased by 2.9% qoq to 379min from 269min in 3QFY2012. However, the effect of these positive factors was partially overshadowed by the negative impact of the decline in ARPM by 2.5% qoq to `0.422/min from `0.433/in in 3QFY2012. Total volumes carried on the network grew by 9.1% qoq to 124bn min.

April 27, 2012

Idea Cellular | 4QFY2012 Result Update

Exhibit 4: Trend in MOU

450 425 4.3 1.8 2.3 (1.0) (1.5) 1.4 2.7 6 3 0 (3) 375 350 (5.1) (6.9) (6) (9)

(
%

(min)

400

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

MOU (min)
Source: Company, Angel Research

qoq growth (%)

Management indicated that the decline in ARPM was due to marketplace battle and overcapacity. The worrying thing is that the current round of tariff wars is being fought among incumbents, with an eye on revenue market share.

Exhibit 5: Trend in ARPM

0.50 1.0 (2.9) 4.1 1.4 (2.5) (0.5) (4.5) 0.40 (7.8) 0.35 (6.4) 8 4 0 (4) (8) (12)

0.45

(`/min)

4QFY12

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

Idea has consistently been able to increase its VAS as a share of total revenue since the past four quarters (unlike Bharti Airtel). Ideas VAS share increased to 14.3% in 4QFY2012 from 13.7% in 3QFY2012.

April 27, 2012

4QFY12

(%)

Idea Cellular | 4QFY2012 Result Update

Exhibit 6: Trend in VAS share in mobility revenue

15 14

14.3 13.7 12.4 12.6 12.9 13.0 12.1 12.1 13.2

(%)

13 12 11

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

VAS share (%)

Source: Company, Angel Research

Idea reported net subscriber addition of 6.3mn subscribers in 4QFY2012 (highest amongst all incumbents), with the companys total subscriber base, as of EoP March 2012, standing at 112.7mn.

Exhibit 7: Trend in subscriber net additions

10 8 6.2 6 5.1 5.3 7.6 7.7 5.6 6.2 5.1 6.3

(mn)

4 2 0

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

Subscriber net addition (mn)

Source: Company, Angel Research

Thus, increased MOU, higher VAS share and modest subscriber net additions in 4QFY2012 arrested the downfall in average revenue per user (ARPU), which was negatively affected by declining APRM. ARPU stood almost flat qoq at `160/month during the quarter.

April 27, 2012

4QFY12

4QFY12

Idea Cellular | 4QFY2012 Result Update

Exhibit 8: Trend in ARPU

190 2.6 180 0.6 (1.4) (4.2) (7.5) (8.4) (12) 0.6 (0.6) (3.1) (6) 0 6

(`/month)

160 150

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

ARPU (`/month)

qoq growth (%)

Source: Company, Angel Research

EBITDA margin enhances adjusting for one-offs

For 4QFY2012, Ideas EBITDA margin declined by 146bp qoq to 25.3%. EBITDA margin of the company was impacted by one-off provision created by the company for certain regulatory (revenue sharing) charges of ~`150cr, which resulted in license fee and WPC charges increasing to 13.7% of revenue in 4QFY2012 from 11.2% of revenue in 3QFY2012. Management indicated that these charges as a percentage of revenue are expected to revert back closer to 3QFY2012 levels going forward. Adjusting for these charges, EBITDA margin actually grew by 134bp qoq to 28.1%. During the quarter, revenue for established service areas (ESA) stood at `4,778.4cr, up 5.8% qoq; however, EBITDA margin of ESA declined by 176bp qoq to 28.6% due to one-off expenses. Revenue from new service areas (NSA) grew by 13.5% to `625cr. EBITDA losses of NSA declined to `160cr in 4QFY2012 from `172cr in 3QFY2012. In addition, Indus Tower business showed 2.6% qoq revenue growth to `332cr, with EBITDA margin remaining almost flat qoq at 45.2%.

Exhibit 9: Trend in EBITDA margin

60 50 40 30 20 10 0 (10) (20) (30) (40) (27) (29) (31) Indus (26) Consolidated 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 28 43 25 30 45 27 29 46 26 30 45 27 29 45 25

(%)

(36) New service areas

Established service areas

Source: Company, Angel Research

April 27, 2012

4QFY12

(%)

170

Idea Cellular | 4QFY2012 Result Update

Exhibit 10: Opex breakup

100 80 60 25.4 18.8 5.0 11.3 23.5 16.1 0 4QFY11 1QFY12 2QFY12 3QFY12 SGA cost 4QFY12 EBITDA margin Access charges Network costs
Source: Company, Angel Research

26.6 16.5 4.7 11.3 24.7 16.2

25.7 16.2 5.2 11.1 24.7 17.1

26.7 17.6 4.8 11.2 22.9 16.8

25.3 15.8 4.7 13.7 23.4 17.0

(%)
40 20

License fee

Employee cost

Outlook and valuation

Idea continued to deliver strong operational performance but the decline in ARPM due to marketplace battle reflects that there will be limited upsides in tariff rates in the near term. VAS share in mobility revenue is showing promising uptrend and will aid the companys overall ARPU profile. The company is continuously reporting net subscriber addition number higher than other incumbents, though in absolute terms net subscriber additions have been cooling off. This will, in turn, scale up total traffic on the network. With higher VAS share as a percentage of total revenue, stable ARPM and rising number of subscribers for 3G services, we expect revenue to witness a 13.28% CAGR over FY2012-14E. Idea remains surrounded by lot of regulatory uncertainties after the cancellation of its licenses in nine circles. To regain its licenses in the auction, the company will have to incur additional costs, which will, in turn, hamper the companys overall profitability. Hence, we maintain our Neutral rating on the stock.

Exhibit 11: Assumptions for KPIs

FY2011 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) EoP 0.42 395 166 89.5 FY2012 0.42 374 158 112.7 FY2013E 0.42 373 157 125.9 FY2014E 0.44 365 160 137.3 % CAGR 1.9 (1.2) 0.6 10.4

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

April 27, 2012

Idea Cellular | 4QFY2012 Result Update

Exhibit 12: 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

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Aug-07

Aug-08

Aug-09

Aug-10

EV
Source: Company, Angel Research

17

14

11

Exhibit 13: Recommendation summary

Company Bharti Airtel Idea Cellular Reliance Communication Reco. Neutral Neutral Neutral CMP (`) 308 81 74 Tgt. price (`) Upside (%) FY2014E P/BV (x) 1.7 1.7 0.4 FY2014E P/E (x) 14.0 17.2 11.1 FY2011-14E EPS CAGR (%) 11.5 20.3 1.1 FY2014E RoCE (%) 12.5 11.8 3.5 FY2014E RoE (%) 12.5 10.0 3.2

Source: Company, Angel Research

April 27, 2012

Aug-11

Apr-12

Idea Cellular | 4QFY2012 Result Update

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 (`) FY2010 12,447 3,127 25.1 1,347 10.8 1,800 14.5 2,766 9,040 72.6 3,407 27.4 2,015 1,392 11.2 401 84 1,075 121 11.3 954 954 2.9 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 22,558 5,457 24.2 2,577 11.4 3,781 16.8 4,794 16,609 73.6 5,949 26.4 3,371 2,578 11.4 1,037 1,541 478 31.0 1,064 1,064 3.2 FY2014E 25,326 6,059 23.9 2,890 11.4 4,064 16.0 5,339 18,352 72.5 6,974 27.5 3,661 3,313 13.1 1,012 2,301 736 32.0 1,565 1,565 4.7

April 27, 2012

Idea Cellular | 4QFY2012 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 Deferred tax liabilities Other liabilities Total liabilities Assets Gross block - fixed assets Accumulated depreciation Net block Capital WIP Total fixed assets Net intangible assets Other non-current assets Goodwill on consolidation Non compete fees Current assets Inventories Debtors Cash Loans and advances Other current assets Total current assets Less:- current liab. Less:-provisions Net current assets Profit and loss account Total assets 54 466 290 2,556 298 3,663 3,845 223 (405) 504 19,950 60 555 1,478 3,560 434 6,086 7,280 264 (1,457) 24,680 65 696 250 4,342 1,164 6,517 6,888 313 (683) 27,015 65 742 1,574 4,512 400 7,292 7,963 451 (1,122) 27,101 65 833 2,229 5,169 587 8,882 8,799 507 (423) 27,966 27,059 8,891 18,168 547 18,714 1,130 6 33,698 11,213 22,485 3,647 26,132 6 41,092 14,104 26,988 704 27,692 6 45,292 17,475 27,817 400 28,217 6 48,892 21,136 27,756 627 28,383 6 3,300 8,530 44 11,874 2 7,859 214 19,950 3,303 8,947 48 12,298 2 12,071 310 24,680 3,309 9,705 35 13,048 2 13,337 627 27,015 3,309 10,768 35 14,112 2 12,337 650 27,101 3,309 12,333 35 15,677 2 11,637 650 27,966 FY2010 FY2011 FY2012E FY2013E FY2014E

April 27, 2012

Idea Cellular | 4QFY2012 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/(utilised) Cash at start of the year Cash at end of the year (3,923) (2,797) 3,086 290 3,771 1,188 290 1478 1,294 (1,228) 1,478 250 (1,000) 1,324 250 1574 (700) 655 1,574 2229 (1,091) 32 (1,059) 1,910 (4,062) 915 101 23 2,240 (784) (1,053) (2,869) (1,236) 3,476 2,240 5,536 (9,849) 1,130 96 504 (8,119) 4,211 (441) (1,659) (343) (2,002) 1,702 (4,541) 317 (4,224) 1,267 27 550 1,214 1,763 6,198 (3,896) 23 (3,874) (1,000) (0) (935) 891 (44) 5,182 (3,827) (3,827) (700) 0 FY2010 992 2,015 3,007 84 3,090 121 2,969 FY2011 FY2012E FY2013E FY2014E 963 2,432 3,394 3,394 98 3,296 1,055 2,981 4,037 4,037 332 3,705 1,541 3,371 4,912 4,912 478 4,435 2,301 3,661 5,962 5,962 736 5,226

April 27, 2012

10

Idea Cellular | 4QFY2012 Result Update

Key Ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) 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 0.7 12 156 0.6 12 173 0.7 13 174 0.8 12 175 0.9 12 175 7.0 7.3 8.0 5.5 7.0 7.0 7.8 8.1 5.5 9.5 10.3 7.5 11.8 13.2 10.0 0.9 0.8 0.1 0.6 1.7 8.0 0.9 0.7 0.1 0.6 2.0 7.0 0.7 0.5 0.1 0.7 2.1 5.5 0.7 0.6 0.1 0.8 1.9 7.5 0.7 0.7 0.1 0.9 1.8 10.0 2.9 9.0 0.0 36.0 2.7 10.0 0.0 37.2 2.2 11.2 0.0 39.5 3.2 13.4 0.0 42.7 4.7 15.8 0.0 47.5 28.2 9.1 2.3 2.8 10.1 1.7 29.9 8.2 2.2 2.4 9.9 1.5 37.2 7.3 2.1 2.0 7.9 1.5 25.3 6.1 1.9 1.7 6.3 1.4 17.2 5.1 1.7 1.4 5.2 1.3 FY2010 FY2011 FY2012E FY2013E FY2014E

April 27, 2012

11

Idea Cellular | 4QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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 Yes 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 27, 2012

12