2QFY2012 Result Update | Telecom

October 21, 2011

Idea Cellular
Performance highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT 2QFY12 4,620 1,187 25.7 106 1QFY12 4,521 1,204 26.6 177 % chg (qoq) 2.2 (1.4) (95)bp (40.3) 2QFY11 3,659 879 24.0 180 % chg (yoy) 26.3 35.0 167bp (41.2)

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 30,180 0.6 104/56 714,267 10 16,786 5,050 IDEA.BO IDEA@IN

`91 -

Source: Company, Angel Research

For 2QFY2012, Idea Cellular (Idea) reported modest revenue growth, which was in-line with our expectation; however, the company disappointed on the bottom-line front. The major highlight of the result was inching up of average revenue per minute (ARPM) by 4.1% and VAS share in mobility revenue increasing to 13.2% from 12.1% in 1QFY2012. We maintain our Neutral view on the stock. Quarterly highlights: For 2QFY2012, Idea reported consolidated revenue of `4,620cr, up 2.2% qoq, on the back of 4.1% qoq growth in ARPM to `0.427/min and subscriber growth of 5.4% qoq with end-of-period (EoP) subscriber base standing at 100.2mn. The effect of these positive factors was partially overshadowed by the negative impact from the decline in minutes of usage (MOU) by 6.9% qoq to 364min from 391min in 1QFY2012. EBITDA margin decreased by 95bp qoq to 25.7% due to higher employee costs and roaming and access charges. However, EBITDA per minute (EPM) stood flat qoq at `0.11. PAT came in at `106cr, down 40.3% qoq, due to higher interest costs of `294cr and higher depreciation and amortization expenses of `737cr on account of 3G-related expenses. Outlook and valuation: Idea posted growth in ARPM again for the second consecutive quarter on account of increased VAS share in mobility revenue and tariff hikes undertaken from August 2011. Management indicated that the full effect of hiking tariff rates would flow in from 3QFY2012, which will further aid the companys ARPM. This will, in turn, scale up ARPM, which we expect will post an 8.3% CAGR over FY2011-13E. With increasing ARPM, higher VAS share as a percentage of total revenue and rising number of subscribers for 3G services, we expect revenue to witness a 22.8% CAGR over FY2011-13E. We value the stock at EV/EBITDA of 6.5x FY2013E i.e., at 10% discount to Bharti Airtels EV/EBITDA multiple, which gives us a fair value of `93. Hence, at current levels, we maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.0 8.7 11.8 33.5

Abs. (%) Sensex Idea

3m

1yr

3yr 57.1 69.1

(9.0) (17.2) 14.5 26.5

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)
Source: Company, Angel Research

FY2009 10,131 18.6 881 27.8 2.8 32.2 2.2 6.4 6.2 3.6 12.8

FY2010 12,447 22.9 954 8.3 27.4 2.9 31.6 2.5 8.0 7.0 3.0 11.1

FY2011 15,503 24.6 864 (9.4) 24.5 2.7 33.6 2.5 7.0 5.5 2.6 10.7

FY2012E 19,610 26.5 807 (6.6) 26.0 2.4 37.4 2.3 6.2 8.5 2.1 8.2

FY2013E 23,363 19.1 1,166 44.4 27.1 3.5 25.9 2.1 8.2 10.7 1.7 6.4

Srishti Anand
+91 22 3935 7800 Ext: 6820 srishti.anand@angelbroking.com

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

Please refer to important disclosures at the end of this report

Idea Cellular | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 Financial performance (Consolidated, Indian GAAP)

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

2QFY12 4,620 3,433 1,187 737 450 294 156 50 106 106 0.3 25.7 9.7 2.3

1QFY12 4,521 3,317 1,204 703 501 246 255 78 177 177 0.5 26.6 11.1 3.9

% chg (qoq) 2.2 3.5 (1.4) 4.9 (10.3) 19.3 (38.9) (35.6) (40.3) (40.3) (40.3) (95)bp (136)bp (163)bp

2QFY11 3,659 2,780 879 582 297 103 194 14 180 180 0.5 24.0 8.1 4.9

% chg (yoy) 26.3 23.5 35.0 26.6 51.5 185.9 (19.7) 250.7 (41.2) (41.2) (41.2) 167bp 162bp (262)bp

1HFY12 9,141 6,750 2,391 1,439 951 540 411 128 283 283 0.9 26.2 10.4 3.1

1HFY11 12,447 9,040 3,407 2,015 1,392 401 84 1,075 121 954 954 3 27.4 11.2 8.3

% chg( yoy) (26.6) (25.3) (29.8) (28.6) (31.7) 34.9 (61.8) 5.3 (70.3) (70.3) (70.3) (122)bp (78)bp (524)bp

Exhibit 2: 2QFY2012 KPI data for the mobility business

2QFY12 ARPM (`/min) MOU (min) ARPU (`/month) EPM (`/min) Subscriber base (mn) EoP
Source: Company, Angel Research

2QFY12E 0.41 379 155 98.1 0.11

Var. (%) 4.2 (4.0) (0.3) 2.1 3.6

1QFY12 0.41 391 160 95.1 0.11

% chg (qoq) 4.1 (6.9) (3.1) 5.4 -

2QFY11 0.42 394 167 74.2 0.10

% chg (yoy) 1.7 (7.6) (7.2) 35.0 7.0

0.43 364 155 100.2 0.11

Exhibit 3: 2QFY2012 Actual vs. Angel estimates

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

Actual 4,620 25.7 106

Estimate 4536 26.0 154

% Var. 1.8 61bp (31.2)

Modest revenue growth

Idea reported a decent performance for 2QFY2012. Consolidated revenue grew by 2.2% qoq to `4,620cr as against `4,521cr in 1QFY2012. The mobility segments revenue also posted 2.2% qoq growth to `4,582cr on the back of growth in ARPM by 4.1% qoq to `0.427/min and subscriber growth of 5.4% qoq with EoP subscriber base standing at 100.2mn. The effect of these positive factors was partially overshadowed by the negative impact from the decline in MOU by 6.9% qoq to 364min from 391min in 1QFY2012. MOU during the quarter witnessed a decline, as 2Q is a seasonally weak quarter for telecom companies due to the monsoon season, which leads to higher call drop rates.

October 21, 2011

Idea Cellular | 2QFY2012 Result Update

Exhibit 4: Trend in MOU

450 425
(min)

3.7 2.3

4.3 1.8 (1.0) (1.5)

6 3 0 (3) (6.9) (6) (9)

(

400 375 (6.0) 350

2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

%
)

(5.1)

MOU (min)
Source: Company, Angel Research

qoq growth (%)

During the quarter, ARPM growth of 4.1% qoq to `0.427/min came in as a positive surprise. Factors that led to the increase in ARPM were: 1) higher contribution of VAS to revenue, 2) increased roaming revenue and 3) higher promotional tariff. Going ahead, the full impact of tariff hikes undertaken from August 2011 will flow in, which will further aid the companys ARPM.

Exhibit 5: Trend in ARPM

0.60 0.55 4.1 (2.9) 1.0 8 4 0 (4) (8) (12)

(0.5) (3.4) (7.8) (8.9) (6.4) (4.5)

(`/min)

0.45 0.40

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

VAS as a share of total revenue increased to 13.2% in 2QFY2012 compared to 12.1% in 1QFY2012.

October 21, 2011

2QFY12

(%)

0.50

Idea Cellular | 2QFY2012 Result Update

Exhibit 6: Trend in VAS share in mobility revenue

14 13 12 12.4 10.6 11.2 12.6 12.9 13.0 12.1 12.1 13.2

(%)

11 10 9

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

VAS share (%)

Source: Company, Angel Research

Idea reported net subscriber addition of 5.1mn subscribers in 2QFY2012, which is the highest among all incumbents in the telecom sector. The companys total subscriber base, as of EoP September 2011, stood at 100.2mn.

Exhibit 7: Trend in subscriber net additions

10 8 6.2 6 6.2 5.1 5.3 4.4 7.6 7.7 5.6 5.1

(mn)

4 2 0

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Subscriber net addition (mn)

Source: Company, Angel Research

Thus, increased ARPM, higher VAS share in mobility revenue and modest subscriber net additions in 2QFY2012 arrested the steep downfall in average revenue per user (ARPU), which was negatively affected by declining MOU. ARPU came in at `155/month from 2QFY2012 from `160/month in 1QFY2012, down 3.1% qoq.

October 21, 2011

2QFY12

2QFY12

Idea Cellular | 2QFY2012 Result Update

Exhibit 8: Trend in ARPU

300 6

(`/month)

250 (4.3) 200 (9.9) 150 (7.5)

0.6 (1.4)

(0.6) (3.1) (4.2)

(6) (8.4) (12)

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

ARPU (`/month)

qoq growth (%)

Source: Company, Angel Research

EBITDA margin declines

For 2QFY2012, Ideas EBITDA margin decreased by 95bp qoq to 25.7% due to higher employee costs and roaming and access charges. However, EPM stood flat qoq at `0.11. During the quarter, revenue for established service areas (ESA) stood at `4,158cr, up 2.0% qoq; however, EBITDA margin of ESA declined by 30bp qoq to 29.4%. Revenue from new service areas (NSA) grew by 3.3% qoq to `497cr. EBITDA margin of NSA also declined qoq by 670bp. Going ahead, we expect EBITDA margin of NSA to scale up with increased tariff rates. In addition, the Indus Tower business showed merely 0.4% qoq revenue growth to `309cr, with EBITDA margin increasing by 170bp qoq to 46.3%.

Exhibit 9: Trend in EPM

0.19 0.17 0.15 0.13 0.11 0.09 0.14 0.13 0.13 0.11 0.10 0.11 0.11 0.11

(`/min)

0.10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

October 21, 2011

2QFY12

(%)

Idea Cellular | 2QFY2012 Result Update

Exhibit 10: Trend in EBITDA margin

60 50 40 30 20 27 42 24 27 46 24 28 43 25 30 45 27 29 46 26

(%)

10 0 (10) (20) (30) (40) (50) (42) (35) New service areas (27) (29) (36) Consolidated 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

Established service areas

Indus

Source: Company, Angel Research

Exhibit 11: Opex breakup

100 24.0 80 15.2 60 5.9 11.4 27.6 20 15.9 0 2QFY11 3QFY11 4QFY11 1QFY12 SGA cost 2QFY11 EBITDA margin Access charges Network costs
Source: Company, Angel Research

24.0 18.2 5.2 11.4 25.1 16.1

25.4 18.8 5.0 11.3 23.5 16.1

26.6 16.5 4.7 11.3 24.7 16.2

25.7 16.2 5.2 11.1 24.7 17.1

(%)
40

License fee

Employee cost

Outlook and valuation

Idea continued to post growth in ARPM for the second consecutive quarter on account of increased VAS share in mobility revenue and tariff hikes undertaken from August 2011. Management indicated that the full effect of hiking tariff rates would flow in from 3QFY2012, which will further aid the companys ARPM. Also, 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 ARPM, which we expect will post a CAGR of 8.3% over FY2011-13E. With increasing ARPM, higher VAS share as a percentage of total revenue and rising number of subscribers for 3G services, we expect revenue to witness a 22.8% CAGR over FY2011-13E. We value the stock at EV/EBITDA of 6.5x FY2013E i.e., at a 10% discount to Bharti Airtels EV/EBITDA multiple, which gives us a fair value of `93. Hence, at current levels, we maintain our Neutral rating on the stock.

October 21, 2011

Idea Cellular | 2QFY2012 Result Update

Exhibit 12: Assumptions for KPIs

FY2010 ARPM (`/min) MOU (min) ARPU (`/month) Subscriber base (mn) EoP 0.53 386 204 63.8 FY2011 0.42 395 166 89.5 FY2012E 0.44 377 166 105.9 FY2013E 0.49 359 177 116.1 % CAGR 8.3 (4.7) 3.2 13.9

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

Exhibit 13: One-year forward EV/EBITDA

122,000 109,000 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

Apr-07

Apr-08

Apr-09

Apr-10

Aug-07

Aug-08

Aug-09

Aug-10

Apr-11
5

EV

17

14

11

Source: Company, Angel Research

Exhibit 14: Valuation

(` cr) EBITDA Target EV/EBITDA(x) Target EV Debt Cash Target mcap Target price (`)
Source: Company, Angel Research

FY2013E 6,331 6.5 41,150 11,900 1,567 30,817 93

October 21, 2011

Aug-11

Idea Cellular | 2QFY2012 Result Update

Exhibit 15: Change in estimates

Parameter (` cr) Net revenue EBITDA Interest expense PBT Tax PAT

Earlier estimates 18,981 5,008 985 1,156 345 811

FY2012E Revised estimates 19,610 5,092 1,128 1,097 290 807

Variation (%) 3.3 1.7 14.5 (5.1) (15.9) (0.5)

Earlier estimates 22,190 6,099 985 1,791 573 1,218

FY2013E Revised estimates 23,363 6,331 1,119 1,714 549 1,166

Variation (%) 5.3 3.8 13.6 (4.3) (4.3) (4.3)

Source: Company, Angel Research

Exhibit 16: Recommendation summary

Company Bharti Airtel Idea Cellular Reliance Communication Reco. Accumulate Neutral Neutral CMP (`) 378 91 74 Tgt. price (`) 430 Upside (%) 13.8 FY2013E P/BV (x) 2.3 2.1 0.4 FY2013E P/E (x) 15.3 25.9 11.6 FY2011-13E EPS CAGR (%) 24.7 13.9 (0.4) FY2013E RoCE (%) 12.9 10.7 4.2 FY2013E RoE (%) 14.9 8.2 3.1

Source: Company, Angel Research

October 21, 2011

Idea Cellular | 2QFY2012 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 (`) FY2009 10,131 2,108 20.8 1,124 11.1 1,844 18.2 2,242 7,318 72.2 2,813 27.8 1,403 1,410 13.9 495 23 939 58 6.1 881 881 2.8 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 FY2012E 19,610 4,847 24.7 2,231 11.4 3,284 16.7 4,157 14,519 74.0 5,092 26.0 2,867 2,225 11.3 1,128 1,097 290 26.4 807 807 2.4 FY2013E 23,363 5,716 24.5 2,669 11.4 3,787 16.2 4,860 17,032 72.9 6,331 27.1 3,498 2,833 12.1 1,119 1,714 549 32.0 1,166 1,166 3.5

October 21, 2011

Idea Cellular | 2QFY2012 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 52 362 3,086 1,682 186 5,369 3,864 172 1,332 526 22,817 54 466 290 2,556 298 3,663 3,845 223 (405) 504 19,950 60 555 1,478 3,560 386 6,038 7,280 264 (1,505) 24,632 65 645 1,384 3,922 465 6,481 6,802 333 (655) 26,225 65 768 1,567 4,935 589 7,924 7,886 421 (383) 26,491 20,523 5,997 14,526 2,141 16,667 2,045 2,246 27,059 8,891 18,168 547 18,714 1,130 6 33,698 11,213 22,485 3,647 26,132 6 38,198 14,080 24,118 2,756 26,874 6 42,398 17,577 24,820 2,047 26,868 6 3,100 10,671 18 13,790 2 8,912 113 22,817 3,300 8,530 44 11,874 2 7,859 214 19,950 3,301 8,947 48 12,296 4 12,023 310 24,632 3,300 9,754 48 13,101 4 12,800 320 26,225 3,300 10,919 48 14,267 4 11,900 320 26,491 FY2009 FY2010 FY2011 FY2012E FY2013E

October 21, 2011

10

Idea Cellular | 2QFY2012 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 10,355 2,589 497 3,086 (3,923) (2,797) 3,086 290 3,723 1,188 290 1,478 776 (94) 1,478 1,384 (900) 183 1,384 1,567 (1,230) 1,334 104 2,389 (7,354) (1,489) 47 882 (2,240) (10,154) 2,397 7,958 (1,091) 32 (1,059) 1,910 (4,062) 915 101 23 2,240 (784) (1,053) (2,869) (1,188) 3,476 2,288 5,584 (9,849) 1,130 96 504 (8,119) 4,164 (441) (536) (408) (945) 2,729 (3,609) 10 (3,599) 777 (1) (1,260) 1,171 (89) 4,575 (3,492) (3,492) (900) 0 FY2009 FY2010 FY2011 916 1,403 2,319 23 2,342 58 2,284 992 2,015 3,007 84 3,090 121 2,969 963 2,432 3,394 3,394 98 3,296 FY2012E 1,097 2,867 3,964 3,964 290 3,674 FY2013E 1,714 3,498 5,212 5,212 549 4,663

October 21, 2011

11

Idea Cellular | 2QFY2012 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 0.6 10 162 0.7 12 156 0.6 12 173 0.7 12 171 0.9 12 169 6.2 9.2 6.4 7.0 7.3 8.0 5.5 7.0 7.0 8.5 10.1 6.2 10.7 12.4 8.2 0.9 0.7 0.1 0.4 1.7 6.4 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 2.0 6.2 0.7 0.6 0.1 0.9 1.9 8.2 2.8 6.9 0.0 41.8 2.9 9.0 0.0 36.0 2.7 10.0 0.0 37.2 2.4 11.1 0.0 39.7 3.5 14.1 0.0 43.2 32.2 13.2 2.2 3.6 12.8 1.6 31.6 10.2 2.5 3.0 11.1 1.9 33.6 9.2 2.5 2.6 10.7 1.7 37.4 8.2 2.3 2.1 8.2 1.6 25.9 6.5 2.1 1.7 6.4 1.5 FY2009 FY2010 FY2011 FY2012E FY2013E

October 21, 2011

12

Idea Cellular | 2QFY2012 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%)

October 21, 2011

13