Any decision to increase rates, however, should provide support to the stock in the near term
After being an outperformer in 2013 with returns of 62 per cent, 2014 has been a muted year for Idea Cellular, with investors losing 23 per cent since the start of the year. The losses for the scrip were largely on worries about the fallout from aggressive bidding and higher spectrum costs, muted minutes of use per customer and consequences of a price war on data and voice with the entry of Reliance Jio.
The key risk, according to Himanshu Shah of HDFC Securities, is licence renewals (including 900 MHz spectrum retention) in CY15 for Idea. While the company has done well by buying 1,800 MHz band spectrum in seven of the nine circles coming for renewal, Shah says the company risks losing 900 MHz spectrum in these circles. The 900 MHz spectrum is more cost-efficient than 1,800 MHz, as it requires deployment of lesser towers and equipment to cover a similar area. These nine circles would contribute about 72 per cent of Idea’s revenues in CY15 and it poses a structural risk, since the company is a leader in four of them. Aggressive bidding to retain the 900 MHz spectrum could lead to an increase in costs.
Motilal Oswal’s Shobit Khare has downgraded his net profit estimates for Idea for FY15/FY16 by 13-27 per cent to factor in higher amortisation and finance costs due to increased spectrum outlay. The impact includes the recent spectrum auction pay-out (total Rs 10,700 crore), excess spectrum payment estimated at Rs 1,900 crore and the cost of renewing the licences and retaining 5 MHz in the 900-MHz band spectrum in the nine circles (Rs 14,800 crore at 2.5 times current 1,800 MHz band price) which are coming up for renewal between December 2015 and April 2016.
One of the ways in which telecom operators can recover part of the spectrum costs is to increase fares. Including the spectrum pay-outs for CY15, HDFC Securities estimates that blended RPM (revenue per minute) has to increase an additional seven paise (approximately by 15 per cent) to offset annual post tax cash impact. A one paisa a minute increase in RPM would improve target price by Rs 14 for Idea, estimates HDFC's Shah.
Most analysts favour Bharti Airtel to Idea Cellular due to the concerns mentioned above and have reduced their price targets downwards over the last one month; average of 15 analysts who have recommendation post spectrum auction is Rs 152. At the current price of Rs 133.40, the stock is trading at 24 times its FY15 earnings and enterprise value, a slight premium to Bharti.
Higher impact on Idea
The total outgo for Idea Cellular in the recent spectrum is Rs 10,674 crore. The company will need to pay about 25-33 per cent or about Rs 3,100 crore upfront (by end-FY14); post that, there is a two-year moratorium and the balance to be paid in 10 equal instalments annually. The company is looking to make the upfront payment from internal accruals (Rs 2,500-3,000 crore), with the rest to be funded by debt.
While the company has taken an approval to raise Rs 3,000 crore in equity from qualified institutional investors, the same is likely to be raised after the general elections to be held over the next three months. The company also feels that the bid price will be covered within less than two years in Ebitda terms, based on the current Ebitda trends of its nine strategic (profitable) markets. For now, the current debt situation, seems to be under control with net debt at Rs 9,000 crore and net debt to Ebidta of 1.23 for the telecom operations. The company says, “We do not expect much change from the current level.”
Sharekhan analysts say the impact is likely to be higher (as compared to Bharti Airtel) on Idea’s earnings and fair value, given the fact that the total outgo is more than the estimated operating profit of the company in FY14. They estimate the impact of Rs 25-30 a share (fair value) and to the tune of 9-10 per cent on the earnings estimate for FY15. But, the actual impact would depend on how the company reacts in the forthcoming spectrum auctions, which will have a bearing on its earnings and debt.
Naval Seth of Emkay Global says Idea has front loaded spectrum requirements and acquired reasonable quantum of 1,800 MHz spectrum in most circles which are due for renewal in the next two-three years. The company, according to him, could reduce its dependency on 900 MHz spectrum and forgo some holding in the same band. The company, however, says “Spectrum win in the 1800 MHz band will give us the impetus to expand the network and launch 4G in eight of our key revenue markets covering 64 per cent of revenues, making it one of the few networks to offer all three services.”
Among other worries for the sector are the falling minutes of usage and the entry of Reliance Jio which is expected to roll out its data and voice services this calendar year. Despite the higher spectrum pay-out, companies will be hamstrung on the pricing front as a lot will depend on the pricing strategy of Reliance Jio. Cutting down of discounted minutes has helped Idea to improve its revenue per minute from 41.1 paise in Q3FY13 to 44.9 paise in Q3FY14. However, minutes of usage came down from 384 to 376 during this period, before peaking out at 406 in March 2013 quarter. Thus, any price increase could lead to further drop in minutes of usage.
Idea though believes tariffs and minutes of voice usage, both will strengthen and expects an increase in usage of value-added services.
After being an outperformer in 2013 with returns of 62 per cent, 2014 has been a muted year for Idea Cellular, with investors losing 23 per cent since the start of the year. The losses for the scrip were largely on worries about the fallout from aggressive bidding and higher spectrum costs, muted minutes of use per customer and consequences of a price war on data and voice with the entry of Reliance Jio.
The key risk, according to Himanshu Shah of HDFC Securities, is licence renewals (including 900 MHz spectrum retention) in CY15 for Idea. While the company has done well by buying 1,800 MHz band spectrum in seven of the nine circles coming for renewal, Shah says the company risks losing 900 MHz spectrum in these circles. The 900 MHz spectrum is more cost-efficient than 1,800 MHz, as it requires deployment of lesser towers and equipment to cover a similar area. These nine circles would contribute about 72 per cent of Idea’s revenues in CY15 and it poses a structural risk, since the company is a leader in four of them. Aggressive bidding to retain the 900 MHz spectrum could lead to an increase in costs.
Motilal Oswal’s Shobit Khare has downgraded his net profit estimates for Idea for FY15/FY16 by 13-27 per cent to factor in higher amortisation and finance costs due to increased spectrum outlay. The impact includes the recent spectrum auction pay-out (total Rs 10,700 crore), excess spectrum payment estimated at Rs 1,900 crore and the cost of renewing the licences and retaining 5 MHz in the 900-MHz band spectrum in the nine circles (Rs 14,800 crore at 2.5 times current 1,800 MHz band price) which are coming up for renewal between December 2015 and April 2016.
One of the ways in which telecom operators can recover part of the spectrum costs is to increase fares. Including the spectrum pay-outs for CY15, HDFC Securities estimates that blended RPM (revenue per minute) has to increase an additional seven paise (approximately by 15 per cent) to offset annual post tax cash impact. A one paisa a minute increase in RPM would improve target price by Rs 14 for Idea, estimates HDFC's Shah.
Most analysts favour Bharti Airtel to Idea Cellular due to the concerns mentioned above and have reduced their price targets downwards over the last one month; average of 15 analysts who have recommendation post spectrum auction is Rs 152. At the current price of Rs 133.40, the stock is trading at 24 times its FY15 earnings and enterprise value, a slight premium to Bharti.
Higher impact on Idea
The total outgo for Idea Cellular in the recent spectrum is Rs 10,674 crore. The company will need to pay about 25-33 per cent or about Rs 3,100 crore upfront (by end-FY14); post that, there is a two-year moratorium and the balance to be paid in 10 equal instalments annually. The company is looking to make the upfront payment from internal accruals (Rs 2,500-3,000 crore), with the rest to be funded by debt.
While the company has taken an approval to raise Rs 3,000 crore in equity from qualified institutional investors, the same is likely to be raised after the general elections to be held over the next three months. The company also feels that the bid price will be covered within less than two years in Ebitda terms, based on the current Ebitda trends of its nine strategic (profitable) markets. For now, the current debt situation, seems to be under control with net debt at Rs 9,000 crore and net debt to Ebidta of 1.23 for the telecom operations. The company says, “We do not expect much change from the current level.”
Sharekhan analysts say the impact is likely to be higher (as compared to Bharti Airtel) on Idea’s earnings and fair value, given the fact that the total outgo is more than the estimated operating profit of the company in FY14. They estimate the impact of Rs 25-30 a share (fair value) and to the tune of 9-10 per cent on the earnings estimate for FY15. But, the actual impact would depend on how the company reacts in the forthcoming spectrum auctions, which will have a bearing on its earnings and debt.
Naval Seth of Emkay Global says Idea has front loaded spectrum requirements and acquired reasonable quantum of 1,800 MHz spectrum in most circles which are due for renewal in the next two-three years. The company, according to him, could reduce its dependency on 900 MHz spectrum and forgo some holding in the same band. The company, however, says “Spectrum win in the 1800 MHz band will give us the impetus to expand the network and launch 4G in eight of our key revenue markets covering 64 per cent of revenues, making it one of the few networks to offer all three services.”
Among other worries for the sector are the falling minutes of usage and the entry of Reliance Jio which is expected to roll out its data and voice services this calendar year. Despite the higher spectrum pay-out, companies will be hamstrung on the pricing front as a lot will depend on the pricing strategy of Reliance Jio. Cutting down of discounted minutes has helped Idea to improve its revenue per minute from 41.1 paise in Q3FY13 to 44.9 paise in Q3FY14. However, minutes of usage came down from 384 to 376 during this period, before peaking out at 406 in March 2013 quarter. Thus, any price increase could lead to further drop in minutes of usage.
Idea though believes tariffs and minutes of voice usage, both will strengthen and expects an increase in usage of value-added services.