Axiata Group - Idea Calls In Weaker

THE BUZZ

Axiata’s 19.7%-owned Indian associate, Idea Cellular (Idea), reported revenue growth of 3% q-o-q (+22% y-o-y) while headline EBITDA expanded 6% q-o-q (+19% y-o-y) to INR14.4bn for 1QFY13. Excluding forex losses, the telco’s core earnings of INR2.6bn reflect a growth of 15% q-o-q (+45% y-o-y).

OUR TAKE

Missing estimates. Idea’s core earnings for the June quarter (1QFY13) were below expectations, with 2QFY13 likely to be a weak one too, due to seasonality. The results were characterized by: (i) a deceleration in revenue growth (+2.5% q-o-q) after two quarters of above average numbers, and (ii) EBITDA margin pressure from the decline in the average revenue per minute (RPM). The telco was affected by the new consumer protection ruling in India, which set a cap on the processing fee for reload vouchers and the company’s inability to pass on the 2% increase in service tax to its subscribers. This contributed to a 3% q-o-q slide in RPM to INR0.41 and the 2%-pts drop in EBITDA margin to 26.1%, excluding the INR1.5bn one-off cost booked in the previous quarter. Idea’s net profit contracted 2% q-o-q as it accelerated depreciation by INR480bn and booked in forex losses from the depreciation of the INR.

Higher VAS from SMS interconnect recognition. Idea’s value added services (VAS) revenue contribution inched higher to 14.5% from 14.3% in 1QFY13 but the latest quarter’s number included the SMS interconnect revenue (previously booked under mobile revenue), which will be the standard going forward. Stripping this out, VAS revenue would have exhibited a slight decline.

3G contribution still immaterial. Idea said 3G remains a very important component of its overall longer term vision and it is committed to expanding the proportion of revenue coming from data. The company’s 3G coverage is currently available in more than 3,000 towns and 10,000 villages. It added 500k active 3G subscribers during the quarter to 3.1m (+19% q-o-q), generating incremental APRU of INR88 (-3% q-o-q).

Regulatory developments. The Empowered Group of Ministers (EGoM) have proposed a reserve price of INR140bn-INR160bn (USD2.5-3bn) for the 1800 MHz spectrum on a pan-India basis. This is 10%-20% lower than the earlier price of INR180bn proposed by the Telecom Regulatory of India (TRAI), which has drawn criticism from the telcos and the GSM Association. The EGoM has submitted its proposal to the Cabinet, which will make a decision ahead of the spectrum auction slated for end-August. We think the auction may be postponed given the tight timeline.

RECOMMENDATION

Maintain NEUTRAL on Axiata. We are maintaining our forecast and SOP fair value of RM5.80 on Axiata. Given the 6% q-o-q depreciation of the Indian Rupee (INR) against the RM, Idea’s weaker earnings Idea will skim its contribution to Axiata. There may be further pressure from the translation of revenue from its other operating companies (OpCos), as the Sri Lankan Rupee (SLR) and the Indonesian Rupiah (IDR) had also slipped 7% and 1% respectively q-o-q, as illustrated in Fig. 2. About 40% of Axiata’s net profit is derived from its overseas OpCos, which account for 41% of our SOP. Its key share price re-rating catalysts are: (i) stronger than expected results, and (ii) a special dividend.

Source: OSK