Axiata’s operating companies  (OpCos)  in  India  and  Sri  Lanka  posted fairly  good  set  of  2QCY13  results.  With  the worst  probably  over for  XL Axiata  (XL),  we  see  minimal  downside  risk  to  Axiata’s future earnings. We believe Axiata (and XL) may see a re-rating if regulatory issues and Axis’  acquisition  price  are  sorted  out.  For  XL,  having  additional spectrum will boost its data business while saving 50% on capex.  
 
  Another  solid  quarter  from  Idea.  Axiata’s  associate,  Idea  Cellular (Idea,  9%  of  SOP  valuation),  reported  a  surge  in  1QFY14  net  profit  to INR4,627m  (+97.7%  y-o-y),  marginally  ahead  of  consensus expectations.  1QFY14  revenue  growth  was  intact  (+7.9%  q-o-q)  following a good 4QFY13 (+8.7%). The combination of stronger EBITDA margin and lower tax rate led to net profit rising 50.1% q-o-q.  

  Positive  trends  in  India.  The  solid  quarter  from  Idea  suggests  that mobile  competition  is  now  less  intense,  as  tariffs  are  showing  signs  of improvement.  Management  has  also  indicated  that  Idea  (along  with  the top  three  players)  enjoyed  gains  in  revenue  market  share.  Along  with better  tariffs,  less  discounted  minutes  was  a  factor  for  the  EBITDA margin improvement. If this continues on the back of  easing competitive intensity, Idea should continue to see better profitability.  

  Decent  quarter  for  Dialog.  Axiata’s  84%-owned  subsidiary,  Dialog Axiata (Dialog, 3% of SOP valuation),  posted 2HFY13 core net profit of SLR1,806m  (+3.6%  y-o-y),  in  line  with  our  forecast  (at  51%)  but  beat consensus’ (57%) full-year estimates. Q-o-q revenue growth was steady but EBITDA margin was flat due to rising network rollout cost.  

  Outlook  in  Sri  Lanka.  The  competitive  environment  has  remained largely  stable,  with  Management  indicating  that  data  (9%  of  revenue) grew  56%  in  1H  amid  stable  voice.  However,  it  noted  increasing competition in data (unlike voice, data tariffs do not have floor pricing).

  Investment  case.    Maintain NEUTRAL,  with  an  unchanged  SOP  FV  of MYR6.55.  Axiata’s  FY13  growth  outlook  remains  challenging  due  to underperformance at XL Axiata (EXCL IJ; NEUTRAL, FV: IDR4,600), but its growing dividend is will likely to support the stock.

Source: RHB