Idea Cellular

An upwardly mobile ‘Idea’

Idea Cellular, a pure-play wireless operator, has not missed out on its share of the spoils in India's phenomenally successful mobile telephony story. This has been the case despite the company not being a pan-India player, having a presence in 11 of the 23 telecom circles in the country. Going ahead, we expect the company to grow at a faster-than-industry average rate and continue to reap the benefits of India's explosive mobile telecom growth story, making it the fastest-growing telco under our coverage.

Strong focus on execution post-management changes: Idea Cellular, after several changes in its shareholding pattern, finally passed into the hands of the Aditya Birla Group in mid-2006 with the exit of the Tata Group. Post the takeover, Idea has focussed strongly on execution and this has been reflected in its marketshare, which has been steadily rising. On account of shareholder issues through a significant part of its operating history, important management time was spent on resolving these issues, leading to an inconsistent performance on the marketshare front. With these issues now sorted out, the company has placed a strong focus on execution and with an experienced management team in place, seems set to record strong growth going forward.

Tower hive off to improve operational efficiencies: In line with the industry leaders Bharti Airtel and Reliance Communications (RCOM), Idea's Board of Directors have also decided to hive off its passive telecom infrastructure into wholly-owned subsidiaries, subject to court approval. With the concept of infrastructure sharing taking off in India, this is likely to enable the company to improve its operational and capex efficiencies. The value of its tower business on a ball-park basis works out to Rs23 per share.

Fastest-growing telco, EPS CAGR of 73.6% over FY2007-09E: Idea Cellular is expected to maintain rapid growth over the next few years, driven primarily by strong accretion to its mobile subscriber base. We forecast Topline and Bottomline to grow at a CAGR of 45.2% and 73.6% respectively, over FY2007-09E, making the company the fastest-growing telco under our coverage.

Outlook and Valuation

Going forward, we expect Idea Cellular to record a Topline CAGR growth of 45.2% and Bottomline CAGR growth of 73.6% over FY2007-09E. EBITDA Margins are expected to be largely flat on account of significant expansion costs that the company would have to incur to expand its network across the country.

We expect the Topline growth to come primarily from strong accretion to Idea’s mobile subscriber base, which we expect will hit 33.7mn by FY2009 from 14.0mn in FY2007, a CAGR growth of over 55%. This we expect will grow at a faster rate than the overall industry average, which is 46%. This is expected to lead to some marketshare gains. We expect Idea to record marketshare of 9.8% by FY2009E vis-a-vis 8.7% in FY2007. However, we expect the pressure on ARPUs to continue and estimate an 11% CAGR fall over FY2007-09E.

At Rs120, the stock trades at a P/E of 20.9x FY2009E EPS, EV/EBITDA of 12.1x FY2009E EBITDA and an EV/subscriber of US $274.5 on our FY2009E subscriber base. We Initiate Coverage on the stock, with a Buy recommendation and 12-month Target Price of Rs142. This is excluding any potential benefits derived from the hiving off of its tower business.

----- With due apologies and full credits to Angel Broking Limited