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Idea Cellular Limited
Get ‘idea’
Investment rationale
Well positioned for long-term value creation
Idea Cellular is the fifth largest telecom operator in India, in terms of wireless
subscriber market share, but third in terms of revenues. Thanks to its attractive
2G/3G spectrum footprint, strong brand and execution capabilities, we expect
Idea to further consolidate its position as a Tier-I wireless operator, alongside
Bharti and Vodafone-Essar.
Significant catch up in operational/financial metrics likely
We expect Idea to continue to outperform industry revenue growth, owing to
its 2G footprint expansion and favourable base-effect in terms of total subs as
well as MOU/sub. More importantly, Idea's wireless EBITDA margin (~21%
in 2QFY11) is significantly lower compared to Bharti (37%). We expect the
gap to narrow (to <10pps) over medium to long term, driven by turnaround
in 10 new circles (incl. Karnataka), and higher revenue scale in older circles.
FCF break-even in FY12e
Idea's net profit would see a sharp drop in FY12e due to 3G-related costs
(amortisation and interest). Nonetheless, it is likely to achieve FCFF-breakeven,
driven by higher operating FCF and moderation in capex. We forecast net
debt of ~INR123bn by end-FY12e (excl. Indus), as against INR93bn presently.
Valuation and outlook
Idea’s stock currently trades at FY12e/13e EV/EBITDA of 7.8x/6.4x. However,
excluding the tower business (INR20/share), the core wireless business is
being valued at 7.4x/6.1x FY12e/13e EV/EBITDA. With prospects of >20%
EBITDA CAGR over the next 2-3 years, we believe Idea's forward EV/EBITDA
valuation is likely to sustain at around 7.5x, implying a share price of INR85
by Dec-11 (>20% absolute upside potential). Key downside risks are: Irrational
competition post introduction of MNP, levy of one-time fee for additional
spectrum held by incumbents.
Investment rationale
Potential to outperform
Idea's operating and financial metrics are significantly lower than those of 'senior'
GSM operators like Bharti and Vodafone-Essar. Prima-facie, this indicates potential
for superior revenue and EBITDA growth relative to the industry and closest peers.
Idea has steadily gained revenue market share over the last few years, thanks to
expansion in geographic footprint, increased capex spend in established circles, and
strong brand/execution. The company should continue to deliver superior revenue
growth in our view, thanks to base-effect (lower market share of net-adds and MOU
per sub versus peers).
More importantly, Idea's wireless EBITDA margin (~21% in 2QFY11) is significantly
below that of market leader Bharti (~37%). We expect this gap to narrow over the
medium-to-long term, driving Idea's out-performance at the EBITDA level versus its
larger rivals. At present, Idea's margins are weighed down by start-up losses in the
nine new circles, poor margins in the Karnataka circle (acquired from Spice), as well
as lower network utilisation and revenue scale in the older circles.
Earnings to decline sharply in FY12e, but focus on free cash flows
We expect Idea's consolidated net profit to decline sharply in 4QFY11e and again in
1QFY12e, driven by 3G-related costs (spectrum fee amortization, depreciation and
interest). However, this is well known and already reflected in the share price. For the
next 1-2 years, we believe investors should focus on Idea's EBITDA growth and FCF
generation and not on earnings. We expect the company to turn FCFF positive by end
of FY12e; however, given the high interest burden, Idea's net-debt is unlikely to start
coming down until end-FY13e.
Valuation and outlook
Idea’s stock currently trades at FY12e/13e EV/EBITDA of 7.8x/6.4x. However,
excluding the tower business (INR20/share), the core wireless business is being valued
at 7.4x/6.1x FY12e/13e EV/EBITDA.
With prospects of >20% EBITDA CAGR over the next 2-3 years, we believe Idea's
forward EV/EBITDA valuation is likely to sustain at around 7.5x, implying a share
price of INR85 by Dec-11 (>20% absolute upside potential). We upgrade our
recommendation to BUY on current levels.
Key downside risks are: Irrational competition post introduction of MNP, levy of onetime
fee for additional spectrum held by incumbents.
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