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Idea Cellular Ltd.
Highest Leverage to Indian
Wireless Business
What's Changed
Price Target Rs82.00 to Rs91.00
EPS F2012/13 -2%/+2%
Three reasons for OW: 1) Largest domestic revenue
market share increase over the last two years and the
highest active subscriber base ratio – implying high
quality subscribers. 2) Less capex than peers – due to
having the lowest number of subscribers per spectrum
ratio of the top six operators and the lowest number of
subscribers per base terminal station (BTS). 3) Highest
exposure to the domestic wireless network – and
highest sensitivity to growth via 3G.
Increasing market share: Idea has gained 4%
revenue market share over the last three years to 13.4%,
moving from a regional to an all-India operator. It has
consistently achieved higher revenue growth (at 7% in
F4Q11) than the peer industry average, ex-Idea, of 3%.
Idea now gains as much incremental revenue as the
No.1 player, Bharti, who has almost twice Idea’s
revenue market share at 28%. In terms of quality based
on Telecom Regulatory Authority of India (TRAI) data,
Idea has the highest visitor location register (VLR)
subscribers, of 93%, implying less multiple SIMs in its
network and high yielding subscribers.
Invested for future growth: Idea has consistently
maintained a higher capex-to-sales ratio compared to
domestic peers in building its network. This has led to
the lowest subscriber per spectrum ratio and hence, less
capex requirements in future.
Raising target price: We have raised subscriber
estimates by 15-20% long term and lowered our current
net debt based on the F4Q11 earnings release, leading
to a revised target price of Rs91/share, implying 21%
upside. Cash profit estimates largely remain the same
for the short term, however they are up 5-8% over the
long term.
Investment Case
Summary & Conclusions
We reiterate our OW call on Idea and raise our target price to
Rs91/share, implying 21% upside from current levels.
Reasons behind our positive outlook:
Idea has been improving its operational performance.
Despite the highly competitive Indian telecom sector, which
has recently been turning less intense, Idea has increased its
revenue market share by 4% over three years and has the
highest active subscriber base ratio, implying high quality
subscribers.
The company has also been maintaining a relatively
higher capex-to-sales ratio vs. peers. Idea has the thirdlargest
GSM spectrum amongst operators, including the
superior 900 MHz of spectrum which enables it to have the
lowest number of subscribers per spectrum ratio of the top six
operators and the lowest number of subscribers per BTS.
Hence we believe that in future, Idea will need to spend less on
capex than its peers.
Idea has highest exposure than peers to domestic
wireless and highest sensitivity to growth via 3G. This is
significant since 2G ARPMs are stabilizing due to the reduced
competitive intensity in the Indian wireless space, and
increased 2G data usage. Healthy traffic growth of 5-6% per
quarter could lead to 20-25% minutes growth per annum. Even
assuming a 6% p.a. decline in industry ARPMs from current
levels, 2G revenues show growth in the high teens for
F2012e/13e.
In this report, we have raised subscriber estimates by
15-20% for the long term, based on Idea’s consistent addition
of over 2.5mn subscribers in the last six months (Exhibit 1). We
have also lowered our current net debt forecast based on the
F4Q11 earnings release. This leads to a revised target price of
Rs91/share. Cash profits, which are roughly 3-4x reported
profits, largely remain the same over the short-term however
they are up 5-8% over the long term. Valuations on P/CEPS
basis are therefore more attractive at 7x and 5.5x for F2012E
and F2013E
Improving operational parameters in a tough Industry
environment
The Indian telecom sector has as many as 12-14 operators per
circle, with 5-6 of these existing operators having launched
services in the last two years. A few of the operators have
spectrum, but have not yet launched operations. Despite this
highly populated competitive landscape, Idea has managed to
inch up both its revenue market share as well as subscriber
market share over the last three years. As shown in Exhibit 3,
its subscriber market share has moved up 1.7% to 10.9% and
more importantly its revenue market share has moved up 4% to
13.4%. Idea is one of three players who has a higher revenue
market share than subscribers – suggesting superior quality
paying customers.
To further substantiate this, the TRAI releases data, pertaining
to VLR subs as a percentage of reported subs on a pan-India
basis. This hints at the number of real subscribers vs. net SIM
card sales reported each month. Idea leads the VLR subs
table at 93% of its reported subs, as shown in Exhibit 4 –
implying it has the highest active subscriber base ratio, and in
turn, high quality subscribers
Higher capex-to-sales ratio – leading to highest growth for
now and lower capex spend in future
As shown in Exhibit 5, Idea has been spending a higher
capex-to-sales ratio than its peers; Idea has the third-largest
GSM spectrum amongst operators, including the superior
900 MHz of spectrum, coming behind only Bharti and
Vodafone, as shown in Exhibit 15. Superior capex and
spectrum availability enable it to have the lowest subscribers
per spectrum ratio of the top six operators and the lowest
subscribers per BTS. Hence we believe that in future, Idea will
spend less on capex compared to its peers.
Idea has moved from being a 13-circle player in 2008 to being
an all-India operator currently; aided by its acquisition of Spice
which gave it the Punjab and Karnataka licenses. Idea also
received pair bands of 4.4 MHz of 1800 MHz of spectrum in 10
circles in 2010. This has enabled it to grow absolute
incremental minutes in its network as well as incremental
revenues in line with the leading operator, Bharti (Exhibit 6).
Starting at less than half of Bharti’s base and adding virtually as
much incremental revenue, Idea’s revenue growth rate is twice
as much as its peers.
3G to further compound the overall wireless growth to
20% p.a. in F2011-14e
With the license fees being paid for 3G, balance sheets have
been stretched for incumbents and rationality has prevailed in
pricing. The focus seems to be on getting 2-2.5x of incremental
ARPU ~Rs250/month. The 3G data packages are priced up to
45% more costly than 2G at sub-250 MB consumption; and as
much as 90% for higher consumption of 2 GB. Importantly 3G
so far has not witnessed any tariff wars or subsidies on
handsets. Our discussions with various industry sources
reveal almost 9% of active subscribers have 3G enabled
handsets – that’s 60mn handsets. Initial feedback from
vendors and operators suggests traffic growth from 3G seems
to be already 2-3% of overall revenues and volumes, in the first
quarter of launch.
3G has lower capex than 2G: Incremental capex to move to
3G should be lower than 2G, because of operators’ existing
passive infrastructure. The key spend in 3G capex has been
towards backhaul. Passive spend is about 10%; active radio
electronics and backhaul 45% each. Incumbents are spending
only an additional 10-15% to the tower operators to add a 3G
site on their 2G networks, and hence opex saving costs for 3G
are largely being covered by 2G and hence, theoretically
EBITDA margins could be as high as 60%.
Revenue upside: We believe India could have 90mn
subscribers by 2015, with ~Rs200/month additional ARPU (i.e.
US$4.6bn p.a.) thereby increasing India’s weighted average
ARPU by Rs2-3/month. The industry could gain US$2.3bn in
EBITDA. This could further lead to stabilization in ARPUs for
the industry over the next three years vs. the 15-20% p.a.
decline over the previous three years. Overall revenues for the
Industry could increase from 14% to 17% over F2011/13e
Idea has the highest sensitivity of stocks under our coverage to
higher ARPUs and margins, due to 3G as well as 2G, followed
by RCOM and Bharti. Every 10% change in ARPM changes
profits Idea by 30%. In our base case and target price
calculations we include only the book value of the 3G license
paid. We estimate 3G value of Rs37/share assuming 13mn
subscribers and incremental ARPU of Rs180/share, which
would raise our EBITDA and earnings by an average ~12%
and ~41%, respectively, by F2015e
Towers equate to 41% of market cap
Idea owns ~26k towers through a two-layered structure. It
directly owns around 9k towers. It also owns 17k towers
through its 16% ownership in Indus’ 108k towers in the rest of
the country. Indus – the joint venture between Bharti Infratel,
Vodafone Essar and Idea – was formed in 2007 to provide
passive infrastructure to all mobile operators.
We estimate a possible value for Idea’s towers in Indus using
DCF and use an EV/tower of 100k to value its directly-owned
towers. The combined value for Idea’s towers is US$2.2bn, or
Rs30/share, 41% of its market cap; as shown in Exhibit 12. A
partial sale of the tower business could provide a positive
trigger and improve its balance sheet. This equates to an
enterprise value of US$101K per tower, largely in line with
current deals in the Indian markets. Indus management and
the JV partners said that they would look to list this business in
the near to medium term, although that was in October 2009.
Earlier this year (January 2011), Idea Cellular management
suggested that an Indus IPO is likely to come out by next fiscal
year.
Exhibit 12
Idea: Towers Equate to 40% of Market Cap
Idea directly owned towers 9 ,077
Indus Overall towers 1 08,586
Idea towers in Indus (16%) 1 7,374
Total Idea towers 2 6,451
Towerco Contribution to idea's base case (Rs/sha 3 0
Towerco Value (US$ bn) 2 .2
Idea Mcap (US$ bn) 5 .5
Towerco % of Overall Mcap 40%
EV/Tower 1 00,167
EV/Tower for Standalone towers 1 00,000
Source: Company data, Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd.
Highest Leverage to Indian
Wireless Business
What's Changed
Price Target Rs82.00 to Rs91.00
EPS F2012/13 -2%/+2%
Three reasons for OW: 1) Largest domestic revenue
market share increase over the last two years and the
highest active subscriber base ratio – implying high
quality subscribers. 2) Less capex than peers – due to
having the lowest number of subscribers per spectrum
ratio of the top six operators and the lowest number of
subscribers per base terminal station (BTS). 3) Highest
exposure to the domestic wireless network – and
highest sensitivity to growth via 3G.
Increasing market share: Idea has gained 4%
revenue market share over the last three years to 13.4%,
moving from a regional to an all-India operator. It has
consistently achieved higher revenue growth (at 7% in
F4Q11) than the peer industry average, ex-Idea, of 3%.
Idea now gains as much incremental revenue as the
No.1 player, Bharti, who has almost twice Idea’s
revenue market share at 28%. In terms of quality based
on Telecom Regulatory Authority of India (TRAI) data,
Idea has the highest visitor location register (VLR)
subscribers, of 93%, implying less multiple SIMs in its
network and high yielding subscribers.
Invested for future growth: Idea has consistently
maintained a higher capex-to-sales ratio compared to
domestic peers in building its network. This has led to
the lowest subscriber per spectrum ratio and hence, less
capex requirements in future.
Raising target price: We have raised subscriber
estimates by 15-20% long term and lowered our current
net debt based on the F4Q11 earnings release, leading
to a revised target price of Rs91/share, implying 21%
upside. Cash profit estimates largely remain the same
for the short term, however they are up 5-8% over the
long term.
Investment Case
Summary & Conclusions
We reiterate our OW call on Idea and raise our target price to
Rs91/share, implying 21% upside from current levels.
Reasons behind our positive outlook:
Idea has been improving its operational performance.
Despite the highly competitive Indian telecom sector, which
has recently been turning less intense, Idea has increased its
revenue market share by 4% over three years and has the
highest active subscriber base ratio, implying high quality
subscribers.
The company has also been maintaining a relatively
higher capex-to-sales ratio vs. peers. Idea has the thirdlargest
GSM spectrum amongst operators, including the
superior 900 MHz of spectrum which enables it to have the
lowest number of subscribers per spectrum ratio of the top six
operators and the lowest number of subscribers per BTS.
Hence we believe that in future, Idea will need to spend less on
capex than its peers.
Idea has highest exposure than peers to domestic
wireless and highest sensitivity to growth via 3G. This is
significant since 2G ARPMs are stabilizing due to the reduced
competitive intensity in the Indian wireless space, and
increased 2G data usage. Healthy traffic growth of 5-6% per
quarter could lead to 20-25% minutes growth per annum. Even
assuming a 6% p.a. decline in industry ARPMs from current
levels, 2G revenues show growth in the high teens for
F2012e/13e.
In this report, we have raised subscriber estimates by
15-20% for the long term, based on Idea’s consistent addition
of over 2.5mn subscribers in the last six months (Exhibit 1). We
have also lowered our current net debt forecast based on the
F4Q11 earnings release. This leads to a revised target price of
Rs91/share. Cash profits, which are roughly 3-4x reported
profits, largely remain the same over the short-term however
they are up 5-8% over the long term. Valuations on P/CEPS
basis are therefore more attractive at 7x and 5.5x for F2012E
and F2013E
Improving operational parameters in a tough Industry
environment
The Indian telecom sector has as many as 12-14 operators per
circle, with 5-6 of these existing operators having launched
services in the last two years. A few of the operators have
spectrum, but have not yet launched operations. Despite this
highly populated competitive landscape, Idea has managed to
inch up both its revenue market share as well as subscriber
market share over the last three years. As shown in Exhibit 3,
its subscriber market share has moved up 1.7% to 10.9% and
more importantly its revenue market share has moved up 4% to
13.4%. Idea is one of three players who has a higher revenue
market share than subscribers – suggesting superior quality
paying customers.
To further substantiate this, the TRAI releases data, pertaining
to VLR subs as a percentage of reported subs on a pan-India
basis. This hints at the number of real subscribers vs. net SIM
card sales reported each month. Idea leads the VLR subs
table at 93% of its reported subs, as shown in Exhibit 4 –
implying it has the highest active subscriber base ratio, and in
turn, high quality subscribers
Higher capex-to-sales ratio – leading to highest growth for
now and lower capex spend in future
As shown in Exhibit 5, Idea has been spending a higher
capex-to-sales ratio than its peers; Idea has the third-largest
GSM spectrum amongst operators, including the superior
900 MHz of spectrum, coming behind only Bharti and
Vodafone, as shown in Exhibit 15. Superior capex and
spectrum availability enable it to have the lowest subscribers
per spectrum ratio of the top six operators and the lowest
subscribers per BTS. Hence we believe that in future, Idea will
spend less on capex compared to its peers.
Idea has moved from being a 13-circle player in 2008 to being
an all-India operator currently; aided by its acquisition of Spice
which gave it the Punjab and Karnataka licenses. Idea also
received pair bands of 4.4 MHz of 1800 MHz of spectrum in 10
circles in 2010. This has enabled it to grow absolute
incremental minutes in its network as well as incremental
revenues in line with the leading operator, Bharti (Exhibit 6).
Starting at less than half of Bharti’s base and adding virtually as
much incremental revenue, Idea’s revenue growth rate is twice
as much as its peers.
3G to further compound the overall wireless growth to
20% p.a. in F2011-14e
With the license fees being paid for 3G, balance sheets have
been stretched for incumbents and rationality has prevailed in
pricing. The focus seems to be on getting 2-2.5x of incremental
ARPU ~Rs250/month. The 3G data packages are priced up to
45% more costly than 2G at sub-250 MB consumption; and as
much as 90% for higher consumption of 2 GB. Importantly 3G
so far has not witnessed any tariff wars or subsidies on
handsets. Our discussions with various industry sources
reveal almost 9% of active subscribers have 3G enabled
handsets – that’s 60mn handsets. Initial feedback from
vendors and operators suggests traffic growth from 3G seems
to be already 2-3% of overall revenues and volumes, in the first
quarter of launch.
3G has lower capex than 2G: Incremental capex to move to
3G should be lower than 2G, because of operators’ existing
passive infrastructure. The key spend in 3G capex has been
towards backhaul. Passive spend is about 10%; active radio
electronics and backhaul 45% each. Incumbents are spending
only an additional 10-15% to the tower operators to add a 3G
site on their 2G networks, and hence opex saving costs for 3G
are largely being covered by 2G and hence, theoretically
EBITDA margins could be as high as 60%.
Revenue upside: We believe India could have 90mn
subscribers by 2015, with ~Rs200/month additional ARPU (i.e.
US$4.6bn p.a.) thereby increasing India’s weighted average
ARPU by Rs2-3/month. The industry could gain US$2.3bn in
EBITDA. This could further lead to stabilization in ARPUs for
the industry over the next three years vs. the 15-20% p.a.
decline over the previous three years. Overall revenues for the
Industry could increase from 14% to 17% over F2011/13e
Idea has the highest sensitivity of stocks under our coverage to
higher ARPUs and margins, due to 3G as well as 2G, followed
by RCOM and Bharti. Every 10% change in ARPM changes
profits Idea by 30%. In our base case and target price
calculations we include only the book value of the 3G license
paid. We estimate 3G value of Rs37/share assuming 13mn
subscribers and incremental ARPU of Rs180/share, which
would raise our EBITDA and earnings by an average ~12%
and ~41%, respectively, by F2015e
Towers equate to 41% of market cap
Idea owns ~26k towers through a two-layered structure. It
directly owns around 9k towers. It also owns 17k towers
through its 16% ownership in Indus’ 108k towers in the rest of
the country. Indus – the joint venture between Bharti Infratel,
Vodafone Essar and Idea – was formed in 2007 to provide
passive infrastructure to all mobile operators.
We estimate a possible value for Idea’s towers in Indus using
DCF and use an EV/tower of 100k to value its directly-owned
towers. The combined value for Idea’s towers is US$2.2bn, or
Rs30/share, 41% of its market cap; as shown in Exhibit 12. A
partial sale of the tower business could provide a positive
trigger and improve its balance sheet. This equates to an
enterprise value of US$101K per tower, largely in line with
current deals in the Indian markets. Indus management and
the JV partners said that they would look to list this business in
the near to medium term, although that was in October 2009.
Earlier this year (January 2011), Idea Cellular management
suggested that an Indus IPO is likely to come out by next fiscal
year.
Exhibit 12
Idea: Towers Equate to 40% of Market Cap
Idea directly owned towers 9 ,077
Indus Overall towers 1 08,586
Idea towers in Indus (16%) 1 7,374
Total Idea towers 2 6,451
Towerco Contribution to idea's base case (Rs/sha 3 0
Towerco Value (US$ bn) 2 .2
Idea Mcap (US$ bn) 5 .5
Towerco % of Overall Mcap 40%
EV/Tower 1 00,167
EV/Tower for Standalone towers 1 00,000
Source: Company data, Morgan Stanley Research
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