Idea Cellular Noise…. no good news ::Macquarie Research,

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Idea Cellular
Noise…. no good news
Event
 The High Court of Delhi announced its judgement on the 2008 merger of
Spice Communications with Idea. The court ruled that the six licences of
Spice could not be transferred to Idea. The court also imposed a fine of
Rs10mn on Idea for withholding information. We spoke to the company to get
their views on this.
Impact
 Idea contemplating next move: Idea did not give a detailed view on its next
steps but is likely to challenge this ruling. This is ‘our’ view on the outcome:
 Idea-Spice merger unlikely to be cancelled: When Idea announced the
merger in 2008, Spice had licenses in six circles and operations in two
(Punjab and Karnataka). Idea and Spice do not have parallel operations in
any circle. Post merger, Idea had moved customers in those two circles to the
Idea brand. The court ruling mentions that the customers should not get
impacted. As a result, we think the DOT (department of telecoms) will allow
Idea to continue operations in these circles. In the worst case, we believe Idea
would have to return the 900MHz spectrum it acquired with Spice and roll out
services in the 1,800MHz spectrum which was allotted to Idea in those circles.
 Overlapping licenses and spectrum on circles will be returned to DOT:
This should have no impact as the street and Idea have not built in use of the
spectrum in the business plan/ financial models. Idea is likely to pay the
Rs10mn fine under protest as they claim to have presented all legally
relevant documents to the court
Earnings and target price revision
 No change. Media reports suggest that the DOT can impose a penalty of
Rs3bn (for six circles); ~1.2% of market cap (6.7% of FY12 EBITDA). We wait
for further details on whether any additional penalty or punitive action is
imposed. The eventual outcome may take at least two quarters to emerge as
Idea is likely to challenge any such fine at the appellate tribunal (TDSAT).
Price catalyst
 12-month price target: Rs52.00 based on a Sum of Parts methodology.
 Catalyst: Progress on operating metrics (ARPM/ MOU/ 3G), news flow on 2G
controversy, regulatory payments and new telecom policy (M&A rules).
Action and recommendation
 Maintain Underperform rating: We believe that the penalty imposed is likely
to have a limited impact on Idea’s financials. But the regulatory/ legal
overhang is likely to impact performance till eventual resolution. At some
stage, we believe Idea will be an interesting name to play. At this time,
however, it is trading at a premium to peers driven by M&A expectations. We
think this is unlikely to materialise in the next two quarters (if at all). We wait
for clarity on the telecom policy (notably excess spectrum charges and M&A
rules) and the valuation premium to shrink before we reconsider our position.