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UBS Investment Research
Idea Cellular
Spice merger – Not a big issue
Event: Idea challenges order on Spice merger to division bench (Delhi HC)
Idea has challenged the earlier Delhi high court (HC) ruling on Spice merger to a
division bench. Delhi HC had stayed the transfer of six mobile licenses of Spice to
Idea stating that the company did not comply with M&A guidelines. It had asked
Idea to seek DoT permission for merging Spice service areas. The court has also
imposed a fine of Rs 10m on Idea for concealing information. Idea has maintained
that it has not concealed any information and will contest the judgement.
Impact: Maximum fine is likely to be Rs3,300m or Rs1 per share
Based on our discussions with industry contacts, we believe that the most likely
outcome is that Idea pays a fine to DoT of Rs3,300m or Rs1 per share. Of the 6
Spice service areas, Punjab and Karnataka are operational. Idea is the number two
player in Punjab with rev market share of 20.6% while in Karnataka Idea is
number four with rev market share of 7.6%. Based on AGR data, Punjab
contribution 5.4% to AGR in Mar11 while Karnataka contribution was 4%
Action: Idea is our top pick in the Indian mobile sector
Idea continues to outperform its peers both in terms of revenue and earnings
growth. Further, we expect Idea to benefit the most from improvement in pricing,
regulatory environment given it’s a pure play on Indian mobile sector. We think
Idea could also be an M&A candidate as and when consolidation plays out in the
sector.
Valuation: Maintain Buy rating with SoTP based PT of Rs100
We value Idea at Rs93, Idea’s share in Indus at Rs20 and also incorporate a charge
of Rs13 towards one time spectrum fees and spectrum renewal fees.
Idea Cellular
Idea Cellular is a GSM mobile operator in India with a nationwide subscriber
base of 43.0m (including Spice) for a market share of 11.1% as of March 2009.
The company operates in 16 of 22 service areas in India and has access to 900
MHz spectrum in nine of 16 service areas. The company is part of the Aditya
Birla Group.
Statement of Risk
We believe irrational competition among operators presents the biggest industry
specific risk factor for Idea Cellular. In terms of company-specific risks, we
identify the following: new circle strategies, and Idea’s ability to scale up to
meet burgeoning demand in the Indian mobile sector.
There is low visibility for capex associated with the new circles as it will depend
on the amount of spectrum allocated as well as which circles are likely to be
allocated spectrum.
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