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Idea Cellular Ltd (IDEA IN)
N: Idea cuts 3G tariffs to take the mass market route
Idea cuts 3G tariffs by 50%; others likely to follow, in our view
3G ecosystem still has gaps; combination of lower cost
handsets and availability of mass market content the key
Neutral rating and retain TP of INR97
Idea cut its 3G data tariffs by c50%: The move, in our view, is driven by a poor take-up
in 3G so far and efforts by the company to take 3G mass market (evident from the
company’s 3G brand campaign, which is trying to position 3G as mass market from its
present positioning of high-end services). Idea’s new 3G tariff plans make it cheaper than
CDMA data card plans (see Figure 3). We note the tariff cuts were expected and hence we
are not making any change to our estimates. We estimate c65m 3G subscribers for the
overall sector by the end of FY13, and incremental 3G ARPU of cUSD3. In our view, the
success of Idea’s lower tariff will be driven by making current users stickier, driving rapid
3G conversion and improving 3G usage.
What is driving Idea’s tariff cut? India has c550m unique mobile users, of which only
c50m are estimated to have 3G handsets. So the problem is twofold: first, the task to
migrate subscribers with 3G capable handsets to the 3G platform, and second, the need to
create demand for the rest of the base, so that subscribers invest in 3G-enabled handsets.
Although prices for 3G handsets have been coming down, there are some obvious gaps in
content infrastructure which need to be plugged. That said, the combination of lower
tariffs and declining handsets prices does lower the total cost of ownership and this should
improve 3G migration and 3G data usage. However, for the sector and Idea to benefit
fully from higher volumes, the 3G network should be robust, otherwise tariffs cuts may
just fail to deliver the desired results. If all goes well, upward revision of 3G capex by the
sector is likely, in our view.
Handsets, data and tariffs and not only tariffs: India’s 2G minute factory model success was
not driven just by tariff cuts; the key was the availability of cheap handsets, innovative
products such as lifetime plans and lower tariffs. In our view, 3G also needs to go down the
same route, and post these tariff cuts, the focus should now shift to plug gaps on content
infrastructure. If these gaps remain, 3G mass market positioning may not materialise.
Valuation and risks: We retain our 12-month target price of INR97 and reiterate our Neutral
rating on the stock. We value the core business at INR91 per share and its stake in Indus JV at
INR21. Our target price factors in the negative impact of INR15 for the TRAI (Telecom
Regulatory Authority of India) recommendations on sector regulations. Upside risks include
the ability to monetise tower assets (Idea has a 16% stake in Indus), and the key downside risk
would be acceptance of the TRAI recommendations in their current format.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Idea Cellular Ltd (IDEA IN)
N: Idea cuts 3G tariffs to take the mass market route
Idea cuts 3G tariffs by 50%; others likely to follow, in our view
3G ecosystem still has gaps; combination of lower cost
handsets and availability of mass market content the key
Neutral rating and retain TP of INR97
Idea cut its 3G data tariffs by c50%: The move, in our view, is driven by a poor take-up
in 3G so far and efforts by the company to take 3G mass market (evident from the
company’s 3G brand campaign, which is trying to position 3G as mass market from its
present positioning of high-end services). Idea’s new 3G tariff plans make it cheaper than
CDMA data card plans (see Figure 3). We note the tariff cuts were expected and hence we
are not making any change to our estimates. We estimate c65m 3G subscribers for the
overall sector by the end of FY13, and incremental 3G ARPU of cUSD3. In our view, the
success of Idea’s lower tariff will be driven by making current users stickier, driving rapid
3G conversion and improving 3G usage.
What is driving Idea’s tariff cut? India has c550m unique mobile users, of which only
c50m are estimated to have 3G handsets. So the problem is twofold: first, the task to
migrate subscribers with 3G capable handsets to the 3G platform, and second, the need to
create demand for the rest of the base, so that subscribers invest in 3G-enabled handsets.
Although prices for 3G handsets have been coming down, there are some obvious gaps in
content infrastructure which need to be plugged. That said, the combination of lower
tariffs and declining handsets prices does lower the total cost of ownership and this should
improve 3G migration and 3G data usage. However, for the sector and Idea to benefit
fully from higher volumes, the 3G network should be robust, otherwise tariffs cuts may
just fail to deliver the desired results. If all goes well, upward revision of 3G capex by the
sector is likely, in our view.
Handsets, data and tariffs and not only tariffs: India’s 2G minute factory model success was
not driven just by tariff cuts; the key was the availability of cheap handsets, innovative
products such as lifetime plans and lower tariffs. In our view, 3G also needs to go down the
same route, and post these tariff cuts, the focus should now shift to plug gaps on content
infrastructure. If these gaps remain, 3G mass market positioning may not materialise.
Valuation and risks: We retain our 12-month target price of INR97 and reiterate our Neutral
rating on the stock. We value the core business at INR91 per share and its stake in Indus JV at
INR21. Our target price factors in the negative impact of INR15 for the TRAI (Telecom
Regulatory Authority of India) recommendations on sector regulations. Upside risks include
the ability to monetise tower assets (Idea has a 16% stake in Indus), and the key downside risk
would be acceptance of the TRAI recommendations in their current format.
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