Idea Cellular : TP: INR90 Buy ::Motilal oswal

CEO Track – Mr Himanshu Kapania
Industry potential intact; consolidation inevitable
Core essence
 Industry potential for voice and data growth is intact.
 The sector is now better placed to enforce competitive discipline, as relative
gap between scale/margins of incumbents has reduced.
 Upcoming 2G spectrum auction will be a defining event.

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Industry insights
 Industry consolidation is inevitable, given significant losses for challengers
and upcoming increase in spectrum costs.
 Tariffs and margins are bound to reverse; the industry is now better placed to
enforce discipline, as relative gap in scale/margins of incumbents has reduced.
 Expect telecom sector revenue to grow at a CAGR of 10-12% over the next 10
years.
Company vision and strategy
 Idea has scaled up significantly over the last two years, with the top player's
lead over Idea in the India wireless business reducing from 2.7x to 1.9x in
revenue terms and from 4.1x to 2.5x in EBITDA terms.
 It plans to tap the data opportunity by positioning 3G as a mass product.
 It intends to maintain leadership in the established circles; cautiously invest
in new circles to maintain effective deterrent.
Key triggers/milestones/challenges
 Industry VLR subscriber base remains under 700m and has the potential to
reach 1b.
 Upcoming Supreme Court mandated 2G auction will be a defining moment
for the sector, and force various industry participants to rethink their
strategies and cash losses.
 Industry initiatives to reduce subscriber churn will bring sanity in the market
and support margins.


Valuation and view
We expect consolidated EBITDA CAGR of 20% over FY12-14, largely driven by 17%
traffic CAGR. The stock trades at an EV of 6.3x FY13E and 4.9x FY14E EBITDA. Maintain
Buy with a target price of INR90 based on 6.7x FY14 EV/EBITDA (5% discount v/s
Bharti) for wireless business, INR5m/tower for stake in Indus, and INR121b
potential regulatory outlay.