Idea Cellular IDEA IN Big aspirations need capital; downgrade to SELL -Religare

While Idea has shown solid execution in voice, we take a closer look at its
positioning within the data market. With slowing voice market growth, we
think players need to incrementally strategize for data. In our view, Idea needs
to match the investments of larger players given its market share aspiration.
Idea’s levered balance sheet is a constraint and it needs more capital to
compete effectively in data. Valuations at 8x fwd EV/EBITDA and the premium
to Bharti could prompt management to consider raising equity capital.

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 Voice growth slowing, data key: While March-quarter voice volume growth came
as a surprise to us, we think this was led by a one-time event, viz. the exit of certain
weak operators. Most circles grew 5-7% YoY (Fig 7) in the March quarter and very
few reported double-digit growth. This implies themarket share push will continue
in voice, and data will become the key driver over the medium term.
 Idea needs to keep up investments…: In order to carry the market share gain
momentum of voice into data, Idea’s investments in data would need to keep pace
with larger players. At present, Idea’s 3G footprint lags peers. We have seen a fall in
capex/sales in FY13 to conserve cash, but such low levels are unsustainable.
 …but balance sheetsmaller, likely need for capital: Idea’s balance sheet is smaller
than Bharti’s and leverage is a constraint (Fig 19). Given the need to investin data
RMS, Idea would likely have to raise capital or sell assets to create room for capex and
spectrum payouts. Competition in data will be tough with Vodafone, Bharti (already
raised equity, Fig 15) and RIL; thus Idea needs to strengthen its balance sheet.
 Valuations expensive,stay cautious: Idea is trading at 8.3x forward EV/EBITDA, a
38% premium to Bharti. While execution has been superior and the underlying
market structure has improved, sector growth has decelerated and risks remain.
Downgrade to SELL on limited stock upside;maintain TP at Rs 110