Idea Cellular - breport.myiris.combreport.myiris.com/SIHL/BIRATTCO_20110713.pdf · such as Bharti...

Idea Cellular 13th July 2011

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Subscriber addition will drive revenue growth

Idea Cellular has been riding on the overall telecom growth of India. It has consistently added 10-11% subscribers out of the total domestic subscriber addition in any period. The April 2011 data released by TRAI exhibits that Idea has left behind big players such as Bharti Airtel and Vodafone Essar in terms of net subscriber addition for the month. The steady performance staged by Idea can be attributed to its pan India presence, an efficient telecom infrastructure in place and focus towards the lower income group. We believe that Idea will continue to garner a sizable portion of the net subscriber addition in India. Subscriber number growth has also translated to increase in the minute of usage which has been consistently rising Q-o-Q (9% growth in Q4 FY11 compared to Q3 FY11). Subscriber addition along with growth in MOUs will drive the revenue growth.

Margin maintenance through scale benefit

Idea’s EBITDA margin for the existing circles has been steady for the last four quarters. In the new circles its losses has been reducing gradually narrowing the gap between the existing and new circles. The consolidated EBITDA margin also has remained steady in the same period. Maintaining a steady margin can be attributed to the scale benefit that Idea enjoys. Its opex per minute has declined to Rs.0.31 Cr in Q4 FY11 from Rs.0.36 Cr in Q4 FY10. The minute per cell site (tower) has also improved (to 14 lakh minutes/cell site in Q4 FY11 from 10 lakh minutes/cell site in Q4 FY10), which indicates efficient usage of the existing cell sites by diverting more minutes of usage through them. We expect Idea will be able to keep the EBITDA margin stable on back of the scale benefit.

Valuation

At current market price of Rs.79 the stock is trading at an EV/EBITDA multiple of 7.8x and 6.5x its FY12E EBITDA of Rs.4,891 Cr and FY13E EBITDA of Rs.5,891 Cr respectively. We value the stock at EV/EBITDA multiple of 9.0x its FY12E EBITDA of Rs.4,891 Cr and 7.5x its FY13E EBITDA of Rs.5,891 Cr and arrive at a target price of Rs.98. We recommend BUY for Idea for an investment horizon of 12 months with an upside potential of 25%.

Sector: Telecom Key Details Market Cap(Rs. Cr.) 25,951 Market Cap(US$ Bn.) 5.8 O/S Share, Cr 330.4 Face Value, Rs. 10 2 Week Avg Vol, NSE Lakh 55.4 52 Week High 80.9 52 Week Low 55.6 Rs/US$ 44.6 Bloomberg IDEA IN Reuters IDEA.BO NSE IDEA BSE 532822

Share Holding, % Q4 FY11 Q4 FY10 Promoters 46.04% 46.99% FII 9.90% 7.40% Inst Inv 7.91% 7.52% Others 36.15% 38.09%

Source: BSE

Subrata Das (Analyst) [email protected] Siddharth Rajpurohit (Senior Analyst) [email protected]

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Idea SENSEX

CMP Rs.79 Recommendation: BUY Target Price Rs.98

mailto:[email protected]�



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Company Background

Idea Cellular an Aditya Birla Group company, is a leading telecom service provider with Pan-India presence. It operates in all the 22 circles in India. As per the TRAI’s April 2011 data Idea is the fifth largest service provider in India in terms of total wireless subscriber base. Idea operates in the 900 MHz spectrum in 9 circles in India; which provides an advantage to the company as operation in 900 MHz Spectrum involves lower Capital expenditure and Operational expenditure compared to 1800 MHz. In the recently concluded 3G spectrum auction, Idea won spectrum in 11 out of 22 service areas with a total payment of Rs.5,769 Cr. Interestingly none of the telecom operators have 3G license for all the 22 circles. BSNL was allotted 3G licenses in 20 circles, and MTNL in 2 circles of Delhi & Mumbai. Bharti Airtel, Reliance Communications and Aircel have won licenses in 13 circles each in the 3G auction.

Tower Infrastructure

Idea may look to monetize the 9,000 telecom towers it owns, over and above the tower venture Indus Towers. Stake sale in Idea’s tower arm is expected to generate about Rs.5,400 Cr., helping the company repay some of its debt it took for 3G radio bandwidth.

Indus Towers

Idea Cellular holds 16% stake in India’s largest tower company Indus Towers. Bharti Infratel and Vodafone are the two other promoters with 42% stake each in Indus Tower. The company which provides shared telecom infrastructure services to the telecom operators and other wireless service providers such as broadband service providers currently has 1,10,000 towers in 16 telecom circles. Exhibit1: Indus Tower shareholding

Source: Company, SIHL Research

Idea , 16%

Bharti , 42%

Vodafone , 42%


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Subscriber additions to drive revenue growth

Idea is the fifth largest operator in terms of number of wireless subscribers. The performance has further improved in April 2011 when it has added 24.5 lakh subscribers to rank second in the subscriber addition tally after Reliance Communication. Idea has always managed to maintain a 10-11% share of the total domestic subscriber addition in any period. We believe that Idea will continue to maintain its pie in the total subscriber addition which will ensure a steady revenue growth for the company. Its focus towards the lower usage customers is likely to impact parameters such as ARPU or revenue per minute (RPM) however will help its top line to grow steadily. Exhibit2: Operators’ share in net additions during April 2011

Source: TRAI, SIHL Research

Reliance , 19.16%

Idea, 15.97%

Bharti, 15.72%Vodafone,

15.71%

Unitech, 9.46%

Tata , 8.12%

Aircel, 7.22%

Sistema, 3.77% Etisalat, 1.50%

Stel, 1.18% BSNL, 1.13% Videocon, 0.88%

Loop, 0.14% Others, 0.04%


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Exhibit3: Total wireless subscriber additions every quarter

Particulars, Cr. Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Bharti Airtel 12.8 13.7 14.3 15.2 16.2 Reliance Com. 10.2 11.1 11.7 12.6 13.6 Vodafone Essar 10.1 10.9 11.6 12.4 13.5 Idea Cellular 6.4 6.9 7.4 8.2 9.0 Tata Teleservices 6.6 7.3 7.9 8.4 8.9 Aircel 3.7 4.2 4.7 5.0 5.5 Uninor 0.4 0.6 1.1 1.9 2.3 BSNL 6.9 7.3 7.8 8.7 9.2 MTNL 5.1 5.2 5.3 5.4 5.5 LOOP 2.8 2.9 3.0 3.0 3.1 Videocon 0.0 1.9 4.5 7.3 7.1 STEL 1.0 1.3 1.6 2.3 2.8 HFCL 0.3 0.7 1.0 1.6 1.5 Etisalat DB 0.0 0.0 0.1 2.6 9.7

Source: TRAI, SIHL Research Besides the addition of fresh subscribers Idea has also emerged as the biggest beneficiary of the mobile number portability (MNP) launched in January 2011. Idea has reported a net gain of 6,87,602 subscribers in its network due to MNP till May 2011.

Idea has also recorded highest number of active subscribers in April 2011 as per the data released by TRAI. Active subscribers are those subscribers whose mobile connection is at an active state currently and is able to receive and send voice calls or SMS. The active subscriber data represents a true picture of the actual number of subscribers any operators have at any point of time. A large number of subscriber addition through MNP and higher number of active subscribers reported by Idea indicate a satisfied and a loyal customer base. This can be attributed to Idea’s pan Indian presence and better network connectivity.


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Exhibit4: Proportion of active subscribers

Particulars, in % of total subscribers Jan-11 Feb-11 Mar-11 Apr-11 Idea 90.3 92.7 93.1 92.9 Bharti Airtel 92.6 92.5 90.7 89.5 Vodafone Essar 77.7 78.4 79.5 80.8 Reliance Com. 66.3 65.4 64.1 63.6 Uninor 47.0 50.7 52.7 54.8 BSNL 53.4 53.2 53.3 54.6 Aircel 59.9 57.2 55.6 54.1 Tata Teleservices 49.6 49.8 50.0 48.7 Loop 44.1 43.9 43.5 42.5 Videocon 49.7 46.6 44.3 42.5 HFCL 49.9 44.6 41.9 41.5 STEL 41.0 38.6 37.1 37.1 MTNL 36.6 36.2 35.4 35.2 Etisalat DB 33.6 37.5 34.2 31.5

Source: TRAI, SIHL Research

Margin maintenance through scale benefit

Idea has established operations in 13 circles of Maharashtra & Goa, Gujarat, Andhra Pradesh, Madhya Pradesh & Chhattisgarh, Delhi, Kerala, Haryana, Uttar Pradesh West & Uttaranchal, Uttar Pradesh East, Rajasthan and Himachal Pradesh and also in Punjab and Karnataka (procured via Spice Telecom acquisition). The new service areas include Mumbai, Bihar, Orissa, Tamil Nadu, J&K, Kolkata, West Bengal, Assam and the North East. While the EBITDA margin in the new service areas has been stable from Q1 FY11, losses in the new service areas have been reducing gradually.

Exhibit5: EBITDA margin in old and new circles Particulars, Rs. Cr. Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 11 Old circles

Revenues 3,025 3,383 3,351 3,594 3,830 EBITDA 975 934 905 960 1,041 EBITDA margin 32.2% 27.6% 27.0% 26.7% 27.2% New circles

Revenues 276 306 338 396 439 EBITDA -142 -140 -143 -138 -129 EBITDA margin -51.5% -45.7% -42.2% -34.9% -29.4%



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Stability in margins can be attributed to the scale benefit that the company enjoys. Its Opex per minute has declined to Rs.0.31 Cr in Q4 FY11 from Rs.0.36 Cr in Q4 FY10. The minute per cell site has also improved (14 lakh minutes/cell site in Q4 FY11 to 10 lakh minutes/cell site in Q4 FY10) which indicates efficient usage of the existing cell sites by diverting more minutes of usage through them. While the 3G rollout is likely to increase the network cost its ability to keep a check on parameter such as opex/minute will maintain the margin. Exhibit6: Opex per minute Particulars Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Opex* 2,424 2,765 2,780 3,007 3,160 MOU# 6,828 8,227 8,483 9,350 10,196 Cellsites** 66,187 66,725 67,980 70,208 73,668 Opex/Minute 0.36 0.34 0.33 0.32 0.31 Minutes/Cellsite 0.10 0.12 0.12 0.13 0.14


*Opex and Opex/minute in Rs. Cr.

#MOU in Cr.

** Cellsites includes towers owned by IDEA (+) rented from Indus Towers (+) rented from other Tower Infra companies.


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Exhibit7: Operational matrix Particulars Q4 FY10 Q1 FY11 Q2 FY11 Q2 FY11 Q4 FY11 Operating circles 22 22 22 22 22 Cell sites-owned 8,672 8,719 8,838 8,944 9,077 Cell sites-Indus 35,499 35,798 36,618 37,819 39,587 Subscriber base(Cr.) 6.4 6.9 7.4 8.2 9.0 Prepaid subs(% of total subs) 95.7 95.9 96.1 96.3 96.4 Postpaid churn (%) 3.0 2.9 2.9 2.8 2.7 Prepaid churn (%) 7.9 8.4 8.2 10.3 11.0 Blended churn (%) 7.7 8.2 8.0 10.0 10.7 ARPU(Rs.) 185 182 167 168 161 Minute of usage/user 398 415 394 401 397 Revenue per minute(Rs.) 0.47 0.44 0.42 0.42 0.41


Exhibit8: Peer comparison-Financials (based on Consolidated FY11 data)

Particulars Mcap Revenue Mcap/Sales EBITDA Margin PAT Margin Debt/

Equity Debt/Mcap Interest Coverage Ratio

TTM PE RoE RoCE

Rs. Cr

(X) % % (X) (X) (X) (X) % %

Idea 25,951 15,503 1.68 24.4% 5.8% 0.98 0.5 3.0 29.4 7.3% 5.7%

Reliance Comm. 19,886 22,430 0.89 37.5% 6.0% 1.05 1.9 1.8 15.1 3.8% 2.6%

Bharti Airtel 147,722 59,467 2.48 33.7% 10.2% 1.26 0.4 4.5 25.0 12.4% 8.9%

TTML 3,889 3,168 0.91 36.8% 2.5% 7.56* 1.6 1.2 49.1 3.2% 5.7% Source: Company, SIHL Research. Note: TTML has negative Net worth of Rs.615 Cr. IDEA derives highest P/E multiple amongst its listed peers, due to lowest Debt/Equity, and high interest coverage ratio.


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Exhibit9: Peer comparison Revenue (Rs. Cr.) FY10 FY11 Idea 12,447 15,503 Reliance Comm 21,496 22,430 Bharti Airtel 41,847 59,467 Vodafone 21,808 24,941

ARPU (Rs.) 4Q FY10 4Q FY11 Idea 185 161 Reliance Comm 139 107 Bharti Airtel 220 194 Vodafone 197 171

Revenue per Minute (Rs.) 4Q FY10 4Q FY11 Idea 0.46 0.41 Reliance Comm 0.44 0.44 Bharti Airtel 0.47 0.43



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Valuation Exhibit10: EV/EBITDA 1 yr forward band


At current market price of Rs.79 the stock is trading at an EV/EBITDA multiple of 7.8x and 6.5x its FY12E EBITDA of Rs.4,891 Cr and FY13E EBITDA of Rs.5,891 Cr respectively. We value the stock at EV/EBITDA multiple of 9.0x its FY12E EBITDA of Rs.4,891 Cr and 7.5x its FY13E EBITDA of Rs.5,891 Cr and arrive at a target price of Rs.98. We recommend BUY for Idea for an investment horizon of 12 months with an upside potential of 25%.

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Risk Concerns

A recent Delhi court order (dated 4th July, 2011) has directed Idea to transfer six overlapping licenses along with airwaves to the Department of Telecom (DoT), which Idea received when it acquired Spice Communications in 2008 for Rs.2,720 Cr. Out of the six circles, Idea has its own operations in Andhra Pradesh, Delhi, Maharashtra and Haryana; however operation in the Punjab and Karnataka circles are run through Spice’s license. The court order says licenses will remain with DoT, and IDEA cannot use them unless explicit permission is granted. Idea has also been slapped Rs.1 Cr. fine for not sharing complete information with the court.

Idea has received a breather from the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) which passed an interim order restraining DoT from imposing a penalty of Rs.250 Cr. However final decision on the issue yet to be taken and a penalty charged would affect the company’s profitability.


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Financials

Exhibit11: Income Statement Particulars, Rs. Cr. FY10 FY11E FY12E FY13E Total Revenue 13,512 16,743 20,852 25,147 Consolidation Elimination 1,065 1,239 1,772 2,213 External Revenue 12,447 15,503 19,080 22,934 Operating Expenditure 9,040 11,713 14,188 17,043 EBITDA 3,407 3,791 4,891 5,891 Depreciation & Amortization 2,015 2,397 3,077 3,414 EBIT 1,392 1,393 1,814 2,477 Interest 369 457 871 767 Other Income 101 61 52 22 Profit Before Tax 1,124 997 995 1,732 Tax 121 98 189 346 PAT 1,003 899 806 1,386

Source: Company, SIHL Research Exhibit12: Balance Sheet Particulars, Rs. Cr. FY10 FY11E FY12E FY13E Sources of Funds

Share Capital 3,300 3,303 3,303 3,303 Reserves & Surplus 8,026 8,947 9,753 11,139 Shareholders' Fund 11,370 12,298 13,104 14,490 Convertible Preference Share 2 2 2 2 Loan 7,859 12,023 12,224 9,508 Deferred Tax Liability 214 310 310 310 Total 19,446 24,633 25,640 24,310

Application of Funds Gross Block 27,059 33,698 36,198 39,698

Depreciation & Amortization 8,891 11,213 14,290 17,704 Net Block 18,168 22,485 21,908 21,994 Capital Work in Progress 546 3,647 5,331 4,415 Intangible Asset Fixed Asset 18,714 26,132 27,239 26,409 Goodwill 6 6 6 6 Investment 1,130 1,228 1,228 1,228 Current Asset 3,663 3,355 3,972 4,436 Inventories 54 46 78 86 Sundry Debtors 466 472 695 838 Cash 290 250 373 175 Other Current Asset 298 295 295 295 Loans and Advances 2,556 2,292 2,531 3,042 Current Liabilities & Provisions 4,068 6,087 6,805 7,769 Current Liabilities 3,845 4,052 4,770 5,734 Provisions 223 2,035 2,035 2,035 Net Current Asset (405) (2,733) (2,833) (3,333) Total 19,446 24,633 25,640 24,310



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Exhibit13: Cash Flow Statement

Particulars, Rs. Cr FY10 FY11E FY12E FY13E Net Profit+ Depreciation 3,293 3,296 3,883 4,800 (Inc)/Decrease in Working Capital -750 476 223 301 Cash Flow from Operation 2,542 3,772 4,106 5,101 Capital Expenditure -4,147 9,739 4,184 2,584 Change in Investment Dec/(Inc) 1,004 -97 0 0 Cash Flow from Investment -3,144 9,642 4,184 2,584 Issue of Equity 2 4 0 0 Issue/(Repay) of Debt -1,578 4,164 201 -2,716 Dividend -635 0 0 0 Cash Flow from Financing -2,210 4,167 201 -2,716 Miscellaneous Item 16 1,663 0 0 Cash Flow from Year -2,796 -40 123 -199 Opening Balance 3,086 290 250 373 Net Cash 290 250 373 175


Exhibit14: Ratio Analysis Growth FY10 FY11E FY12E FY13E Revenue 22.9% 24.6% 23.1% 20.2% EBITDA 21.2% 11.3% 29.0% 20.4% EBIT -1.2% 0.1% 30.2% 36.5% PAT 13.9% -10.4% -10.3% 71.9% Margin

EBITDA 27.4% 24.5% 25.6% 25.7% EBIT 11.2% 9.0% 9.5% 10.8% PAT 8.1% 5.8% 4.2% 6.0% Valuation

EPS 3.0 2.7 2.4 4.2 Book Value per Share 34.4 37.2 39.7 43.9 P/E 25.9 28.9 32.8 19.1 P/BV 2.3 2.1 2.0 1.8 EV/EBITDA 9.8 10.0 7.8 6.1 Fundamental

Debt Equity 0.7 1.0 0.9 0.7 Interest Coverage Ratio 3.8 3.0 2.1 3.2



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Technical View

Idea has breached a Bearish price channel on weekly chart. The first warning of a trend change occurred when prices traded above 55 level of price channel line support and 20 week EMA. A subsequent break above main trend line resistance of 72-74 has provided an indication of a trend change along with the confirmation of higher lows over a period of time. Investor can buy IDEA at CMP of Rs.79 with a stop loss of Rs.70 for a short term target of Rs.95. We are optimistic that stock will further exercise its strength with higher volume expansion & increased volatility to attain the levels of 120 – 130.


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Contact Details

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