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Idea Cellular (IDEA) - Visit Note - Dtd. - March 15, 2013




Axis Capital Limited


18 Mar 2013





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We met Himanshu Kapania, Managing Director of Idea Cellular and came back more confident on sustained uptick in RPM and data revenue – the key earnings and valuation drivers. Key takeaways:  Current and headline RPM gap will continue to narrow: The gap between current (34 paise) and headline (43 paise) voice RPM will continue to narrow as promotional offers keep declining at a faster clip with reducing competition (exits and scale down of operations by new operators)  Exponential growth in data revenue likely as data-enabled handsets now affordable: Though addressable market opportunity for data revenue is 450-500 mn subscribers, the current 3G penetration is less than 10%. Declining handset prices (at inflexion point of USD 45-50) will ensure rapid growth in data usage J-curve in 3G likely: Growth in India, which has been slow in first two years, will see a pick up over the next couple of years – in line with global trends. With this, we expect non-voice ARPU to reach international standards (30-40%) over next 3-5 years from 15% currently. Voice volumes – room for upside: Management believes Idea currently loses Rs 135 mn per day on promotional offers (due to 9 paise lower RPM compared to headline tariff) and highlighted the potential market opportunity at ~500 mn based on declining dual SIMs. Also, with declining competitive intensity, minutes will migrate from marginal players to old operators as price arbitrage reduces. Maintain HOLD with TP of Rs 105 (8% downside): We value Idea at Rs 140/sh (7x FY15E EV/ EBITDA) less Rs 35/sh for regulatory charges. Note the regulatory charges can reduce further on possible lower spectrum prices after the failure of the recent 900 MHz/ 1800 MHz auctions. At CMP of Rs 113, the stock trades at 24x FY14E EPS of Rs 4.7 and 17x FY15E EPS of Rs 6.8. Regards, Priya Rohira (Executive Director – IT & Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1104 Nivedan Reddy (Asst VP – Telecom) Institutional Equity Research Axis Capital Ltd. Tel.: + 91 22 4325 1128

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