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Idea Cellular (IDEA) - Co. Update - Dated - October 08, 2013




Axis Capital Limited


09 Oct 2013





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 Biggest beneficiary of on-going industry consolidation – Idea has the highest sensitivity to reduced churn and increase in tariffs – An improving margin profile (600 bps expansion over FY13-15E) and stable capex will result in o Significant de-leveraging on strong FCF generation (net debt/ equity at 0.2x in FY15E vs. 0.9x in FY13); this is irrespective of fund raising (proceeds amount assumed to be approximately same as required for spectrum) o Doubling of return ratios: RoE/ RoCE to improve to 14%/ 16% in FY15E (8%/ 9% in FY13) o Note all figures are post dilution assuming equity issuance of Rs 37.5 bn at CMP  Regulatory hurdle has been downsized: Recent TRAI recommendation of cut in spectrum reserve price addresses the key overhang of steep regulatory pay-outs. Idea’s regulatory charges now stand at Rs 22/sh vs. peak of Rs 55/sh  Idea likely to strengthen spectrum footprint; fund raising will help – While additional spectrum will lead to lower long term capex and better operational efficiencies, the kicker would come from rolling out data services (spectrum acquired through auctions is liberalized i.e. can be used to offer any service) – Voice and data market share to increase: We believe Idea will use spectrum acquired in upcoming auctions to expand 2G capacity for better network coverage and also launch 3G services in major circles like Mumbai and Delhi Maintain BUY with revised SoTP-based TP of Rs 210; implies 15% upside from CMP of Rs 182  We have valued business at Rs 232/sh (9x FY15E EV/EBITDA) and deducted Rs 22/sh as regulatory charges. Note regulatory charges are sensitive to change in spectrum price  Deserves premium valuation: We are comfortable with 9x multiple for Idea as (1) it will be the only listed telecom play in India with a deleveraged balance sheet post FY15 (inducing prospects of high dividend), (2) strong corporate governance, and (3) 90% of consolidated EBITDA is from India wireless business (vs. 50% for Bharti) where industry is seeing consolidation Risks  Reliance Jio aggressively entering voice market: – Mitigant: Reliance Jio has 2300 MHz spectrum, which is inefficient for launching voice services. We believe greenfield investments will be unviable in a voice market which already has a 70% penetration  DoT not accepting cut in spectrum reserve prices – Mitigant: Since last two auctions have failed, we see little reason for DoT to be enthusiastic with pricing. Also, spectrum supply will be more than last auctions At CMP, the stock trades at 30x FY14E EPS of Rs 5.6 and 20x FY15E EPS of Rs 8.6. Note EPS is calculated using fully diluted no. of shares. 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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