>Idea Cellular (MOTILAL OSWAL)

■ Downgrading FY10E PAT by 28%: We downgrade FY10E PAT for Idea by 28% to reflect margin pressure in incumbent circles from 1) increased competition and 2) recent termination charge cut. We expect near-term weakness in RPM and MOU on lower subscriber quality and increased discounting. While EBITDA loss in new circles (esp. Bihar) could peak out in 4QFY09, six new circle launches lined up for 1QFY10-3QFY10 will continue to drag margins. Our FY10/ FY11 EBITDA estimate is now 5-6% lower than consensus while PAT is 30-40% lower.

■ Subscriber momentum remains strong but earnings to stabilise only in FY11: Subscriber momentum remains strong for Idea. QTD, Idea (incl. Spice) reported second highest subscriber growth at 9.2%, largely driven by ramp-up in new circles (Mumbai and Bihar). However, aggressive expansion and full consolidation of Spice from FY10 will lead to 15% PAT decline in FY10E (21% decline in FY09E). We expect earnings to stabilise only in FY11 (+6% YoY).

■ More susceptible to negatives; risks to tariffs is on the downside: Idea is highly leveraged to mobile RPM movements given lower margins (PAT margin of 8% v/s 22-25% for Bharti and RCOM) and no significant non-wireless business. We believe that risk to tariffs is on the downside in the current environment due to several simultaneous new launches by Aircel, RCOM, Tata Tele, Vodafone, and Idea itself. We model a 15% RPM decline in FY10E (similar to Bharti) v/s 16-17% decline over FY07-09E.

■ Execution on track; FY09 marks peak capex (ex-3G): Idea remains a solid long-term growth story given strong market share traction, significant network expansion, healthy balance sheet, and lower time-to-market due to its participation in Indus. FY09 will be peak capex for Idea; capex intensity (ex-3G) is likely to decline from 64% in FY09 to 23% in FY11.

■ Indus IRU unlikely to impact consolidated financials: IRU with Indus has been implemented effective January 2009 and consequently Idea will start paying rent on ~11,100 towers. As of December 2008, Idea had ~17,800 owned towers with a tenancy ratio of 1.4x. IRU implementation is unlikely to meaningfully impact consolidated financials as Idea will consolidate Indus on JV basis (16% stake). Standalone EBITDA could be impacted by ~Rs4.3b assuming a rental outgo of ~Rs32,000/site/month.

■ Valuations remain at a premium; Neutral: Idea is trading at 7.1x EV/EBITDA FY10E and 23.7x EPS based on our revised estimates. Valuation premium reflects depressed earnings due to continued investments in new circles (which are currently loss making). However, given competitive pressure on incumbent circles, possibility of consensus downgrades, and low RoIC, stock performance is likely to remain muted. Neutral.

To see full report: IDEA CELLULAR