>IDEA CELLULAR (BNP PARIBAS)

Patience will pay – reiterate BUY

■ The 900 MHz spectrum advantage
Idea’s GSM 900MHz spectrum covers 47% of the population, which provides it with competitive advantage over new entrants with 1800MHz. The 900MHz spectrum can accommodate ~50% more subscribers per BTS (refer spectral coverage charts – Exhibit 1 and 2) compared to 1800
MHz, thus providing higher ROI. Analysis of revenue market share across circles of Bharti validates that performance in 900 MHz circles is better compared to 1800MHz circles in most circles. We expect Idea to consolidate its position among the top operators in India by virtue of this superior spectrum asset coupled with strong execution capabilities.

■ Management’s focus on profitability instils confidence
Management has highlighted its focus on profitability as it expands into new circles. In its new markets, management intends to optimize rather than maximize network coverage, which provides us comfort in our EBITDA margin estimates. The reported EBITDA of Idea has been depressed as the EBITDA of older profitable circles has been offset by the losses in the recently launched circles. As the new markets turn profitable we expect a significant growth in EBITDA over the next 24-36 months providing a three-year EBITDA CAGR of 24%.

■ Adequately capitalized for network expansion and 3G
Idea has guided for a capex of INR60b in FY10 excluding 3G. We expect Idea to generate FY10 EBITDA of INR37.5b which, coupled with existing cash of INR51b, is sufficient to fund its FY10 capex, excluding 3G. We expect Idea to borrow ~USD1b incrementally to fund its 3G plans. Idea had a low net-debt to equity of 0.27x and net-debt to EBITDA of 1.7x which positions it comfortably to take on incremental debt.

■ Raising TP to INR 85; reiterate BUY
We maintain our BUY rating on Idea and increase our TP to INR85.00 from INR65.00 based on a DCF based core business value of INR60.00 (FY10 EV/EBITDA of 7x) and the stake in Indus Tower valued at INR25.00 (EV/tower of USD150,000 in-line with recent tower asset deals). We recommend Idea to investors with a three to five year investment horizon as earnings growth will accelerate around FY11-12 as profitability of new circles peak and interest burden eases.

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