>IDEA CELLULAR LIMITED(EDELWEISS)

DIAL IN FOR GROWTH

■ Optimising presence; maximising long-term growth
Idea Cellular (Idea), currently operating in 17 of 22 telecom circles in India, is set to become a pan-India player by end-2009. The company is a unique wireless play—strong incumbent in a tough industry environment with superior spectrum profile, as well as a new entrant capitalising on new growth opportunities. Idea’s expansion into new circles is expected to provide a leg up to its subscriber and revenue growth in the near term and offer long-term profit growth opportunities. We expect subscribers to double over FY10-12 with new circles contributing ~28% to net adds and ~15% to topline in FY12E.

■ Growth metrics compelling over FY10-12 vis-à-vis domestic peers
We expect Idea to be the fastest growing domestic teleco (ex-Indus) with healthy revenue CAGR of 14% and EBITDA CAGR of 16% over FY10-12E. While we expect new launches to contribute to subscriber/revenue growth, we believe old circles’ profitability will subsidise new circles’ losses up to FY12. Strong investment focus over FY10-11 is expected to keep net profit under pressure, though we expect an improving FCF profile (expect FCF positive in FY12).

■ Indus advantage: Operational benefits and likely valuation gains
Idea holds 13.42% effective stake in India’s largest tower company Indus. Indus provides Idea the scope to leverage its presence in 16 circles for its expansion plans through speedier network rollouts. With Indus consolidation, we expect Idea’s revenue, EBITDA and net profit CAGR of 14%, 20% and 14% respectively over FY10-12E. We believe Idea’s stake in Indus is a likely valuation trigger, if the latter were to list or equity stake sale by promoters or with addition of external tenant(s).

■ Outlook & valuations: Healthy growth metrics; initiating coverage with ‘BUY’
We expect Idea’s consolidated EBITDA and net profit to post a healthy CAGR of 20% and 14%, respectively, over FY10-12E. The company is in a comfortable funding position (ex-3G) post stake sale to Axiata and Providence Equity. We peg Idea’s fair value at INR 98/share, comprising DCF-based core business value at INR 73/share and stake in Indus and owned towers at INR 25/share. Key risks include irrational bidding for 3G spectrum and execution risks on new launches. At INR 80, the stock is trading at a P/E of 24.8x and 25.6x and EV/EBITDA of 10.2x and 8.5x FY10E and FY11E, respectively. We initiate coverage on the stock with a ‘BUY’ recommendation (Sector Outperformer/Medium Risk).

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