Wednesday, January 13, 2010


Every paisa counts. We are surprised with the recent strength in Idea’s stock price which has gained 13% over the past 1 month. The stock is now back to its post-RCOM tariff- announcement levels despite a spate of tariff cuts post the same. Expectation of better-than-feared 3QFY10 earnings (which we believe will not reflect the impact of tariff cuts completely) and ‘acquisition-premium’ (fraught with many uncertainties, in our view) have possibly driven the recent strength – unjustified in our view. REDUCE.

High-leverage wireless play – every paisa (of RPM/EPM) counts
Our current FY2011E RPM and EPM estimates for Idea (Rs0.45/min and Rs0.08/min), respectively, do not build any sharp pricing correction in the market from hereon. This assumption, we believe, could be tested over the coming months as new players jostle for network fill. Idea’s EBITDA/EPS estimates, the company being a pure wireless play (outside its stake in Indus), are particularly sensitive to pricing (or realized yield or RPM) assumptions. Exhibit 1 (on the next page) depicts Idea’s EBITDA/EPS sensitivity to pricing and volume elasticity. We believe that Idea could report a PAT loss in FY2011E below an RPM of Rs0.40/min.

3G auctions may stretch the balance sheet – a tricky ‘bid or no bid or partial bid’ decision for Idea
Idea is comfortably placed for fund 2G expansion though its balance sheet may get stretched in case of 3G auctions. Based on the current 2G active infrastructure capex, we estimate net debt to EBITDA at 2.5X at end-FY2011E. End-FY2011E net-debt to EBITDA may expand to 4X in case of 3G auction (assuming that it bids for pan-India license and funds the entire 3G investment by debt) and license payment (assuming US$1 bn total license fee outlay) and 4.4X assuming 3G capex (assuming US$300 mn 3G capex in FY2011E, see Exhibit 2). 3G capex and expansion, in addition to investment in new circles, may increase the operating and financial leverage further which is not a good attribute in an increasingly competitive market. We believe that the company may not bid for pan-India 3G license.

3QFY10E results will not reflect the full impact of tariff cuts
Idea’s 3QFY10E earnings will get a boost from (1) the sharp jump in sale of special tariff vouchers and (2) pricing has been cut at various times during the quarter in different circles. Thus, Dec 2009 quarter reported financials will not reflect the impact of pricing action completely. For 3QFY10E, we expect Idea to report revenues of Rs28.7 bn (down 3% qoq), EBITDA of Rs7.1 bn (down 12% qoq), and PAT of Rs654 mn (down 68% qoq); ex-Spice, we expect a 13% qoq drop in RPM to Rs0.48/min, flat MOU at 374 min/sub/month, and 13% qoq drop in ARPU to Rs181/sub/month. Exhibit 3 depicts our Dec 2009 quarter expectations for Idea.

To read the full report: IDEA