Buy RCOM and sell IDEA on a rupee-neutral basis in anticipation of out performance of RCOM over IDEA in the near term. RCOM is trading at a cheaper valuation than IDEA largely due to the recent rally in IDEA on the back of speculative buying in anticipation of the merger of Spice Telecom, Aircel and Idea. RCOM is currently trading at 13 times FY08 EV/EBIDTA against 15 times on IDEA. Even on a EV per subscriber basis, RCOM is trading at USD 545 against USD 590 for Idea (March '07 ending subscriber numbers).
Potential upside in RCOM can also come from
1. Expected clarity on Spectrum allocation towards July end
2. Upcoming Overseas FLAG IPO
3. Demerger of the tower business
4. Launch of consumer broad band and IPTV
RCOM has also been consolidating in the range of 505 - 520 from past few trading sessions. The stock has attracted significant trading volumes along with jump in delivery volumes in the recent past. We expect the trade to generate a potential return of 6% to 7% on GEP.
Pair Strategy - Long RCOM, Short IDEA