Idea Cellular

Investors with a two-three-year horizon can buy the shares of Idea Cellular, a mobile phone player aspiring to have a pan-India presence by December 2009, considering the continuing strength in its current circles of operation and. launches (both recent and impending) in more profitable circles.

These apart, there is also a strong technical advantage in the form of frequency allocations in the 900 MHz band and benefits from Indus Towers that are likely to kick in over the next few years.

At Rs 79, the stock trades at about 20 times its likely 2009-10 per share earnings. This is expensive compared to broader markets.

However, Idea Cellular has managed a 45 per cent-plus growth in revenues for the last two successive financial years.

Due to expansion to new circles from 11 to 17 through organic and inorganic means, it has had substantial increase in capital expenditure, which has affected margins.

But capital expenditure is expected to moderate from here on even as payoffs from these investments begin.

After the Mumbai and Bihar launches last year, Idea has seen an increase in EBITDA margins from 26.3 per cent to 28.9 per cent, over the last four quarters.

In fact the capital expenditure for FY10 has been scaled down from Rs 6,000 crore to Rs 5,500 crore.

Last year, Idea received Rs 7,294.9 crore from TMI for a 14.9 per cent stake sale, and Rs 2,748 crore from Providence Equity for a 20 per cent stake sale in Aditya Birla Telecom — its subsidiary.

This may ensure that the company is adequately funded for its expansion, with minimal borrowings.

In fact Idea’s interest costs have come down over the last couple of quarters.

Idea currently has operations in 17 circles.
Operational gains

Of these, the company has established operations in 11, recently launched them in four and acquired two through the buyout of Spice Communications last year.

The company has managed to add on an average 1.3 million subscribers a month over the last one year, 30 per cent more than its run-rate in 2007-08 and double that of 2006-07. In established circles such as Kerala, Maharashtra and Madhya Pradesh, Idea is the top mobile operator in terms of the subscriber base.

In most other established circles, it is a key player. Most of its recent launches have been in circles such as Mumbai (August 2008), Tamil Nadu and Chennai (May-July 2009), which are relatively higher (Average Revenue Per User, ARPU) revenue generating ones, thus making them lucrative for Idea and may ensure quicker break-even.

In circles such as Bihar and Mumbai, Idea’s monthly subscriber additions are bigger than Vodafone Essar’s.

Idea has had spectrum allocated in the 900 MHz band in nine of its circles of operation. Capex requirement towards building networks in the 900MHz band are much lower when compared to the 1,800 MHz band.

This is due to the fact that geographic coverage achieved is much higher (of the order of 50 per cent) in the 900 MHz band.

This is a key advantage vis-À-vis many competitors, especially new entrants.

This may also be helped by the fact that in many circles the company is building its own fibre network to carry National Long Distance traffic.

This plays a key role in optimising the cost of carrying traffic as well garnering roaming revenues. Scale advantages also ensure that price wars on tariffs can be fought against existing and new players.

Idea is also set to benefit from its association with Indus Towers, where it is a 16 per cent stake holder.

Indus Towers has over 1,00,000 towers pooled from Bharti Airtel, Vodafone Essar and Idea Cellular in 15 circles.

This ready availability of towers ensures a quicker rollout for Idea in many circles and reduction in capital expenditure.

Tamil Nadu, Mumbai and Chennai are examples of how the company has managed to go to market fairly quickly after spectrum allocation due to the association with Indus Towers.
Risks

From April 2009, the Telecom Regulatory Authority of India (TRAI) has decreased termination charges for incoming calls for both domestic and international calls by 10 paisa.

This could lower realisations for the company. Subscriber churn, as and when mobile number portability is introduced, and the possibility of stiff outlays for the 3G spectrum auction that is likely to be conducted at a later date are also key points to watch out for.

via BL