IDEA, MTNL, HPCL

IDEA, MTNL, HPCL

Asian Oilfield, M&M, BOB, Jagran, Indus Fila, Idea - BUY

Asian Oilfield, M&M, BOB, Jagran, Indus Fila, Idea - BUY

Idea Cellular

Idea Cellular

Idea Cellular Limited (Initiating coverage)

Idea Cellular Limited (Initiating coverage)

IDEA Cellular

IDEA Cellular

Idea-Spice deal fails on pricing

Talks between Idea Cellular, India’s sixth-largest wireless operator, and the BK Modi-owned Spice Telecom on a merger have broken down due to differences in price, a person close to the negotiations said. The two sides had held preliminary discussions on the possibility of a merger or an acquisition by Idea three-four weeks ago. Idea, which is present in 11 out of the country’s 23 circles, was keen on expanding its subscriber base. But it baulked at the price being demanded by Spice Telecom.

“Expectations of the Spice management were unrealistic. They were quoting almost twice the value of the company. The merger was called off around a fortnight ago. There is no question of it even after the Spice IPO,” said the person who did not wish to be quoted as he is not authorised to speak. Idea Cellular MD Sanjeev Aga refused to comment. Spice Telecom CMD Dilip Modi could not be reached for comment.

Spice, which offers cellular services in Punjab and Karnataka, had revenues of around Rs 553 crore in 2006. It was looking at a valuation of about $1.3 billion (over Rs 4,300 crore). Idea found it excessive, as Spice does not have a nation-wide presence and continues to make losses.

Analysts say that if Bharti Airtel’s valuation is taken as the benchmark, Spice would command a price of about $1 billion. But Spice is only present in two circles and is a pure-play mobile company compared with Bharti, an all-India integrated operator. Therefore, Spice’s valuation would be at a discount of 30%-35% to Airtel, or about $650 million-$700 million.

Idea officials are also believed to have cited Spice’s weak presence in Karnataka as a dampener. It ranks sixth in the southern state with a share of around 7% despite having made an early start. While most operators have expanded footprint across India after starting with a few circles in the 1990s, Spice has confined to just two circles. It applied for pan-India licences only in September last year.

Idea is present in 11 out of 23 circles and has licences to operate in Mumbai and Bihar where is expects to roll out services as soon as spectrum is allocated. While a merger with Spice would have given it ready presence in two more circles, the price demanded was almost four times Idea would need for rolling out greenfield operations in these two circles. Idea shares gained 0.79% to close at Rs 115.50 on Friday.

The BK Modi group has a 51% stake in Spice, while Telekom Malaysia holds the rest. After the IPO, Telekom Malaysia will hold 39% and the Modis 41%. Another person close to the Modi group said the group had been keen on exiting Spice at a good valuation. “They have been looking for a buyer and while Telekom Malaysia has shown some interest, it will also not pay too high for buying out Modis,” the person, who did not wish to be identified said.

Pair Strategy - Long RCOM, Short IDEA

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

Kotak - Tata Tea, Dish TV, Reliance Industries, Idea Cellular, UTI Bank, Torrent Pharma, Automobiles, Economy

Kotak on Tata Tea

Tata Tea reported 14.7% growth in revenues at Rs2.51 bn (we expected 12.2% growth) and 34% increase in EBITDA to Rs150 mn (we estimated Rs243 mn) during 4QFY07. While domestic branded tea sales continue to do well (9% volumes growth and 12% value growth for branded tea in domestic portfolio), higher wage expenses (wage increases and new accounting standards) resulted in lower EBITDA. Tetley continues to post marketshare gains in key markets. However, stagnant black tea market in UK remains a concern. Tata Tea has agreed for conditional sale of its stake in Energy Brands Inc (EBI) to Coca Cola. Tata group had earlier acquired 30% stake in EBI (25% held by Tata Tea and 5% by Tata Sons) for US$677 mn, in a bid to add a high growth beverage portfolio in the world's largest beverage market. With the sale of 30% stake to Coca Cola for US$1.2 bn, Tata Tea will need to redraw its plans for improving its growth profile. Tata Tea has reiterated its thrust on three verticals—Tea, Coffee and Water, and has announced the acquisition of a controlling stake in Mount Everest Mineral Water Limited (MEMW). We believe that given the robust macro environment in rural as well as urban India, domestic tea business will continue to do well. However, we have concerns on the Tetley business and need to watch out for Tata Tea's strategy to drive growth. We retain In Line rating on the company. Our revised target price of Rs992/share includes Rs91/share from investments in group companies (valued at 50% discount to market price). Our target price implies a P/E of 21.5X and 16.9X on FY2008E and FY2009E respectively.

Kotak on DishTV

We have downgraded Dish TV to IL from OP noting the fact that the stock is trading above our 12-month DCF-based target price of Rs125 and the stock's strong outperformance over the past few weeks. We continue to like Dish TV as a good play on India's emerging distribution opportunity. Indeed, we are most favorably disposed to the distribution portion of the media chain versus broadcasting and content given distribution's ownership of the last-mile, its more loyal audience and hence more predictable cash flows. We would wait for more visibility on the pace of adoption of DTH service in India, Dish's execution versus others and pricing strategy of new entrants. However, we model rapid uptake of DTH service in India given problems with the cable industry. Thus, Dish's current valuations leave limited scope for execution and macro-environment-related disappointments. We retain our earnings estimates.

Kotak on Reliance Industries

According to an article in Petrowatch (31st May 2007), Reliance's gas and oil production from KG D-6 block may be delayed by a few months. We do not expect a delay, if any, to have a material impact on valuations although it may be a modest negative for sentiment. We anyway use valuations based on FY2010E EPS discounted back to set our 12-month fair valuation for Reliance stock (see Exhibit 1). We have made some minor changes to our model—(1) exchange rate (Rs43/US Dollar for FY2008E-FY2010E versus US$44/US Dollar previously) and (2) use of gas for internal refining process for RIL refinery also; we already model this for RPL refinery. Our consolidated FY2008E, FY2009E and FY2010E EPS are Rs71.5, Rs98.5 and Rs153.5, respectively versus Rs73.2, Rs95.6 and Rs150.1, respectively, previously. Key upside risks to our 12-month target price of Rs1,400 (Rs1,375 previously) stem from continued high liquidity in the Indian market and new E&P discoveries.

Kotak on IDEA Cellular

Several newspaper articles over the past few days have reported discussions between Idea Cellular and Spice Telecom regarding a potential merger or acquisition of Spice by Idea. The managements of the respective companies have not confirmed the news. In our view, the reported merger is unlikely to change the competitive landscape in India. The merger will give Idea a presence in two new circles'Punjab and Karnataka'but would not address key issues including (a) lack of pan-Indian presence, (b) likely weak position in unaddressed and certain existing circles and (c) high risk to operating metrics from emerging price competition. We believe ongoing deterioration in pricing is the real issue and note that Idea is the most vulnerable in the emerging environment. We maintain our U rating on Idea stock with a 12-month forward DCF based target price of Rs100. Key upside risk is higher-than-expected profitability.

Kotak on UTI Bank

On Friday, the UTI Bank shareholders approved the change of bank’s name to 'Axis Bank Ltd' from 'UTI Bank Ltd' and appointment of Dr. P.J Nayak as whole-time Chairman of the bank. The later is subject to the approval of RBI. Simultaneously at its board meeting the UTI Bank board finalized its plan to raise US$1bn of capital to meet the bank’s growth plan through a preferential issue to existing promoters and a equity/GDR issue. We believe that amongst private banks UTI Bank has strong growth potential, is well run and has delivered strong financials. A large part of this credit goes to Dr. Nayak, who has been with the bank for the last seven years. Even assuming that RBI clears Dr Nayak’s appointment it still leaves two long-term crucial issues unresolved - i.e long-term succession plan and potential sell down of stake to a public sector. We believe that the issuance was an opportune time to reduce holding of the government owned organization, which it appears, is unlikely at this stage. The current valuations of 19.5XPER and 4.0X PBR FY2008 therefore appear rich and reduce the margin of safety for investors and we retain our Underperform rating.

Kotak on Torrent Pharma

We recently met the Torrent management. Outlook continues to be robust, with strong revenue growth and margin expansion. For FY2008, we have modeled revenue growth of 18%, 130bps margin expansion (10.8% EBITDA) and 36% growth in net profit. We estimate an EPS of Rs15 and Rs17.4 for FY2008 and FY2009 (versus Rs13.2 and Rs16.1 earlier). Amongst key markets, India, Brazil and CIS are doing very well, a trend, which is likely to continue. Company expects sharp margin expansion in the Brazil market, which will equal investments/loss in Mexico (for product filings). Investment/losses in the US market will continue this year too (for product filings), as revenues are expected to begin from next year. Germany continues to be a dark spot (Rs230 mn loss in FY2007). We have rolled over our DCF to March 2009 and our revised price target is Rs260 (Rs200 earlier), or 15x FY2009 earnings. Key risks include inability to improve profitability of international operations, mainly Germany

Kotak on Auto Sales

May saw a weak sales growth across all segments of the auto industry. CV sales declined impacted by high interest rates. The 2W industry witnessed a decline in volume growth across all players thus raising concerns of a slowdown in demand. Hero Honda along with its peers reported a 6% yoy decline in May. Maruti continued with its growth backed by the launch of the Sx4 sedan and the success of Swift and Zen Estilo while Mahindra- Renault's Logan had a decent launch with 2,786 vehicles being sold in May. Tata Motors reported a 17% yoy drop in volumes of M&HCVs for May. LCV sales however grew at 10% for the month resulting in a 6% yoy decline for domestic CV sales. Car sales for Tata Motors, too, declined 7.6% in May.

Kotak on India Economy

India’s merchandise trade deficit expanded sharply to US$ 7 bn in April 2007 from US$3.9 bn in April 2006 (Exhibit 1). This reflects strong non-oil import demand suggestive of sustained economic activity (abetted by a stronger Rupee). Robust capital goods imports (32.4% during April 2006 ‘ January 2007 vs 39.9% last year), in particular, point to sustained investment. In any case, imports pick up in 1Q of the FY (Exhibit 2). We nevertheless continue to expect non-oil import demand to moderate with a slowdown in real GDP growth (8.2% in FY2008E from 9.4% in FY2007). Although still robust, we also expect some slow down in exports in FY2008E (US$148 bn lower than the commerce ministry’s bullish US$ 160 bn projection) on account of the IMF’s estimate of slower world GDP growth (4.9% 2007E from 5.4% 2006) and a somewhat higher Rupee (Rs43/USD in FY2008E up from Rs45.1/USD in FY2007). The current account deficit is now forecast at a pretty doable 1.4% of GDP in FY2008E, assuming stable oil prices (US$65/bbl Dated Brent). Every US dollar increase in the India basket barrel price hits the current account deficit by about US $ 500-600 mn.

Idea Cellular: Hold

Listed in March at Rs 85, the Idea Cellular stock has since appreciated 47 per cent, and now trades at around Rs 125. The sharp appreciation in the stock's price since listing has significantly narrowed the valuation gap between Idea Cellular and the telecom market leader, Bharti Airtel.

The stock now trades at an enterprise value to EBIDTA multiple that is quite close to that of Bharti, despite a less broad-based business profile. Investors can retain the stock, given the continuing strong subscriber additions and Idea's growing footprint.

However, given the relatively high valuations, the stock may offer opportunities for fresh entry at lower price levels.

Operations

Idea Cellular, which started out in 1997, is a pure-play GSM cellular services provider. It has over the last decade ramped up revenues both through organic growth as well as circle-level acquisitions of companies such as Escotel, RPG Cellular and the Andhra Pradesh operations of Tata Cellular.

These moves have helped Idea Cellular ramp up its geographic presence and acquire a national footprint, with operations now in 11 circles (geographic zones) and a subscriber base of 14.5 million. Idea appears well set in its eight established circles, where it is adding over 4.5 lakh subscribers a month and is the biggest or the No 2 player (based on total GSM subscribers).

In the 11 circles it operates in, eight are profitable, while in three where it started operations recently — Himachal Pradesh, Rajasthan and Uttar Pradesh (East) — the company has reported operating losses.

Operating profits in the eight established circles were at Rs 1,595 crore in the latest financial year, while losses in the three new circles were at Rs 85.7 crore. Idea has also been able to tap the Universal Service Obligation (USO) Fund and has won 27 clusters in the auction process.

This is likely to expand Idea's footprint and also result in savings on operational expenses such as rentals and cell-site maintenance.

Idea Cellular has managed its subscriber base well through such innovative schemes such as two-minute outgoing free, reduced tariff rates for loyal pre-paid subscribers, life-time recharge and so on.

The company has also been among the early movers in offering value added services (VAS) such as ringtone downloads, caller ring-back tone, services catering to more youthful audience .

As for the infrastructure, Idea was the first in India to launch GPRS and EDGE technology-ready mobile networks. These moves have resulted in a rising contribution of VAS to Idea's revenues.

The contribution stood at 9.2 per cent for Idea compared to 10.1 per cent for Bharti Airtel. Idea may be better placed to take advantage of any opportunity arising from third generation mobile services (3G) spectrum policy, which is expected in the next few months.

Taking a cue from Bharti Airtel, Idea has also taken the managed outsourcing route. It recently signed a $700-million agreement with IBM for all its IT infrastructure requirements and inked a $500-million deal with Nokia and Siemens for supply of network equipment.

As a rapidly growing mobile services provider, this move can help Idea reduce overheads and bring greater focus to its core functions. As these deals are recent, and benefits will begin to flow in from the current financial year.

Financials

On the operational metrics, Idea Cellular fares better than the national average for GSM telecom players on metrics such as ARPU (average revenue per user) and churn rate, and compares reasonably with Bharti Airtel on most.

Both Idea and Bharti have similar pre-paid subscriber percentages. Idea's churn rate (customers lost) is lower than the national average of 7 per cent.

Idea has a higher ARPU, of Rs.332, than the national average of about Rs 300, though this pales in comparison with Bharti's Rs 406.

Idea, however, realises more per minute usage revenue at Rs 0.91 compared to Bharti's Rs 0.85.

This is a reflection of Idea's current operations in relatively higher ARPU circles. Going forward, the ARPU is likely to continue to soften across players, but the impact on margins is expected to be made up by a better service mix (with higher VAS and initiatives such as 3G).

Idea's EBITDA (earnings before interest, tax, depreciation and amortisation) margin is relatively high at 34.2 per cent, though this may come down in the near term, in the event of pricing pressure, major network expansion and related operational expenditure.

While margins are on a par with industry average in the established eight circles, it is clear that the three new circles have been a drag on profitability.

But the healthy subscriber additions over the last quarter suggest scope for higher revenues and improved EBITDA in the new circles. This could result in an improvement in the overall profitability for Idea the next fiscal.

Apart from this, the foray into Mumbai could offer Idea the potential for an improvement in margins.

Mumbai is a high ARPU circle and is expected to generate higher revenues and lead to quicker recovery of the capex cost. Idea has indicated a Rs 647-crore spend on initial network building, from its IPO proceeds, for the Mumbai circle.

With increased ARPU in Metro and A category circles, and strong subscriber additions and consolidation elsewhere, Idea could emerge as a leading player in the mobile telephony space.

Possible risks

Though the company boasts of strong growth prospects, investors in the stock have to factor certain risks.

Given that the company is still in the process of ramping up its regional presence, execution risks to its operations are higher than those for Bharti.

Recent cuts in Access Deficit Charge (ADC) on outgoing international calls and roaming charges may also pressure realisations for Idea, if it reduces tariffs. While Bharti and Reliance immediately announced tariff cuts, Idea is yet to do so.

There is speculation on a possible acquisition of Spice Telecom by Idea. Spice has operations in Haryana and Karnataka and has about 2.8 million subscribers.

Though the outcome would depend on the pricing, such a deal can further expand Idea's geographic presence and subscriber base.

Another event that can prove a trigger to the stock price is the possible takeover of Idea Cellular by global telecom majors keen to strengthen their India presence. However, this remains in the realms of speculation.

Morgna Stanley on IDEA, SPICE Merger

Morgan Stanley on IDEA-SPICE Merger

Quick Comment: Recent articles in the press (Economic Times) and on news channels (CNBC TV18) have suggested that Idea Cellular will merge with Spice Communications Ltd.

Our key takeaways, assuming that these as yet unconfirmed reports turn out to be correct: For the sector as a whole, we believe that consolidation is good news; in this case, it would reduce the number of players by one. The merged entity would have 17.4mn subscribers and a market share of 10.2%. Such a merger would enhance Idea’s coverage from 11 circles currently to 13 circles and increase effective population coverage from 59% to 66%. However, this entity would not displace any of the top four players in the Indian wireless market.

We believe that EV/EBITDA multiple is a superior valuation tool, but we use EV/sub for our estimates, since Spice is not a listed entity. Based on our estimates, Idea trades at an EV/Sub of US$583, which is close to the industry average. We believe the deal would be value-accretive for Idea if done at under a 15% discount to this EV/Sub, i.e., at approximately US$500. This would imply an EV of US$1.4bn for Spice. Spice had recently filed its draft documents with the Securities and Exchange Board of India (SEBI) for an Initial Public Offering (IPO). This leads us to believe that the merger may not happen unless the Modi Group (promoters) withdraws the document.

Citigroup - IDEA SPICE Merger

Citigroup in their report on IDEA Spice Merger answer some interesting questions

How likely is it? — Recent media reports suggest there is more to Idea-Spice talks
than pure speculation. However, hurdles remain to the timing (Spice’s listing
plans, Idea’s share lock-ins) as well as the modalities (with reported intentions of
both to buy the other one out to fulfil their national ambitions).


What is the rationale? — The footprint, with Spice’s presence in Punjab and
Karnataka, offers a good fit for Idea. While Spice’s weak presence in Karnataka is a
dampener, there is an opportunity to turn it around. Depending on the structure,
TM stands to gain from a stake (albeit smaller) in a larger Indian wireless play.

What will be the relative valuations? — The relative merger/takeout valuations
would reflect our estimates for Spice’s equity value at US$800-1,000m. In a pure
merger scenario, that would translate to Spice promoters owning 9-11% equity in
the potential combined entity (at Idea’s present market cap).


Who else benefits? — Though small in itself, any M&A event would bode well for
sector fundamentals and valuations. Besides, it might also prompt a rethink among
the remaining aspirants, i.e. Maxis-Aircel and RCOM (given the uncertainty on
GSM spectrum). The larger incumbents would also benefit indirectly. The valuation
range implies RM0.40-0.50 per Telekom Malaysia share for TM's 49% stake in
Spice. This is versus RM0.40/share in our current SOTP based target price for TM.

Remain Overweight on Indian wireless — Potential M&A adds to the long list of
positives – accelerated supply-driven rollout, attractive paybacks (on per min
basis), infrastructure sharing and rational competition. Bharti remains our top pick.

Merrill Lynch - IDEA Spice Merger

Media says Spice Tele to merge with Idea; confirm awaited

Media (CNBC) has flashed that Spice Telecom will likely merge with Idea Cellular. Spice shareholders would reportedly own ~12% of the merged entity. As per media the deal values Spice at Rs45-50bn. Idea is yet to confirm the news.

Spice – 2 circle presence; No.2 in Punjab; weak in K’taka
Spice operates in 2 circles - Punjab & Karnataka. The Co’s wireless sub base totaled ~2.8mn subs as of Apr '07 i.e ~1.7% subscriber mkt share on a pan-India basis. In Punjab, Spice is ranked No.2 (behind Bharti) with ~23% share of total subs. In Karnataka, Spice is ranked No.6 with ~7% mkt share. Latest (Sep ’06) financials indicate Spice is EBITDA positive but makes net loss.

Good strategic fitment with Idea
A merger with Spice would take Idea a step closer to becoming a pan-India operator. Currently, Idea does not have any presence in Spice’s circles.

GSM Subscriber Update

Bharti: The market leader Bharti registered a growth of 3% MoM (58.5% YoY) with a net addition of 1.75 mn (as against 1.70 mn in March 2007), gaining subscribers from the relatively less competitive 'C' circles of Assam (11.6%), North East (11.7%) and West Bengal (10.0%).

Reliance: Reliance, the other national player, registered no change in net additions at 4.37 mn. We believe Reliance may not have reported its numbers yet and that COAI would therefore have been forced to carry forward the same from March 2007.

Idea: Idea registered a strong percentage increase of 49.1% (MoM) to 0.55 mn particularly from Himachal Pradesh (26.8% MoM), Uttar Pradesh (E) (12.6%) and Rajasthan (11.6%). Given Idea's plans of further enhancing its presence across India, the positive trend in incremental subscriber base will play a critical role in determining its success.

BPL: BPL's net subscriber addition has been a poor 6,232 in absolute terms. It is in the sell-out phase, with only one remaining circle - Mumbai. Hence, it is most unlikely that BPL will invest more into the business, leading to continued poor subscriber additions.

Kotak - Bharat Forge, Power Finance Corporation, ABNL-IDEA Strategy

Bharat Forge

Power Finance Corporation

ABNL-IDEA Strategy

B&K - IDEA Cellular

Download B&K - IDEA Cellular

UBS - IDFC, Reliance Energy, IDEA, Maharastra Seamless, Sun Pharma

IDFC

Reliance Energy

IDEA Cellular

Maharastra Seamless

Sun Pharma

Kotak - IDEA Cellular, NALCO, IDFC, Patni, Maharashtra Seamless, Mahindra Gesco, Mahinda & Mahindra Finance

IDEA Cellular,

NALCO

IDFC

Patni

Maharashtra Seamless

Mahindra Gesco

Mahinda & Mahindra Finance

SSKI - IDEA Cellular

SSKI - IDEA Cellular

ENAM - Glenmark Pharma, Godrej Consumer, Hexaware, Idea Cellular, Nalco, Reliance Energy

Glenmark Pharma

Godrej Consumer

Hexaware

Idea Cellular

Nalco

Reliance Energy

Citigroup - RPL, IDEA, India Technicals, Glenmark Pharma

RPL

IDEA

India Technicals

Glenmark Pharma