ENAM - IDEA Cellular - TARGET 107

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Bulk Deals to Watch - IDEA Cellular

09-MAR-2007,IDEA,Idea Cellular Limited,HSBC GLOBAL INVESTMENT FUNDS A/C,BUY,25753661,87.74,-
9/3/2007 532822 IDEA CELL HSBC GLOBAL INVESTMENT FU B 13700000 88.34

IDEA CELLULAR IPO LISTING

IDEA Cellular will LIST on March 9 2007

IDEA CELLULAR IPO ALLOTMENT

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Idea Cellular IPO Subscription Details

QIB - 78.68 times

HNI - 22.8 times

Retail - 3.8 times

OVERALL - 49.51 times

Idea Cellular Ltd.

Background

• Idea Cellular Limited (ICL) was incorporated as Birla Communications Ltd. in the year 1995.The name of the company was changed to Birla AT&T Communications Ltd. and then subsequently to Birla Tata AT&T Ltd. in the year 2001and finally in the year 2002 name was changed to present.
• ICL is the fifth largest GSM mobile services operator, has licenses to operate in 11 circles. It has more than 13 mn subscribers and is adding almost 800,000 more a month.
• ICL has made a pre-ipo placement of Rs 375 crore to its promoters, at the top end of the price band.
• The Birla group has 65.8% equity stake in Idea. Birla has invested Rs13.73 bn in IDEA in this financial year.
• The company also proposes a green shoe option not exceeding Rs3.19bn in excess of the equity shares that are included in the IPO.
• Idea Cellular was awarded a National Long Distance (NLD) licence by the Department of Telecommunications. It will set up the NLD network by March 2008.

Object of the issue are:

• Building, strengthening and expanding its network and related services in the new circles.
• Entry fee and capital expenditure for NLD operations.
• Rollout of services in Mumbai circle.
• Redemption of preference shares.

Strength

• Cellular subscribers are growing at a y-o-y CAGR of 94% in last 10 years, adding nearly six mn subscribers a month. Mobile subscribers are estimated to increase to approximately 210 mn by FY 2008.
• Three drivers like falling handset costs, lowest tariff as compared to other parts of the world and extensive reach have reduced the entry barriers for new subscribers and thus expanded the market available to telecom service providers .
• Its subscriber base increased from 10.36 mn to 12.4 mn during the last quarter, while revenues rose by 49.9% to Rs11.48 bn.
• ICL has 8% market share in the country where less than one in seven people own a cell phone.
• In a span of last five years, the total subscriber base has increased at a CAGR of 86%.
• ICL subscriber numbers have increased by approximately 68.8% in the last nine months to 12.44 mn as at December 31, 2006 from 7.37 mn subscribers as at March 31, 2006.

Weakness

• In the absence of whole India presence like other integrated operators, Idea Cellular is unable to provide seamless roaming services and is forced to share its revenue with other operators.
• Company is dependent on a number of relevant fixed-line, NLD, ILD and other mobile operators for its interconnection arrangements and leased-line arrangements.
• Average monthly churn rate is increasing at 6.2%, 7.3% and 6.2% for financial years 2004, 2005 and 2006 respectively.
• ICL had negative cash flows in the financial years 2002, 2003 and 2006. Any negative cash flows in the future could have an adverse effect on its operations.

Valuation:

• Total revenues increased 31.1% to Rs. 29,733.83 mn for the financial year 2006 from Rs. 22,674.56 mn for the financial year 2005. This increase was mainly due to increase in its subscriber base.
• ARPU declined by 5.5% to Rs. 391 for the financial year 2006 from Rs. 414 for the financial year 2005 per subscriber per month.
• Other income decreased by 32.8% to Rs. 78.97 mn for the financial year 2006 from Rs. 117.43 mn for the financial year 2005. This decrease resulted from reduced interest income.
• Post issue EPS work out to be Rs.0.78 (on upper price band) and Rs. 0.77(on lower price band). Post issue P/E will be in the range from 84 to 96 for the price band of Rs.65/- to Rs.75/-.
• Profit after Tax (PAT) for the fiscal year 2006 was Rs. 2030.43 mn, which increased by 197% in comparison to the last fiscal, which was Rs.682.73 mn.

Motilal Oswal - Idea Cellular IPO

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Idea Cellular: Sharekhan IPO Flash dated February 12, 2007

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[Click the star to watch this topic] Emkay Morning Notes - FAG Bearings, IDEA Cellular IPO

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Idea Cellular: Invest at cut-off

Investors can consider subscribing to the Idea Cellular initial public offering, being made in the price band of Rs 65-75 per share.

Considering the huge untapped demand for mobile telephony in India and the robust subscriber addition of six million per month, the mobile expansion story is expected to sustain over the next few years.

Idea Cellular does not enjoy a pan-India footprint, such as its peers — Bharti Airtel and Reliance Communications — but its strong growth in the four established circles (of the 11 it operates in) of Andhra Pradesh, Delhi, Gujarat and Madhya Pradesh will continue to contribute a substantial part of its revenues.

On the flip side, however, intense competition from established peers and consolidation arising from the Hutchison Essar stake sale would impact standalone players such as Idea Cellular.

Valuation yardstick

Since mobile players are engaged in a major capital investment drive with negative cash flows from operations, conventional valuation yardsticks such as price-earnings multiple may not portray the full picture. Instead, we compared Idea Cellular with its key GSM peer, Bharti Airtel, across three performance metrics: EV (enterprise value; market capitalisation plus debt) to revenues; EV to EBITDA (earnings before interest, tax, depreciation and amortisation) and EV per subscriber.

Based on the annualised third quarter performance of Bharti Airtel, the EV/revenues for its mobile business is 8.1 times. For Idea Cellular, it works out to a much lower multiple of 5.8 times.

Similarly, EV/EBITDA (which reflects the operational cash flows that can be deployed for growth) for Bharti's mobile business works out 22 times vis-a-vs 17 times for Idea. Based on these two metrics, Idea's valuation is at a 20-28 per cent discount to Bharti Airtel. In terms of EV/subscriber (which reflects the potential for future cash flows) it is Rs 19,080 for Idea, over 40 per cent lower than that of Bharti Airtel.

From an investment perspective, this valuation discount of Idea vis-à-vis Bharti makes this offer attractive and leaves potential for capital appreciation. We recommend an investment at the cut-off price.

Key features

The company has operations in 11 circles, which cover 58 per cent of India's population and current subscriber base. Its coverage area includes one metro (Delhi), 3 category A circles (Andhra Pradesh, Gujarat and Maharashtra) and 6 category B circles (Harayana, Kerala, Madhya Pradesh, Rajasthan, UP-East and UP-West) and one category C circle (Himachal Pradesh).

As of December 31, 2006, Idea Cellular had 12.44 million subscribers, enjoying an 8.5 per cent market share. The company is expected to roll out its services in Mumbai and Bihar and has applied for licences in the remaining 10 circles. The category B and C circles are likely to drive subscriber growth in future.

As an original licensee in seven established circles, the company is a market leader in three circles of Haryana, Maharashtra and UP (West). At the same time, it is also substantially dependent on four circles - Andhra Pradesh, Delhi, Gujarat and Maharashtra, which accounted for 63 per cent of its subscriber base, for its overall revenues and growth. And these circles are likely to remain a significant contributor to its revenues and operating profits in the coming years.

Idea Cellular's IPO is to build, strengthen and expand its network in new circles, roll out services in the Mumbai circle, pay the entry fee and capital expenditure for NLD (national long distance) operations and redeem preference shares. Out of Rs 2,125 crore (excluding the greenshoe option of Rs 319 crore), Rs 970 crore is to be utilised towards expansion and strengthening of the networks in Himachal Pradesh, Rajasthan and Uttar Pradesh (East) by March 2008.

From the remaining IPO proceeds, Rs 647 crore is to be utilised for rolling out services in Mumbai, Rs 757 crore towards redeeming preference shares, and Rs 81 crore for payment of entry fee and capital expenditure for NLD. The NLD licence that the company has applied for is expected to facilitate carriage between the 13 circles and reduce the company's operating costs.

Risks and challenges

Idea Cellular is expected to face intense competition from its peers such as Bharti Airtel, Reliance Communications, BSNL and Tata Teleservices, which enjoy a pan-India footprint. Since the mobile market is still a play on subscriber additions, any slowdown in net additions can affect profitability.

For instance, since it is the eighth player to enter the Mumbai mobile market, its ability to penetrate this market will be a tough challenge.

This is despite being a strong player in the Maharashtra circle. In the long run, any slowdown in subscriber growth can lead to a decline in average revenue per user (ARPU), increase its churn and selling and promotional expenses.

The scope for differentiation and new schemes that players such as Reliance Communications have exploited to the hilt in widening and deepening the mobile marketplace may not be fully available to Idea.

Consolidation issues

Being a player operating out of only one metro and three category A circles, Idea has an ARPU that is lower than the leader, Bharti Airtel. For instance, Idea's blended (prepaid and postpaid) ARPU at Rs 338 was lower than Bharti's at Rs 427 for the period ended December 31, 2006. The minutes of usage also was lower at 353 vis-à-vis 467 minutes for Bharti. Though the prepaid customer base was in line with Bharti, the churn was higher.

Second, the outcome of the bidding war for Hutchison Essar's equity stake will be crucial in assessing the changing mobile market dynamics.

If Reliance Communications succeeds in snapping Hutchison, it will not only comfortably march past Bharti in market share, it will be able to use its scale economies to grow its subscriber base at a much faster clip.

If the winner turns out to be Vodafone, it may prove to be an equally aggressive player in the value-added segment of the mobile sweepstakes. Either way, Idea Cellular is likely to face the heat of consolidation.

Offer details: JM Morgan Stanley and DSP Merill Lynch are the lead managers to the offer, with Citigroup and UBS Securities as the co-book running lead managers. The offer opens on February 12 and closes on February 15.

Prabhudas Lilladher - Idea Cellular IPO

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Idea Cellular

Idea Cellular is part of the Aditya Birla group and is the sixth largest wireless operator in India with an 8.5% market share in total wireless subscribers. It currently operates in 11 circles, which comprise one metropolitan circle of Delhi, three category A circles of Andhra Pradesh, Gujarat and Maharashtra, six category B circles of Haryana, Kerala, Madhya Pradesh, Rajasthan, Uttar Pradesh (UP) (East) and UP (West) and one category C circle of Himachal Pradesh.

The present operations of Idea Cellular in 11 of the total 23 circles cover 57.7% of India’s population and about 57.9% of India’s current subscriber base. End December 2006, the company had 12.44 million subscribers, with network coverage of 1,627 census towns and 1,980 other population centers.

Idea Cellular has received unified access services (UAS) licences for metropolitan circle of Mumbai and category C circle Bihar. In addition, the company has nine license applications pending for further circles, which, if obtained, would give it complete access to the entire Indian market. It intends to roll out services in Mumbai circle shortly by installing a network comprising about 1,597 cell sites covering the entire city. The company will expand and strengthen its network in recently rolled out circles of Himachal Pradesh, Rajasthan and UP (East) and install about 105, 810 and 1,247 additional cell sites, respectively, in these circles.

Recently, Idea Cellular was awarded a National Long Distance (NLD) licence by the Department of Telecommunications. It will set up the NLD network by March 2008.

Idea Cellular wants to redeem the outstanding 483 cumulative non-convertible preference shares of Rs 10 million each.

To fund this expansion plan, Idea Cellular has lined up a public issue to raise Rs 2125 crore (excluding the greenshoe option) at a price band of Rs 65 to 75. The company has already made a pre-IPO placement of Rs 375 crore to its promoters/promoter group, Aditya Birla Nuvo and Birla TMT Holdings, and will finance some part from internal accruals.

Strengths

• The Indian telecom market (including GSM and CDMA) is one of the fastest growing in the world, adding nearly six million subscribers a month. Mobile subscribers are estimated to increase to approximately 210 million by FY 2008, from 146.54 million subscribers end December 2006. Factors like falling handset costs, attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus, expanded the market available to telecommunication service providers.
• Idea Cellular has received UAS licences for the Mumbai and Bihar circles. Soon, it will launch its services in these circles. As the mobile penetration level in Bihar is quite low, there are market opportunities and good growth potential for the company.
• Idea Cellular’s NLD licence will allow the company to carry intra-circle as well as inter-circle traffic on its own network, resulting in saving of significant carriage charges that the company currently pays and reduction in operating costs.

Weaknesses

• In the absence of pan-India presence like other integrated operators, Idea Cellular is unable to provide seamless roaming services and is forced to share its revenue with other operators with whom it has roaming arrangement for its subscribers. Beside, the company is largely dependent on a number of relevant fixed-line, NLD, ILD and other mobile operators for its interconnection arrangements and leased-line arrangements. However, in future, both these concerns will be resolved as it starts operations in newer circles, expanding its presence throughout India, and commissions its own NLD network.

Valuation

At the price band of Rs 65 - Rs 75, the annualised EPS for the nine months ended December 2006 on post-issue equity (assuming the greenshoe option is exercised in full), works out to Rs 1.5 - Rs 1.6. PE works out to 42.3 – 47.8, respectively. Bharti Airtel, with a pan-India presence in GSM (in all 23 circles), trades at 39.9 times of annualised nine months consolidated earning. Reliance Communication (RCom), with CDMA presence in 21 of the 23 circles and GSM presence in eight circles (thereby constituting a pan-India presence in all 23 circles), is trading at 34.5 times annualised nine-month consolidated earning. Notably, RCom is a fully integrated telecom service provider with significant presence in almost all telecom services including NLD and international.

On the basis of annualised nine-month consolidated revenue, the market capitalisation to sales works out to 8.39 for Bharti Airtel, 7.12 for RCom, 3.64 for Tata Teleservices (Maharashtra), and 4.28 - 4.85 for Idea Cellular. The market capitalisation per wireless subscriber for Bharti Airtel and RCom works out to about Rs 45684 and Rs 33360, and for TTML Rs 20352, while that for Idea Cellular it is about Rs 14030 – Rs 15886.

B&K - Idea Cellular IPO

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Aditya Birla Nuvo - Idea Cellular IPO - Impact Analysis

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