Investor Rationale for Idea Cellular (2014)

1. COMPANY PROFILE
Idea Cellular is an Aditya Birla Group
Company. Idea is a pan-India integrated
GSM operator offering 2G and 3G
services, and has its own NLD and ILD
operations, and ISP license. With
revenue in excess of $4 billion; revenue
market share of nearly 15%; and
subscriber base of over 121 million in FY
2013, Idea is India’s third largest mobile
operator. Idea ranks among the top 10
country operators in the world with a
traffic of over 1.5 billion minutes a day.
It is listed on the National Stock
Exchange (NSE) and the Bombay Stock
Exchange (BSE) in India.
FUTURE OUTLOOK
Idea has demonstrated market-share
gain prowess over the last three years
and is still wellpositioned vs other
players, but it is unlikely to escape the
impact of industry specific structural
issues: (a) cannibalization of voice by
data over the medium to long term

2. (b) Licence renewal in crucial 900 MHz band which is up for auction in FY15, and
(c) Impact of the imminent entry of Reliance Jio.
 Licence Renewal:
Idea enters a crucial period over the next 12‐18 months as it seeks to renew nine
licenses in the crucial 900MHz band even as FY14 performance and recent fund raising
gives us confidence about its renewal capabilities. Idea ticked all the right Boxes in the
year gone by with 18% revenue growth, 29% EBIDTA margin and a ARPU of 173.
Operating cash flow jumped ~86% YoY on doubling of pre-tax profit and easing of
working capital cycle. However spectrum purchases in Feb auctions plus FY14 capex led
to negative free cash flow for the year. Overall license renewals remain the key near
term risk but we remain optimist on Idea’s ability to fund spectrum purchases.
 Overall Outlook:
The company has reported strong RPM expansion on both Voice and Data but we
believe part of the growth is attributable to election led spending. In our view although
voice growth would moderate in ensuing quarters, we expect the data revenue to rise
considerably at a CAGR of 18% upto 2019.
Launch of R-Jio would continue to remain an overhang on the telecom sector as we
strongly believe R-Jio would launch data services with huge price disruption. This would
lead to slowdown in subscriber acquisition post R-Jio enters the market affecting growth
in Net Sales. We expect the sales to grow at a CAGR of 10% upto 2019.
Further, Idea’s 9 circles are coming up for renewal, which contribute 79% of revenue so
it will have to retain majority of 900 MHz spectrum holding. Given the strong operating
traction in wireless business and recent fund raising, we remain confident of Idea’s
capability to fund the spectrum purchases although we note that competition in the
900MHz band could lead to higher than expected renewal payouts.
 Recommendation:
We maintain a ‘HOLD’ rating on the stock with the 9-12 month target price of Rs.191
per share, a 9% rise from the current market price of Rs. 176.

3. FUTURE FINANCIAL OUTLOOK

4. KEY CONCERNS
 900 MHz auctions coming up next year contribute to 79% of Idea Cellular’s revenue.
Being unable to retain even one of the 9 circles up for auction can severely impact
revenue and profitability
 Launch of Reliance Jio in 2016 is a major threat due to the expected huge price
disruption in services offered. Subscriber growth and revenue can be impacted
further
 Unforeseen disputes with TRAI regarding tower sharing can be an issue
 Further reduction in pricing to stay competitive in the market can also affect revenue
margin
FIANANCIAL PERFORMANCE: (CONSOLIDATED)

6. KEY RATIOS