Idea Cellular Ltd. is recommended as a buy with a price target of Rs. 185-230. The technical outlook is positive as the stock has taken support at Rs. 130 and is trending higher. Company outlook is also positive due to expected robust subscriber growth, improving EBITDA margins, and potential value unlocking from hiving off its tower business. On the financial front, net sales increased 64% YoY while EBITDA and PAT grew 69% and 259% YoY respectively due to margin expansion and lower costs.

1. IDEA CELLULAR LTD.,
We recommend to Buy with a price target of 185-230
Buying Level : 130-150
Target : 185-230
Support levels : 120-130
Resistance : 155
Technical Out Look:
The scrip has taken trend line support at 130
level.
The scrip has formed higher top higher bottom
on monthly and is trending firm to wards the target.
we strongly recommend to buy the stock on
every dip.

2. Company Outlook
Idea Cellular is a part of the US $24 billion Aditya Birla Group and a leading
GSM mobile services operator with licenses to operate in 13 telecom service
areas in India. The company has operations in Delhi, Himachal Pradesh,
Rajasthan, Haryana, Uttar Pradesh (W) & Uttaranchal, Uttar Pradesh (E), Madhya
Pradesh & Chattisgarh, Gujarat, Maharashtra & Goa, Andhra Pradesh and Kerala.
With
the planned expansion into Mumbai, Bihar & Jharkhand,
Idea’s footprint will cover nearly 70 percent of India’s telephony potential. Idea
Cellular had 16.13 Million subscribers as on June 30, 2007, and had a market share of
15.4 percent as on June 30, 2007 in its 11 service areas of operation. We think idea
looks impressive due to the following reasons:-

3. Business Summary
Higher subscriber addition
We expect that the company will see a robust growth in its subscriber base in the
coming months in both new as well as existing circles. Moreover it is expected to
be allotted spectrum in Mumbai in the coming months.
Improvement in EBITDA margins
The EBITDA margins are expected to improve both in the existing and the new
circles. As more and more subscribers will be added and company will enter into
new circles, revenue flow will also be higher.
Hiving off tower business
Following the footsteps of Bharti and RCom, Idea Cellular has also decided to hive
off its tower business into an independent subsidiary. The Board of Directors
(BoD) has approved the demerger plan. So value unlocking is on the cards.

4. Valuation Summary
Tower business Demerger
The company has planned to hive off its tower business for possible transfer of
passive infrastructure. It would result in significant value unlocking. The
company had 13,160 cell sites as of Q1FY08 compared to 10,114 cell sites at
the end of Q4FY07. Around 4500 towers are on sharing basis. Out of 8.662
towers about 4,900 are roof top towers and 3,700 are ground based. They have
a tenancy ratio 0f 1.3x. Company is expected to increase its cell sites to 20000
by FY08.

5. Financials

6. Valuation Summary
Financial Analysis
Net sales increase by 64 percent
Net sales increased by 64 percent Y-o-Y on account of robust subscriber additions.
However the company’s Average Revenue Per Unit (ARPU) has decreased
significantly from Rs.362 to Rs.320.
Aggressive method of recognizing revenue
Idea recognizes entire processing charge from Lifetime prepaid schemes as revenue
upfront, while RCom and Bharti amortize the same over 48 months and 24 months,
respectively. Thus, Idea’s ARPU, revenues and margins, to that extent are inflated.
In Q1FY08 more than 30 percent of net additions were from new lifetime prepaid
scheme. We believe that the policy of booking entire processing fee as revenues
upfront would have contributed almost Rs.6 to ARPU.

7. Valuation Summary
EBITDA grew by 69 percent Y-o-Y.
The EBITDA margins in its ‘established’ circles including Delhi, Maharashtra,
Gujarat, Andhra Pradesh, Madhya Pradesh, Haryana, Kerala and EBITDA
margins increase by 100bps to 34.7 percent. Uttar Pradesh (W) expanded by
40bps Q-o-Q to 38 percent. Losses in 3 new circles have come down to
Rs24.6crore (-40 percent of revenues) from Rs330m (-76 percent of revenues) in
last quarter. Company saw reduction in network and marketing expenses as
percentage of sales by
160 bps. However access charges increased slightly.
PAT increased 259 percent Y-o-Y due to margin expansion, lower depreciation
and interest expense
Idea’s net profit grew by 259.5 percent Y-o-Y. It’s depreciation and amortization
charge decreased by 320bps Y-o-Y as a percentage of net sales. Interest expenses
also were significantly less as percentage of sales.

9. Financials

10. Disclaimer:
This report has been prepared solely for information purposes and
the information contained herein may not be deemed to be an investment
advice. Such information is impersonal and not tailored to the investment
needs of any specific person. The information contained herein is not a
complete analysis of every material fact representing any company,
industry or security. The views expressed may change. While the
information contained herein has been obtained from sources believed to
be reliable, no responsibility (or liability) is accepted for the accuracy of its
contents. Investors are advised to satisfy themselves before making any
investments and should consult with and rely upon their own advisors
whether and how to use such information in making any investment
decision. Neither the author nor his firm accepts any liability arising out of
use of the above information/ article. This report is exclusively for the
clients of Venkataraman & Co. only.
VENKATARAMAN & CO.,
Stock & Share Brokers, New No.2 (Old No.52)
Dr. Ranga Road, Mylapore, Chennai 600 004.
Web: www.venkataraman .com E-mail: vnkco@vsnl.com