Cellular: Buy


Healthy subscriber additions, benefits from Indus Towers and the entry into the high potential Mumbai circle, augur well for Idea.




Mr Kumar Mangalam Birla (left), Chairman, and M. Sanjeev Aga, MD.

K. Venkatasubramanian

A sharp reversal in its stock price from Rs 161 to Rs 91 makes Idea Cellular a good investment for those looking to add a large-cap stock to their portfolio. Investments with a 18-24 months' horizon can be considered in the stock. At Rs 91, the stock trades at 24 times its current earnings and 19 times its estimated FY-09 earnings.

With earnings and subscriber growth rates comparable to its top-tier listed peers, the stock may deliver reasonable capital appreciation. Robust subscriber additions and improving performance in its three new circles, benefits accruing from the Indus Towers stake and the recent allocation of spectrum, which will enable an entry into the high ARPU (average revenue per user) Mumbai circle, make Idea strongly positioned in the telecom services landscape.

Business Drivers

Additions and network enhancement: Subscriber additions in Idea's eight established circles continue to be strong. In many of these circles, Idea has been able to maintain its position as the top or second largest player in terms of subscriber base over the past year.

The company has managed to ramp up monthly subscriber additions from 6-7 lakh to an average of 8.5-9 lakh over the past two quarters, indicating increasing market penetration. In the three relatively new circles of operation — Himachal Pradesh, UP (East) and Rajasthan — Idea expects to become EBITDA-(operating profit) positive by mid-2008. The turnaround was originally expected by this quarter (March 2008). The company attributes this delay to network capacity-addition and doubling of the number of cell-sites.

Although this delay is undesirable, the cell-site addition will enable Idea to enhance its subscriber addition run-rate in these circles. Idea's country-wide NLD (National Long Distance) rollout, which has coincided with its acquiring a national footprint, could help cost savings, as this enables it to carry inter-circle traffic on its own network, reducing carriage costs that are paid to other operators. The other positive from this network capability is the potential for garnering larger roaming revenues. Idea's ILD licence win holds similar potential.

Indus Towers:

Idea has a hybrid model for its tower infrastructure — a combination of owned towers, those leased from other operators and from independent tower companies.

This arrangement may become more structured and generate further savings with the formation of Indus Towers — with Bharti Airtel, Vodafone Essar and Idea Cellular as the constituent players. Indus Towers will offer tenancy to third-party operators for a fee. Idea plans to transfer 9,000 towers to this entity. The venture covers 10 of Idea's 13 service areas of operation.

This creates a more optimal cost structureand may facilitate a quicker rollout of services for Idea. This becomes important in rural or even dense urban areas where locating new cell-sites may face technical and profitability challenges.

Entry into new circles

Idea's license win to commence operations in Mumbai and Bihar circles and the recent allocation of 4.4 MHz spectrum for the same, hold promise. Mumbai is the highest ARPU-generating circle in the country along with Delhi and holds potential for improving Idea's realisations. Though penetrating Mumbai may not be easy, two factors could help Idea in its Mumbai foray.

First, the time involved in the rollout of services may be expedited with the existing tower infrastructure offered by Indus Towers.

Second, with mobile number portability on the anvil, any churn in subscriber base for existing operators in Idea's newer circles of operation, may work in its favour.

In a circle such as Bihar, the mobile penetration is still not substantial and represents an untapped market for Idea. Mumbai operations are expected to commence in the July-September quarter.

Idea has also won licences for nine new circles, but the spectrum is yet to be allocated for commencement of operations. When this is done, Idea will be a national player. This may happen over the next couple of years only.

The 3G policy, expected to be announced during the course of this year, will allow operators to offer high-end voice, data and video services at faster throughput. If this comes through, it may stem the fall in ARPU for most top operators.

Risks

The industry-wide phenomenon of falling ARPU poses a threat to overall revenue growth in the near future, thanks to offers such as 'lifetime recharge' and 'Chota' recharge.

As Idea and other operators tap the 'bottom of the pyramid', newer subscribers may come in with lower ARPUs. But this risk is somewhat mitigated for Idea, as it is yet to make an entry into nine circles, which offers scope for higher APRUs.

Strict spectrum allocation norms may pose constraints to subscriber additions. Mobile number portability may also cause a churn of subscribers from Idea's network