Hold Idea Cellular

Idea Cellular
Price: Rs67
HOLD
Target: Rs70 (Mar’11)

Brace up for crunch time, but stay invested

* Maintain HOLD in an eventful April’10: In our view, risks relating to IDEA’s
earnings outlook from strain on financials following 3G/BWA auction-related
debt funding, impact of transition of majority of subs to 1p/sec and 50p/min
tariff plans, manifested by drop in 4QFY10 ARPM/margins/EPS and TRAI’s
proposals on 2G spectrum-related issues, will play out in April.

* Forecast outlay for securing 3G spectrum raised from Rs40bn to Rs45bn:
In line with our revised auction clearance price of 3G spectrum across service
areas generating over 90% of IDEA’s revenues, we peg an outlay of Rs45bn for
IDEA to secure pan-India 3G spectrum; we expect 50% of this outlay to be
debt-funded (100% previously). Our earnings forecast for IDEA neither
assumes an outlay for, nor an earnings stream from securing BWA-spectrum.

* Earnings outlook for IDEA remains robust, FY11E/12E EBITDA forecast is
5%/8% above consensus: Our recalibrated financials for IDEA – wherein,
besides changes relating to forecast 3G spectrum outlay/funding, we raise
revenue/EBITDA estimates, lower margin/capex estimates – continue to
present a fairly healthy FY10E-12E growth profile (revenue/EBITDA/EPS CAGR
at 16%/21%/10%). However, we do expect FY11E fully diluted EPS to be c.15%
lower YoY on account of subdued margins and higher D&A emanating from
securing pan-India 3G spectrum in the upcoming auction.

* TP raised to Rs70 (previously Rs51) largely on account of higher EBITDA,
lower capex forecast: Our 12-mth TP for IDEA is the sum of the three-stage
DCF-based value (@13% WACC, 3% terminal growth) of its wireless business
(Rs56/sh) and fair value of its 16% holding in Indus Towers (Rs14/sh). At
Rs70, on our FY12E earning forecast for IDEA, the stock would trade at 25.3x
P/E and 5.9x EV/EBITDA; FY12E EBITDA/EPS growth is pegged at 22%/42%.

* Key risks: [1] Although rising earnings contribution from Indus Towers will
boost consolidated financials, being a wireless pure-play, IDEA’s financials are
highly sensitive to KPIs (traffic and tariffs). [2] Relative to peers, EBITDA
multiples are in-line, but EPS multiples are rich. [3] Our earnings forecast do
not capture a potential one-time charge by the DoT for ‘excess’ 2G spectrum.