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Sunday, April 19, 2009

Idea Cellular Ltd: A very good Idea

Scripscan:Idea Cellular Ltd
Beta: 1.01
Institutional Holding* 14.8%
Dividend Yield: -
P/E: 17.1
M-Cap:Rs 16,766 cr
CMP:Rs 54

Introduction:As of March' 09,IDEA Cellular, the fifth largest mobile operator in the country, made large investments in FY09, including the acquisition of Spice Communications, to expand its operations.They are likely to pay off this year with the company improving its margins and keeping the rapid growth in revenues intact. Future growth prospects in the booming Indian telecom industry and cheaper valuations compared to its peers make Idea a good stock to consider at the current level with a horizon of two years.

Business:Idea Cellular, a part of the Aditya Birla group, provides telecom services based on GSM (global system for mobile communications) technology . Idea, which has licences and radio frequencies to operate in all the 22 service areas or telecom circles in the country, is active in 15 circles. It has about 15% share in the GSM user base, with 43 million subscribers, just behind BSNL, the third largest GSM operator with 16% market share.In June ‘08, Idea acquired Spice Communications, which offered GSM mobile services in Punjab and Karnataka . Idea also started operations in Mumbai and Bihar last fiscal. All these, plus the impressive gains in other circles, helped the company increase its user base by 72% in FY09. Idea has seen a gradual decline in its average revenue per user (ARPU) per month over the last few quarters. However, the fall is substantially lower compared to its peers. In the December ‘08 quarter, its ARPU fell by 4.7% to Rs 266 from the year-ago levels. During the same period, Bharti Airtel’s ARPU dropped by 9% to Rs 324, while Reliance Communications (RCom) saw a steep decline of 20% at Rs 271.Idea has also seen an improvement in the usage pattern of its subscribers. It reported an 8.8% jump in minutes of usage per user per month (MoUs) at 410 minutes during the December ‘08 quarter. For Bharti, MoUs increased by 7% to 505 minutes whereas RCom witnessed a sharp drop of 8.7% in MoUs at Rs 449.Revenue from non-voice segments known as value added services (VAS) has seen a gradual improvement for Idea in line with the industry leader Bharti. Idea’s VAS revenue as a percentage of ARPU rose from 8% in the December ‘07 quarter to 9.5% in the quarter ended December ‘08. During the said period, Bharti’s share of VAS revenue remained steady at 9.5%, while for Rcom, it crawled from 6.4% to 7.4%.

Growth drivers:Idea Cellular plans to expand into Tamil Nadu and Jammu and Kashmir in FY10. Idea’s operations are expected to stabilise over the next two-three quarters. The operations in Punjab, Karnataka, Mumbai and Bihar are likely to turn profitable during this period.Post-Spice acquisition, Idea had witnessed a gradual slump in customer base in Punjab and Karnataka. But now, it is on the recovery path. While Idea has already regained its subscriber base in Punjab, it has got the momentum going in Karnataka too.Apart from the basic wireless operations, Idea is focussing on international long distance (ILD) operations , using Spice’s infrastructure. Idea is already providing ILD services to Sri Lankan operators and is in talks with operators in Europe and the US. Until now, Idea was using services from other operators to terminate ILD calls. Now, it will not have to pay carriage charges to other players.

Financial performance:Idea’s revenues have grown at a compounded annual growth rate of 46% in the five years ended March ‘08. Its operations turned profitable in FY05 and the net profit has increased more than 10 times since then. In the December ‘08 quarter, its revenues shot up 53.2% year-on-year to Rs 2,620.9 crore.Earnings before depreciation , interest, tax and amortisation (EBDITA) rose 22.5% to Rs 569.4 crore. Net profit, however, grew just about 8% to Rs 256.2 crore, following higher depreciation and increased operating expenses due to entry into new circles.

Valuations:At the current price of over Rs 54, Idea attracts the cheapest valuation among the top three listed mobile operators. Its enterprise value (EV) is close to seven times its EBITDA. Idea’s value per subscriber is also much lower than that of the other two. RINGING NUMBERS.Idea Cellular holds 16% stake in the teleocm tower company Indus Towers. Bharti Airtel and Vodafone are other partners in the company.Idea along with Spice Communications, which it acquired last June and Aditya Birla Telecom operates in 15 out of 22 telecom circles in the country.IT caters to 43million subscribers across circles and covers 58% of the population in the country.Over 94% of its mobile revenue comes from prepaid customers, which has grown from 92.6% a year ago.The rate at which it loses its prepaid customers is more than its postpaid churn. However, the prepaid churn has come down to 4.4% from 4.9% a year ago. In the same period, its postpaid churn has dropped from 2.9% to 2.7%.While share of its revenue from value added services has increased from 8% to 9.5% in a year, average realised rate per user has fallen from 74 pais to 64 paise.With a manpower of 6,670, Idea has covered 1,37,585 villages and towns as of December’ 08.


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