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Idea Cellular

Strong operating environment; MNP unlikely to be a game-changer

Operating environment remains robust given volume bounce-back v/s seasonally weak 2Q and continued relative stability in RPM.

Idea will capitalize 3G spectrum from 4QFY11, resulting in an increase in the amortization cost and interest cost. We expect Idea to remain profitable in 4QFY11.

Our interactions suggest that there has been limited impact of MNP and porting requests (as a percentage of subscriber base) have not been very significant.

While a majority of the new licencees are facing inquiry on eligibility criteria/non-fulfillment of rollout obligations, Idea's licences have not been mentioned.

Gujarat high court recently ruled against tower de-merger for Vodafone Gujarat. There are alternatives available although they might have some tax implications.

We believe that a potential policy revamp would be positive for incumbents like Idea. We expect revenue and EBITDA growth to rebound driven by 1) normalization of traffic growth, 2) abating tariff pressure, and 3) launch of 3G services. Idea trades at EV/EBITDA of 9.7x FY11E and 7x FY12E. Reiterate Buy with a price target of Rs.90 (8x EV/EBITDA for core business (ex-Indus) and Rs.4.5m/tower for stake in Indus towers).