IDEA CELLULAR LTD

RESEARCH
EQUITY RESEARCH May 07, 2009

RESULTS REVIEW Idea Cellular Ltd Sell

Share Data Significant downside on margins
Market Cap Rs. 186.32 bn Idea Cellular Limited (Idea) reported full year result, in-line with our
Price Rs. 60.10 expectation, with a 50.6% yoy top line growth. In Q4’09, Idea recorded a 7.5%
BSE Sensex 12,116.94
qoq revenue growth as the Company increased its penetration in the existing
Reuters IDEA.BO
13 circles. Besides, EBITDA margin expanded by 209 bps qoq, mainly due to
Bloomberg IDEA IN
Avg. Volume (52 Week) 2.03 mn a decline in marketing expenses in absence of any new launches during the
52-Week High/Low Rs. 113.9 / 34.05 quarter. However, we expect deterioration in Idea’s operating performance
Shares Outstanding 3,100.1 mn with an expected decline in margins and ARPU for next 1-2 years. Thus, we
downgrade our rating to a Sell.
Valuation Ratios (Consolidated)
ARPU likely to continue to decline: We believe the aggressive offers by new
Year to 31 March 2010E 2011E
entrants and passing the benefit of reduction in termination charges to the
EPS (Rs.) 2.1 2.7
+/- (%) -32.1% 31.2% subscribers are likely to lead to further reduction in the average realizations in
PER (x) 28.8x 22.0x coming quarters. Subsequently, we expect a 10-11% p.a. drop in realization
EV/ Subscribers (Rs.) 3,171.9 2,550.8 per minute (RPM) for FY09-11E. Further, the minutes of usage (MOU) are
EV/Sales (x) 1.7x 1.4x
likely to drop by ~8% p.a. due to inferior quality of new subscribers. Overall,
EV/ EBITDA (x) 7.1x 5.7x
we expect a 24% and 10% drop in ARPU in FY10 and FY11, respectively.
Margins likely to come under severe pressure: While, we are leaving our
Shareholding Pattern (%)
Promoters 49 FY10E margin estimates broadly unchanged, FY11E estimates are decreased
FIIs 7 to incorporate the impact of decline in tariffs as the new players roll out their
Institutions 8 services. Besides, the projected growth in number of rental cell sites would
Public & Others 36
increase the network costs-to-sales by 3-4% taking into account the Indus
agreement. Moreover, the Indus JV’s share of profits is likely to be insufficient
Relative Performance
in the near term to compensate for the rentals on the demerged cell sites
140 leading to contraction in the margins. All said, we expect EBITDA margins to
110
decline and remain ~24% in FY10 and FY11.
80 Key Figures (Consolidated)
50 Quarterly Data Q4'08 Q3'09* Q4'09* YoY% QoQ% FY'08 FY'09* YoY%
20
(Figures in Rs mn, except per share data)
Aug-08

Apr-09
Nov-08
May-08
Jun-08
Jul-08

Jan-09
Feb-09
Mar-09

May-09
Sep-08
Oct-08

Dec-08

Net Sales 19,853 27,305 29,365 47.9% 7.5% 67,375 101,484 50.6%
EBITDA 6,772 6,969 8,108 19.7% 16.3% 22,730 28,353 24.7%
IDEA Rebased BSE Index
EBITDA Margin 34.1% 25.5% 27.6% 33.7% 27.9%

Subscribers 24 38 43 79.3% 13.2% 24 43 79.3%

ARPU 287 266 254 (11.5%) (4.5%)

MOU 411 410 402 (2.2%) (2.0%)
ARR 0.70 0.65 0.63 (9.7%) (2.6%)
Per Share Data (Rs.)
Normalized EPS 1.1 0.7 0.9 (16.6%) 23.9% 4.0 3.0 (23.9%)
*numbers include proportionate consolidation of Indus and Spice
Please see the end of the report for disclaimer and disclosures. -1-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH May 07, 2009

Valuation
Currently, Idea’s stock is trading at a forward P/E of 28.8x FY10E and 22x
FY11E. Our DCF-based valuation gives a fair value of Rs. 55, based on the
assumptions of a 14.8% WACC and a 5% terminal growth rate. We remain
concerned about Idea’s operating performance over next 1-2 years
considering the expected aggressive pricing by new players, addition of
marginal subscribers and expected increase in network operating expenses
leading to significant contraction in margins. Thus, we downgrade our rating to
a Sell.
Cost of Capital
Terminal Growth

55.25 14.3% 14.5% 14.8% 15.0% 15.3%

4.0% 56 54 52 50 49
4.5% 58 56 53 52 50
5.0% 61 58 55 54 52
5.5% 63 60 57 56 54
6.0% 66 63 60 58 56

Result Highlights and Outlook

During the quarter, adjusted net sales increased 8.3% qoq to Rs. 28.3 bn
(excluding Spice and Indus). However, Idea’s top line grew by 7.5% qoq to
Rs. 29.4 bn as the combined subscriber base of Idea and Spice grew to
43 mn, up 13.2% qoq. As we expect RPM to reduce due to declining tariffs,
and MOU to come under pressure on account of lower usage by new
subscriber , we lower our revenue estimates to Rs. 131 bn and Rs. 164 bn for
FY10E and FY11E.
Idea's net adds trend
2.5 15%

14%

2.0 13%

12%

1.5 11%

10%

1.0 9%

8%

0.5 7%

6%

0.0 5%
Sep'08 Oct'08 Nov'08 Dec'08 Jan'09 Feb'09 Mar'09E Apr'09E May'09E Jun'09E

Net add Market share-net adds

Source: Company data, Indiabulls research

Please see the end of the report for disclaimer and disclosures. -2-

EQUITY RESEARCH
Declining subscriber quality
and extensive predatory
pricing by new entrants to pull
ARPU down to sub-Rs. 200
levels in FY10E-11E
Please see the end of the report for disclaimer and disclosures.
IDEA CELLULAR LTD
RESEARCH
May 07, 2009
Subscriber momentum remained strong for Idea largely driven by ramp-up in
new circles (Mumbai and Bihar), gaining 4% market share in the first full
quarter of operations. It (incl. Spice) grabbed 11.1% share in the outstanding
All-India quarter ramp up. With six more circles yet to be explored and the
Company focussed on rationalising the capacity on 900 MHz circles, we
expect the subscribers to double in the next two years to 88 mn, with ~12%
market share.
ARPU likely to continue to decline
During the quarter, Idea recorded a modest 2% reduction in MOUs to 402 min,
showing resilience to the market-trend. Due to the various discount offers the
average realisation also dropped to 63 paise. However, it was better than
overall market supported by new circles of Mumbai and Bihar and rise in-
roaming revenues. Overall annually the APRU compressed 11.5% to Rs. 252,
in line with our expectation.
We estimate a further reduction in ARPU to ~Rs. 190 in FY10E and ~ Rs. 170
in FY11E. We model a 10% p.a. decline in RPM over FY09–11E factoring the
reduction in terminal charges and the intensifying price war. We believe there
is a downside risk to RPM considering that several simultaneous new
launches across various circles may lead to an irrational and predatory tariffs
to attract initial subscribers. Furthermore, the MOU are likely to drop by ~8%
p.a. as inferior quality subscribers are added on the network.
Margins likely to come under severe pressure
While the consolidated EBITDA margins improved by 209 bps to 27.6% during
last quarter, the standalone EBITDA in comparison declined 10 bps to 25.9%.
As part of the Indus agreement, Idea carried the shared assets on its balance
sheet, and corresponding depreciation was being recorded. Upon the transfer
of these assets, the company expects the EBITDA margin to decline by ~250
bps in the subsequent quarters.
We continue to believe that margins would plunge over next 1-2 years and
therefore estimate a ~4% pts decline in EBITDA margin in FY10E-11E on
account of below;
-3-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH May 07, 2009

• passing of the benefit of cut in termination charge to subscribers

• inferior subscriber quality from the new circles,
• promotional pricing by new players
• increase in the network operating costs due to the rise in rental cell sites
• increase in the promotional costs in six new circles

Key Risks
The following factors can pose a threat to our rating:
• Faster-than-expected subscriber’s growth
• Lower than anticipated impact of predatory pricing by operators on Idea’s
ARPU.
• Faster-than-expected growth in Spice’s circles
• A lower-than-expected rise in network costs
Key Figures (Consolidated)
Year to March FY07 FY08 FY09* FY10E FY11E CAGR (%)
(Figures in Rs mn, except per share data) (FY09-11E)
Net Sales 43,664 67,200 101,484 131,159 164,428 27.3%
EBITDA 14,637 22,730 28,353 31,390 39,180 17.6%
EBITDA Margin 33.5% 33.8% 27.9% 23.9% 23.8%
Subscribers 14 24 43 71 88 42.9%

ARPU 332 287 252 192 172 (17.2%)

MOU 364 411 404 343 342 (8.0%)
ARR 0.91 0.70 0.62 0.56 0.50 (10.0%)
Per Share Data (Rs.)
Normalized EPS 1.9 4.0 3.1 2.1 2.7 (5.6%)
PER (x) 47.0x 25.7x 19.6x 28.8x 22.0x
*numbers include proportionate consolidation of Indus and Spice

Please see the end of the report for disclaimer and disclosures. -4-
 IDEA CELLULAR LTD
RESEARCH
EQUITY RESEARCH May 07, 2009

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