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Idea Cellular - Risk-reward ratio now favourable; Upgrade to Buy
n Upgrade to Buy. We have incorporated 3G into our Idea model to derive Jun-11 SOTP value of Rs76 (incl. Rs20 from
n 3G/BWA overhang behind us; 2G showing signs of stability. While our TP captures Rs7/sh 'negative' NPV from 3G, we believe Idea's 3G footprint is the most optimal vs. others, given higher 'own revenue coverage' (79%), and lower spectrum cost (41% of revenues). Further, pull out from BWA auction due to high prices, is a rational move in our view. Finally, our thesis of operational out-performance versus peers remains intact, with increasing signs of stability in the industry pricing, and likely EBITDA loss reduction in Idea's new circles starting 1QFY11.
n Key revisions. Our medium-term EBITDA ests. are broadly unchanged, but longer term ests. are higher due to back-ended growth in 3G data revenues. Not surprisingly, our PAT/EPS ests. have been significantly hit by 3G-spectrum costs (FY11e/12e EPS down 22%/66%); EPS is likely to bottom out in FY12. We model Rs90bn capex in FY11 (Rs58bn 3G spectrum fee), and expect net-debt of ~3x EBITDA through FY11.
n Our top pick is Bharti. (1) Idea has outperformed Bharti by 13% YTD-2010, and now trades at similar growth-adjusted FY11e EV/EBITDA multiple-this makes Bharti more attractive on a risk-adjusted basis; (2) Idea has greater downside exposure to TRAI recos-potential share price downside in our worst-case scenario is higher [15%] vis-à-vis Bharti [9%]; (3) Idea's FCF growth led by margin expansion is more back-ended and is likely to play out over a fairly long time horizon (5-6 years); and (4) Lower FCF generation/yield, resulting in slower de-leveraging.
n Downside risks to our view. Domestic wireless competition, leading to lower than expected ARPM/margins, and excessive regulatory costs.
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