Despite the hyper competitive phase over the past two
fiscals, Idea Cellular has improved its revenue market share by 210 bps to 13.2
percent (FY11 end) and is the fastest growing Indian telecom operator. This has
catapulted Idea to become the third largest telco in terms of revenue market
share from being the fifth just two years back.

Idea Cellular chairman KM Birla is of the view that the
hyper-competition phase is apparently continuing. He is quick to highlight the
various achievements of Idea Cellular in being the top gainer in MNP, having
the highest share of active subscribers across the industry, much higher than
industry revenue growth and improvement in market shares.

Idea believes that 3G and ‘Idea Mycash’ (its mobile
banking service) will help it tap the growing opportunities in the ‘non-voice’
segment. Idea’s strategy is to consolidate its leadership in its thirteen
established service areas and cautiously expand in nine new service areas. Idea
notes that the capacity utilisation of its 2G voice service is improving and it
will benefit from long-term sector opportunities” as the hyper-competitive
phase draws to its inevitable close” and pricing power returns to the
operators”. The Aditya Birla Group plans to become a US$ 65 bn group by 2015
(from US$ 35 bn currently) and believes that Idea will play an important role
in reaching this destination”.

Key highlights from the Annual Report

*         Idea’s
EoP subscriber market share stands at 14.6 percent in March 2011 on active
subscriber base (VLR) compared to a reported subscriber market share of 11
percent.

*         SMS
services penetration is only 39 percent and although 60 percent of Idea’s
consumers use GPRS/EDGE enabled devices, only 10 percent are active users of
wireless data.

*         Non-voice
revenues grew by 41 percent in FY11.

*      Few
cases of fraud by employees and by external parties estimated at Rs 0.92 mn was
detected by the management for which appropriate steps are being taken to
strengthen controls.

*     Loan
funds amounting to Rs 60 bn have pledge on 60% shareholding of Idea Cellular in
Indus Towers (Idea holds 16 percent in Indus Towers through a wholly owned
subsidiary).

*       The DoT
has not given its approval for the merger of Spice Communication (Spice) with
Idea and the DoT further took an ex-parte stay from the HC of Delhi on the HC’s
sanction of the scheme of arrangement. The matter is sub-judice and the
Appellate Bench of the Delhi HC has directed the DoT to maintain status quo in
relation to the two operating licences of Spice (Punjab and Karnataka) and not
to take any coercive steps against the 4 non-operating licences till the next
date of hearing. Without qualifying, the auditors have drawn attention to this
issue.

*        Idea
has not received 3G spectrum in Punjab because of its ongoing tussle with DoT
on its acquisition of Spice.

*        Idea
has a contingent obligation to buy compulsory convertible preference shares
issued by ABTL, from the holder at the original issue price of Rs 21 bn.

*        Total
contingent liabilities have increased by ~65 percent YoY mainly because of the
DoT’s stance on Idea’s merger with Spice. This matter is currently sub judice.

Outlook

Idea continues to gain revenue market share
and its growth profile is superior compared to its peers as it continues to
focus on its established circles and act as a new player in 9 circles. Tariff
revisions will lead to operating leverage kicking in and, if sustainable, will
leading to a re-rating of the sector. As new operators become increasingly
unviable and consolidation seems inevitable the only hazy bit in the telecom
story remains the New Telecom Policy 2011.

The new minister has been giving feelers that
the new policy will strike a balance between sustainable growth of the sector
and maximizing Government revenues. We view this commentary as positive and
believe that regulatory hurdles will subside soon. We maintain our Outperformer
rating on Idea, valuing it at 8x FY13E EV/EBITDA and arrive at a target price
of Rs 104 after deducting Rs 18 as the maximum negative impact of the recent
TRAI recommendations (on spectrum pricing, licence renewal, higher spectrum
charges and lowering of licence fees). We are not accounting for reduction of
interconnect charges; however, on a back of the envelop calculation, every 5
paise decline in termination charges will decrease our target price by Rs 4.

 

By Sandhya Pavitrekar

Research Associate – Telecom

Batlivala & Karani Securities India