Idea Cellular - Lehman Brothers

We initiate coverage of IDEA Cellular with a 1-Overweight rating and a target price of Rs110. We believe IDEA is a simple wireless penetration growth story, with a robust 36% FY07-10E revenue CAGR, underpinned by positive surprises on both market-share and ARPU from its planned ramp-up in capex and new circles.

>We expect IDEA’s 781 mn population footprint (13 circles) to see penetration grow from 15% in March 2007 to 36% in March 2011E and 52% in March 2015E. IDEA has revenue KPIs and branding comparable to its listed peers; and is equally well-positioned to benefit from improving near-term industry dynamics (slowing tariff declines, coverage focus, infra sharing, lower handset pricing), in our view.
> We expect to see 80 bp market-share gains over FY07-10E, as IDEA ramps up in its five new circles. With GSM industry ARPU in its new circles higher than its established circles, we expect IDEA to narrow its discount to Bharti’s ARPU from 18.6% to 16.7% by FY10. We expect to see short-term margin surprise from LD traffic and outsourcing; and sharp ramp-up over FY09-10 from maturing new circles.
>IDEA’s rich valuations at 8.3x FY09E EV/EBITDA (a 20% discount to Bharti) are well-supported by its 41% FY07-FY10E EBITDA CAGR, in our view. On our target, IDEA would trade at 9.8x FY09E EV/EBITDA (14% discount to Bharti ex-towerco target). The company expects to receive more licenses this year, representing a free option on IDEA shares, in our view.
>Positive potential catalysts include a pick-up in subscriber additions post the ongoing clean-up, market-share gains, industry M&A, and spill-over demand for Bharti shares. Risks are higher-than-expected capex and delays in new spectrum grants.

We initiate coverage of IDEA Cellular with a 1-OW rating and a 12-month price target of Rs110.