Idea Cellular

Initiate at Buy: Free from Shackles, Poised for Growth
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.

Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%