Closing in on Idea

SPECIAL REPORT

A higher stake in Idea Cellular will improve Aditya Birla Nuvo's profitability.

After a bit of tussle with the Tatas, the Aditya Birla group has finally managed to wrest total control of the Rs 3000 crore Idea Cellular, the fifth largest player in the Indian telephony space. The Birlas are buying out the Tata stake of 48.14 per cent in Idea for which they will have to fork out Rs 4,406 crore.

Of this, Aditya Birla Nuvo (earlier Indian Rayon) will hold 15 per cent for which it will pay an amount of Rs 1372 crore, funded partly through internal accruals and partly through fresh borrowings. Aditya Birla Nuvo (ABN) already has a stake of 20.74 per cent in Idea and with this acquisition, the holding would go up to nearly 36 per cent.

At the price of Rs 4,406 crore, the total equity value for Idea Cellular would be Rs 9,150 crore. Together with the estimated debt on its books of Rs 3,600 crore, the enterprise value (EV) works out to Rs 12,750 crore. So, at a subscriber base of 7.4 million, the EV per subscriber is Rs 17,230 or approximatly $390. This is the lowest among all the listed telecom entities.

Market leader Bharti Tele-ventures commands a market capitalisation of Rs 75,000 crore and has a subscriber base of 19.6 million, resulting in an EV/subscriber of around Rs 39,200 or $880.

Thus, Bharti is currently valued at just over two times Idea or at a discount of 56 per cent. The discount would be even lower if one were to exclude Bharti's wireline business from the numbers: it would fall to around 45 per cent. 
 

AT A GLANCE
No of operating circles*	11
- of which, Metros & A-circles	4
No. of subscribers (mn) - as in March'06	7.36
Overall GSM market share	10.70%
Market share in the circles of its operation	19.40%
Average ARPU level (Rs/month)	343
Industry ARPU average (Rs/month)	325
Source COAI*

At the time of the Cingular stake sale of 16.45 per cent each to the Tatas and Birlas in September 2005 "� just $150mn was paid "� with the EV per subscriber working out to Rs 11,200 or around $250 (at a total market capitalisation for Idea of around Rs 4050 crore and an Enterprise value of Rs 6700 crore).

Thus, the price paid this time is substantially higher, probably a reflection of the recent deals that have taken place in the telecom space. The Telekom Malaysia-Spice deal was done at $338 per subscriber"�Spice is a much smaller company than Idea. The Hutch-BPL deal was transacted at around $440, again BPL has a market share of just 3.4 per cent.

So the Birlas appear to have paid up in line with current market trends. Besides, they would have been willing to pay a slight premium to be totally in control of the company without a joint venture partner. Otherwise, it would seem that they have overpaid somewhat.

The price discount to Bharti is much smaller given that Bharti's all-India market share is an enviable 22 per cent while that of Idea's is almost a third at of that 8.2 per cent: Idea has actually lost market share over the last one year, from 9.8 per cent in April 2005.

Moreover, Bharti has a pan-India presence across all 23 circles whereas Idea operates in just eight circles though it does plan to kick off operations in another three circles very soon. Once this happens, Idea would be catering for 60 per cent of the potential cellular market.

Having said that, Idea does have a strong presence in the markets in which it operates; for example it is the market leader in Maharashtra and Madhya Pradesh and among the top three in Gujarat and Andhra Pradesh.

Moreover, it has a contiguous footprint. Despite not being a major player in the metros"�it has about a million customers in New Delhi"�its presence in prosperous states has helped keep Idea's Average Revenue Per User (ARPU) slightly above that of the industry average though, Bharti's ARPU is way above the average.

In fact, Idea is a fairly profitable company. It posted revenues of Rs 2400 crore in FY05 with Earnings before Interest Depreciation and Tax (EBITDA) of around Rs 870 crore translating into an EBITDA margin of 36 per cent. It should close FY06 with estimated revenues of around Rs 3000 crore and an EBITDA of over Rs 1000 crore, leaving the margins more or less stable.

The company has invested around Rs 1100-1200 crore over the past year or so, and has plans to cover more towns even those with populations of less than 10,000. With handset prices down, tariffs falling and infrastructure sharing becoming a reality, Idea should be able to grow its subscriber base faster than it has in the past.

ABN has been consolidating pro rata numbers from Idea Cellular and should continue to do the same with the increased stake. The company has liquid investments of around Rs 500 crore and its profits before depreciation, royalty and tax for the first three quarters of FY06 add up to just over Rs 200 crore.

The debt-equity ratio for the company is 0.5 which leaves it ample room to leverage. Since Idea's operating margins are strong and there is growth potential, it would boost ABN's profitability. From that perspective, the increase in the stake is a positive for the stock especially now that the Birlas are in total control.