Not a bad idea

The telco lags its peers, but given the growth opportunity in the Indian wireless space, Idea Cellular should be able to scale up.

Shrugging off a troubled history, which stunted growth for several years, Idea Cellular, India's sixth largest wireless player is moving on.

With the Aditya Birla group now firmly in the saddle"�it has a stake of 65.2 per cent, the Rs 2,966 crore telco (FY06 revenues) is trying to improve its presence in the market place.

Today, it commands a share of 8.5 per cent with a subscriber base that is nudging 12 million. That's still way behind market leader Bharti Airtel, which has more than twice that many customers and a 22 per cent plus market share. Or even Hutch Essar which is the fourth largest player with a 16 per cent market share.

Idea isn't as profitable as Bharti either"�its average revenue per user (ARPU) is about 20 per cent lower. Hutch Essar , of course, is believed to have the highest average revenue per minute (ARPM) in the industry.

But given a presence in 13 out of India's 23 telecom circles and a committed promoter with deep pockets, Idea should not have too much trouble scaling up in a wireless market that's growing exponentially.

A fair valuation
In fact, the explosive growth in the cellular space in the last few years and the potential for more, has resulted in telecom valuations being pushed to stratospheric levels.

From an enterprise value of $10 billion ( Rs 45,000 crore) less than a year back, Hutch today commands a valuation nearly twice that"�around Rs 90,000 crore. Idea, it may be remembered, had picked up the stake of 49.8 per cent from the Tatas at Rs 41.50 in June last year.

Today, it is cashing in on this bullishness. It plans to mop up around Rs 2,444 crore (including a greenshoe option for Rs 318.75 crore) at a price of between Rs 65-Rs 75. At these prices, Idea's enterprise value (EV) works out to between Rs 21,630 crore and Rs 23,940 crore, implying an EV/subscriber of $398.5-$441.1.

Compare that with an EV/Subscriber of $708.7 for Bharti and it would mean a discount of 37.7-43.7 per cent. Given Bharti's bigger scale, brand equity, coverage, and superior balance sheet and operating performance, the discount is fair.

An expanding footprint
Idea, which first rolled out its network in 1995 in the states of Maharashtra and Gujarat, has grown both by bidding for licences on its own as also acquiring the networks of Escorts and Escotel.

Today, its footprint while not pan-national, caters for nearly 60 per cent of the subscriber base across 1,353 towns. With the entry into the two circles of Bihar and Mumbai, over the next six to nine months, it will be able to reach out to about 70 per cent of the subscriber population.

Overall, the company today enjoys an overall market share of just over 8 per cent with its market share in its eight established circles having moved up to 17.7 per cent at the end of December from 16.7 per cent in March.

It remains the market leader in the three circles of Maharashtra, Haryana and Uttar Pradesh (West). Idea has also picked up a national long distance (NLD) licence, with which it will set up a backbone, though not a pan-India fibre optic network. That will help bring down inter-connect costs that are incurred when calls are made from a mobile phone to a fixed line number.

Profitability behind peers
While Idea has been operating in eight circles for nearly ten years, it launched services in three circles"�Rajasthan, Himachal Pradesh and Uttar Pradesh (East)"�in the last six months where it will be the fourth GSM operator.

In the process, operational efficiencies have suffered"� subscriber acquisition and servicing costs have jumped by 159 per cent in the nine months ended December 2006 over the corresponding period in 2005-06, while revenues for the same period are up 45 per cent y-o-y. With two more circles to be rolled out, the operating margins will continue to remain under pressure.

Nearly 86 per cent of Idea Cellular's customer base is accounted for by pre-paid customers while the remaining 14 per cent constitutes post-paid subscribers. Since it operates in less affluent regions, weighted average ARPUs are lower"�its post-paid customers spend less than those of its competitors.

According to Sanjeev Aga, managing director, the reason for the lower ARPUs lies in the lower roaming rentals that Idea earns vis-a-vis telcos such as Bharti, which have a pan-India exposure. The minutes of usage (MOU) per subscriber per month, that Idea bills, are on average around 20 per cent lower than that for rival players.

Once again, this is because of the telco's operations in regions where people are less well-to-do. However, non-voice revenues, such as SMS"�at 9 per cent of revenues"�are growing fast and are second only to Bharti's. Idea has also managed to bring down the churn"�or the number of customers switching out of Idea to other operators. 
 

CALL ALERT
Rs crore	FY06	FY07E	Y-o-y change (%)	FY08E	Y-o-y change (%)
Revenues	2965.00	4402.00	48.50	6490.00	47.40
Operating costs	1898.00	2960.00	56.00	4400.00	48.60
EBITDA	1067.00	1440.00	35.00	2085.00	44.80
EBITDA (%)	36.00	32.70	-330 bps	32.10	-60 bps
PAT	211.80	323.00	52.50	335.00	3.70
Debt/Equity ratio	5.90	9.30	-	9.20	-
Market Cap	17,830-20,140
Enterprise Value@65-75	21,630-23,940
EV/Subscriber ($)	$398.5-441.1
Source: Analysts' Estimates

A growing market
What the telco has going for it is a huge, fast-growing market. With nearly 71 million subscribers being added, 2006 was a year of remarkable growth for the wireless industry in India.

The Global System for Mobile Communications (GSM) space in which Idea operates, saw its subscriber base grow 80 per cent to 105.4 million from 58.5 million. The country's cellular subscriber base should touch 170 million by March 2007 and driven by falling handset prices, affordable tariffs, should hit 240 million by March 2008, a growth of 40 per cent.

The opportunity lies in the low penetration, which grew at a high 81 per cent over the last one year but which is just 12.2 per cent of the addressable space. In the next couple of years, the penetration is expected to go up to around 27 per cent.

However, penetration in the metros averages 52 per cent and could taper off. The lower income categories are likely to fuel growth from here onwards.

Moreover, with increasing competition, the average revenue per minute (ARPM) has dropped almost two-thirds from Rs 2.7 in FY04 to Re 1 in Q2 FY07, though it is stabilising at these levels. 
 

HOW THEY STACK UP
	Bharti	Reliance	Hutch	Idea
Subscriber Base (mn)	27.06	25.97	21.40	10.36
EBITDA margin (%)	36.90	36.10	-	35.10
Weighted average ARPU (Rs)	438.00	354.00	475.00	335.00
ARPM (Rs/min)	0.98	0.77	1.04	0.96
Cost Per Min (Rs/Min)	0.62	0.49	-	0.63
Minutes of usage/sub/month	451.00	461.00	405.00	344.00
Churn (%)	4.90	1.90	5.90	4.10
ARPU is average revenue per user, ARPM is average revenue per minute As on Sept 30, 2006

A chance for Idea
While the competition will continue to be intense, there appears to be room for everyone to grow.

It is up to individual players to come up with attractive tariff schemes and ensure good service and that's where Idea will have to prove its mettle. It will need to build scale quickly and control costs, since pricing power is virtually absent in an environment where tariffs are coming off.

With number portability some time away it will be difficult for Idea to win over existing customers, especially in the post-paid segment. What will help Idea is the falling cost of infrastructure"�prices for GSM equipment are coming off and according to Aga, who says they are half the level they were three years back.

Moreover, the managing director says operators are increasingly sharing cell sites"�of Idea's 8600 sites, 45 per cent is shared with Idea being either a guest or a host.

Idea has a high net debt to equity of 5.7 in FY06, the highest among listed Indian telecom stocks. As a result of the huge amount paid for licence fees of around Rs 2,000 crore for 13 circles, the company has carried forward losses to the tune of Rs 1,700 crore and an unamortised licence fee of Rs 1,000 crore.

However, with a committed promoter group which should not hesitate to infuse funds into the business, Idea should not suffer for want of capital. It's now up to the management to deliver the goods.