Idea Cellular Ltd. (Idea) ended the third quarter with a topline growth of 13.1% q-o-q, backed by a robust 13% share in the all-India net adds of 3.8 million and a 3.7% improved realization of 65 paise per minute.
We expect Idea’s market share (excluding Spice) to inflate beyond 11% by March 2010 from the current 9.9%.
In our view, the Company’s share of the market net adds is likely to peak at 14–15% in FY10, given the upcoming roll-outs in five new circles and the overwhelming responses received for the roll-out in Bihar and the re-branding in Punjab.
Moreover, Idea’s brand, which has all-India recognition, renders it a competitive edge over the other entrants in the new circles.
Pressure on margins
The operating margin will likely remain under pressure in FY10E–11E and is expected to come down to ~11% as Idea opts for higher OPEX rather than CAPEX for network expansion.
In addition, intensifying competition and penetration in Class C circles calls for competitive pricing, which would further bring down ARPUs to around Rs250 and Rs210 for FY09E and FY10E, respectively.
While the company’s business model points towards a strong longer-term growth trajectory, the upcoming congestion in the telecom market would exert significant strain on its key operating and financial parameters, thereby limiting major upsides in the stock price.
Thus, we have downgraded our target price to Rs49 and reiterate our HOLD rating on the stock.
Currently, Idea’s stock is trading at a forward P/E of 15.9x FY09E and 13.7x FY10E. Idea’s cash balance stands at Rs81.6 billion because of the TMI infusion leading to a net debt of Rs26 billion.
Our DCF-based valuation gives a fair value of Rs49, based on the assumptions of a 13.3% WACC and a 5% terminal growth rate.