Idea Cellular would enter Tamil Nadu (inc. Chennai), Orissa and West Bengal circles in FY10. This would take the share of five new circles plus two Spice circles to an estimated 17.8% in FY11 and support monthly net additions of 1.28mn in FY11.
However, pace of user additions in the older eight circles is likely to slow down to ~32% in FY11 from over 90% in current year. Idea subscriber base is estimated to touch 60mn in FY10 and subsequently expand to 75mn by March’ 11.
In Q3 FY09, Idea and Bharti reported similar RPM of Re0.64/min, which we expect to fall to just over 0.50/min levels by Q4 FY11 for both the companies.
With MOU likely to hover in a range, Idea ARPU is forecast to fall 23.2% over FY08-11, in line with 23.9% decline for Bharti over the same period.
The company has incurred combined EBIDTA losses of Rs1.1 billion on Mumbai and Bihar operations since August’08 and may require roughly two years for EBIDTA breakeven in the two circles.
It is likely to enter three more circles in FY10, which may increase losses and further dampen OPM. Hence, we factor in a 631bps fall in OPM over FY08-11. Lower EBIDTA of its JVs-Spice and Indus Towers, may add to weakness in margin.
Idea may cover a majority of circles except Assam, J&K and the North-East. A 16% stake in Indus Towers may aid in faster network roll out and potential vale unlocking once Indus is listed on bourses.
A 46.2% CAGR in subscriber base could underpin ~34% CAGR in revenues. Earnings growth is set to trail revenues on account of a 24% equity dilution in the current fiscal.
A key concern is likely margin decline from FY08 levels as roll out costs increase and newer circles take time for operating breakeven.
We project OPM decline of 631bps over FY08-11. Maintain MARKET PERFORMER rating but reduce target price to Rs42.