Jul 03, 2013 05:40 PM IST | Source:

Buy Idea Cellular; target Rs 160: GEPL Capital

Brokerage house GEPL Capital is bullish on Idea Cellular and has recommended buy rating on the stock with a target price of Rs 160 in its July 03, 2013 research report.

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GEPL Capital's research report on Idea Cellular

Idea Cellular, there is continuous improvement in EBITDA margin as compared to flat to declining margins of RCOM and Bharti. This shows how Idea has better cost management as compared to its peers even though it has to play a role of new entrant in around 8 of its new circles. Idea’s new circle margins were negative 21.2 percent in 4QFY13. Operators expect to breakeven on EBITDA basis at Revenue Market Share (RMS) of around 10 percent-12 percent. Idea’s RMS in Bihar is expected at 10 percent and for FY14e we estimate it at 11.5 percent. Similarly, we expect Mumbai margins to improve from around 8.6 percent to around 10 percent. Both circles combined account for around 56 percent of new circle revenues. Expanding RMS in Mumbai and Bihar circles will be the key to reducing EBITDA losses for new circles.

Benefits from reduction in spectrum price
After lukewarm response in the auction held in November 2012, government cut the price of spectrum by 30 percent in circles where there wasn’t any bidding. The Mar-13 auctions however failed as well, as none of the operators participated in the auction. The government will now have to go back to the drawing board and further cut the spectrum reserve price. This price is important as it will be used as benchmark to make Idea and other GSM incumbents (Bharti/Vodafone) pay at the time of license renewals/excess spectrum charges. Idea will benefit more vs. the larger peers from any reduction in the spectrum price, given its smaller balance sheet. We believe that lowered (by 30 percent) price of spectrum will be beneficial to the players like Idea and Bharti.

Looking ahead
Going forward we believe that, incumbents may continue to gain subscriber market share though at a slower rate going ahead. Lower tariff discounting across operators should play into the hands of the incumbents.

Valuation: "EBITDA for FY14-FY15 is expected to see increment of 4 percent-5 percent on the backdrop of drop in churn. Idea has lowest debt amongst all its peer group companies (i.e. net debt /EBITDA of 1.00x and Net Debt /Equity of 0.45x on FY15 estimates) followed by highest ROCE at 12 percent. We give a 'Buy' recommendation to the stock with a target price of Rs 160, which implies an exit EV/EBITDA multiple of 8x on FY15 estimates. At CMP of Rs 140, the stock is trading at an EV/EBITDA multiple of 11x on FY13 results. The premium it commands over its peers is justifies looking at the strong balance sheet of the company and healthy return ratios," says GEPL Capital research report.

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