Citigroup Research has recommended buy rating on Idea Cellular and has upgraded the target price from Rs 128 to Rs 140.
Citigroup Research report on Idea Cellular:
Upgrading target price :
We are revising our Mar-08 target to Rs 140, incorporating a 10% M&A premium on the DCF value (Rs 128). We have raised the core business value of 128 per share due to higher growth over FY07- 10E and imputes a FY09E EV/EBITDA of 12.2x, P/E at 31.7x and P/CEPS at 13.0x. The premium to Bharti on EV/EBITDA is justified by higher growth over the next three years.
Subscriber additions market share to remain stable:
We are factoring in a stable 10% share of net adds until the terminal year (FY16E). Though its market share of net adds should come under pressure in existing circles. Roll-out in new circles should ensure that the overall market share remains stable.
Incorporating 10% M&A premium:
Though AV Birla Group has ruled out a potential M&A transaction in the immediate future, we are attaching a 10% M&A premium to the target price especially as spectrum constraints hinder new entrants in GSM (Maxis, RCOM and Telekom Malaysia). A significant block of private equity investors will also keep potential suitors interested.
Key risks:
Key risk relates to spectrum uncertainty in procuring spectrum hitting the rollout timetable and project cost overruns remain key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing. Maintain Buy/Low Risk.
