Idea Cellular PPT - Collab

MCINTIRE INVESTMENT INSTITUTE
AT THE UNIVERSITY OF VIRGINIA
Idea Cellular
(NSE: IDEA.NS) – Long
Shreyas Hariharan | 04/15/2014
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McIntire Investment Institute
AGENDA
Business Overview
Misperception
Macro Tailwinds
VAR
TAM & Valuation
Catalyst &
Recommendation
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1) Idea Cellular (IDEA): listed on the National Stock Exchange, India
2) Current Price: Rs. 140.10 ($2.4)
“ Other operators service India. We service Bharat. ”
Himanshu Kapania
CEO of Idea Cellular
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OVERVIEW
1)  Idea is the 3rd largest operator in India by subscribers and Revenue Market Share.
2)  Idea is the 7th largest operator in the world by number of subscribers
3)  Idea has pan-India operations in 15 service states
Revenue Market
Share
Idea
Airtel
Vodafone
Reliance
Others
31%
16%
23%
10%
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19%
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REVENUE MARKET SHARE
1)  In the last 6 years, Idea increased RMS by 6.4%: highest among all telecom operators.
2)  This increase was despite hyper-competition in the industry
3)  Idea’s focus is Indian hinterland markets
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MISPERCEPTION #1
Misperception: Main telecom revenue growth in next 1-2 years will be from urban market
Why will rural subscriptions increase manifold
in the next 1-2 years?
Why does the market believe this?
1) Mobile subscriptions in urban India has skyrocketed
since 2007; most current revenue is from urban markets
2) Data growth in urban markets has increased
3) Brand recognition of telecom companies is only
restricted to tier-1 cities.
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1) The urban market is oversaturated (139%), while
rural market (857 million people) is largely
unpenetrated
2) National Telecom Policy estimated that rural teledensity would reach 70% by 2017. This is an increase to
600 million subscribers from rural India.
3) Recent tower regulation by Department of Telecom
(towers have to be at a minimum of 35 ft from
residential building) will reduce urban area overcapacity
and shift operators to rural areas.
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UNDERVALUATION
1)  Due to the first misperception, Idea is highly undervalued.
2)  Idea has a P/E of 27.6 compared to its main competitor Airtel’s P/E of 54.8.
3)  Idea’s Price to cash flow ratio is 6.16, which is lower than the telecom industry average.
4)  Idea’s EV/EBITDA ratio of 5.9 is lower than its top competitors.
EV/
EBITDA
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IDEA
AIRTEL
VODAFON RELIANCE PEER
AVERAGE
5.9
6.16
7.5
8.44
7.64
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MISPERCEPTION #2
Misperception: 2G spectrum scam and TRAI regulations affects Idea’s growth
Why do investors believe this?
1) 122 spectrum licenses were cancelled by the
Supreme Court in Feb 2012
2) Regulatory reserve prices for the 1800 MHz
auctions in Nov 2012 were very high
3) Investors assumed that the telecom
environment was unfavorable for investment
because of license cancellation
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Why is Idea actually better off after the
2G spectrum scam?
1) Reduced competition in rural space- the
number of telecom operators decreased by
31% after license cancellation
2) Unlike other telecos., Idea did not invest
heavily in 2G, hence maintained a very good
debt-EBITDA position after the scam.
Meanwhile, Airtel and Vodafone suffered.
3) Idea’s ARPU improved due to decreased
competition after TRAI regulations increased.
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CHURN RATE
1) Following the 2G spectrum scam and license cancellations, Idea’s churn per month
decreased by almost half.
2) 98.9 % of reported Idea subscribers are active (VLR) subscribers. Hence Idea has highest
retention rate in Indian telecom industry.
3) This is very significant in India where more than 95% of subscriptions are pre-paid.
4) Idea has lowest annual churn rate in Indian telecom industry.
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ARPU AND ARPM
IDEA
PEER AVERAGE
(top 7)
ARPU (INR)
169
105
ARPM (paise)
44.9
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1)  Idea’s sound pricing policy ensures that its
average revenue per user and per minute
are way above industry average
2)  Idea’s ARPU and ARPM have steadily
increased
3)  New M&A policy will hasten market
consolidation, reduce competition and
give Idea greater pricing power
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OPERATIONAL EFFICIENCY
1)  “The main strength of Idea is its sound execution and operational efficiency.”- Reliance
Communications CEO (VAR)
2)  Idea’s Opex/min has been decreasing while its gross revenue/min is increasing.
3)  Mounting losses among other operators in the Indian telecom industry will force the market to
consolidate
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RECENT GROWTH
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RURAL MARKET PROSPECTS
1)  According to TRAI, urban subscriptions declined by 10 million in the last year.
2)  Rural subscriptions are on the rise, increasing by 10%
3)  Since the urban market is oversaturated, the focus of growth in the coming years will be on
unpenetrated rural markets.
4)  Recent tower regulation by DoT (towers have to be at a minimum of 35 ft from residential
building) will result in destruction of 450,000 in tier-1 cities. This will reduce urban area
overcapacity and shift operators to rural areas
5)  Idea was awarded the ‘Best Rural Service Provider of the Year’: Amity Telecom Excellence
Award 2012.
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VALUE ADDED RESEARCH
Ø 
Ø 
Ø 
Ø 
Ø 
Survey conducted by: Srushti NGO
Location: Hatti village, Raichur district, North Karnataka, India.
Number of respondents: 76
Age group surveyed: 21-38
Literacy: 68 out of 76 were illiterate
Q1. Which of the brands can you name/recognize?
93% recognized Idea, 46% recognized Airtel, 53% recognized Vodafone, 28% recognized Reliance
80
60
40
20
0
Idea
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Airtel
Vodafone
Reliance
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VAR: BRAND RECOGNITION
1)  “The toughest strength we have to compete against Idea’s brand recognition, especially in
rural areas.”- Reliance Communications CEO (VAR)
2)  Idea received “Best Ad Campaign of the year” in 2012.
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VALUE ADDED RESEARCH
Q2. Do you have a mobile subscription?
No Respondents
Cell
Phone
32%
Cell
Phone
68%
Q3. Which mobile subscription do you use?
Service Provider
Vodafone
29%
Reliance
2% Airtel
17%
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Idea
52%
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STRATEGIC ACQUISITIONS
Ø 
1) 
Ø 
1) 
2) 
3) 
4) 
Spice Communications
Idea acquired Spice telecom to become a pan-India player
Indus Towers
Idea initiated a Joint Venture to form Indus Towers, the largest tower company in the world.
Idea has a 16% shareholding in Indus.
Indus has 112,100 towers, with tenancy ratio of 2.1
“Idea benefits from reduced capex and increased speed to market due to Indus.”- Consultant
for the tower business (VAR)
Ø  3G
1) Idea won 3G spectrum for 11 circles in 2100 MHz auction
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MARKET CONSOLIDATION
1)  New M&A regulations open up mergers and acquisitions in the telecom industry.
2)  Consolidation is expected in this capital intensive industry where many players are making
losses.
3)  Idea has strong cash flows and relatively low debt to make strategic acquisitions in the coming
few years.
“There are dozens of telecom
players making losses. In the longrun, I see only Vodafone, Idea and
Airtel operating.” Vodafone Sales
Manager (VAR)
“Telecom market is ripe for
consolidation.”
Vodafone CEO Marten Pieters
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DEBT AND CAPEX
Idea
Airtel
Vodafone
Debt/EBITDA
1.83
2.6
3.29
Capex/Sales
14.8%
31.1%
19.1%
1)  Idea has the lowest Debt/EBITDA and Capex/Sales ratios.
2)  Conservative comparison because players other than Airtel and Vodafone have far higher
ratios.
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FUTURE POSITION
1)  In a capital intensive telecom industry, Idea is the best positioned in the next few years
because:
Ø  It can expand to unpenetrated rural markets
Ø  It can acquire smaller operators given the new M&A regulations
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URBAN MARKET SUSTAINABILITY
1)  Idea is well positioned with major technologies: 3G and LTE
2)  It has invested in 11 circles for 3G in the 2100 MHz auctions
3)  It has a strong cash flow to incur capex for future 3G and 4G auctions
4) “Idea has a unique ability to launch new technologies at the right time when consumers are
ready for it.”- Sales Manager, Vodafone (14 years experience in Indian telecom industry)
Example: launch of 3G on March 28, 2011.
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GROWTH OPPORTUNITY
Ø 
1) 
2) 
3) 
4) 
5) 
6) 
Focus areas for expansion in the next 1-2 years are:
West Bengal
North East
Jammu & Kashmir
Assam
Orissa
Tamil Nadu (including Chennai)
Ø  These areas will constitute 20.7% of the total
revenue earned by Indian telecom
Ø  Idea will increase its incremental Revenue Market
Share substantially with these growth prospects
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TAM: BASE CASE
2012
2013
2014
2015
2016
2017
2018
Rural
Subs
320 M
352 M
370 M
407 M
448 M
492 M
541 M
Growth
10%
10%
10%
10%
10%
10%
10%
Idea
Subs.
60.8 M
66.8 M
70.3 M
77.3 M
85.1 M
93.5 M
102.8 M
ARPU
(INR)
169
169
169
169
169
169
169
Revenue
(INR)
10,275M
11,289M
11,881M
13,064M 14,382M 15,801M
17,373M
This is an ultra-conservative estimate because:
1)  Growth rate of rural subscribers is kept constant at 10%, while National Telecom Policy
estimates, VAR contact estimates, Reliance & Idea CEO estimates are all much higher.
2)  Idea’s rural market share is kept constant at 19%, while past trends show substantial increases.
Also, rural market first mover advantage will ensure higher market share.
3)  ARPU is kept constant at INR 169, whereas past trends clearly forecast an increase in ARPU.
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TAM: GROWTH CASE
2012
2013
2014
2015
2016
2017
2018
Rural
Subs
320 M
352 M
405 M
466 M
531 M
600 M
660 M
Growth
10%
10%
15%
15%
14%
13%
10%
Idea
Subs.
60.8 M
66.8 M
89.1 M
116.5 M
148.7 M
186 M
224.4 M
ARPU
(INR)
169
169
169
169
169
169
169
Revenue
(INR)
10,275M
11,289M
15,058M 19,688M 25,130M 31,434M 37,924M
This is realistic estimate because:
1)  Growth rate of rural subscribers is in accordance with National Telecom Policy estimates. It
increases by a faster rate in the next 2 years and by a slower rate after, according to NTP.
2)  Idea’s incremental rural market share is 3% annually based on past trends.
This is still conservative because:
1)  VAR contact, Reliance & Idea CEO estimates of increase in rural subscribers are much higher.
2)  ARPU is kept constant at INR 169, whereas past trends clearly forecast an increase in ARPU.
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CATALYST
1)  All opinion and exit polls predict a clear mandate for BJP led Modi government coming to
power on May 16, 2014.
2)  Narendra Modi is known to be the poster-boy and darling of the telecom industry.
3)  The Modi Government plans to hold spectrum auctions for the 900 MHz and 1800 MHz
bands in the first month it comes to power (May 2014).
4)  The Modi Government plans to clear M&A regulations and raise the spectrum limits. Presently,
a merged entity can have at the most 25% of total airwaves assigned for access services and
50% of the bandwidth assigned in a given band.
5)  “All telecom stocks are expected to rally for a slightly prolonged period when Modi comes to
power.”- Reliance Communications CEO (VAR)
6)  “Idea’s stock would touch Rs. 200 by the end of the year.”- Vodafone Sales Manager
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PEOPLE
1)  Idea Cellular is owned by the Aditya Birla Group, one of the most transparent groups.
2)  The Aditya Birla Group was ranked as the “Number One Corporate” according to Nielson’s
annual Corporate Image Monitor 2012-13.
3)  Kumar Mangalam Birla, the Chairman of Idea and the Aditya Birla Group, was “Business
Leader of the Year” according to Economic Times for 2012-13.
4)  Idea’s CEO Himanshu Kapania was declared “Telecom CEO of the year” in 2012.
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RECOMMENDATION
Initiate a long position on Idea Cellular at an entry price
below Rs. 150.
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