By monetising 20% of its holding in Indus Towers, Idea has reduced its leverage from 1.5x to 0.6x, and armed itself with enough cash and debt capacity to undertake both network growth in its existing circles and footprint expansion in new circles, including potentially inorganic growth. We revise our revenue estimates for existing operations upwards by 6% and 8% for FY09 and FY10 respectively, on the back of stronger-than-expected performance on the subscriber addition and ARPU front. Idea also has been allocated spectrum in Tamil Nadu and Orissa circles, and will likely begin operations this year. We include these two circles in our estimates, and this takes 12% off our FY10 earnings estimate. We retain BUY with a DCF-based target price of Rs156 (previously Rs148).
Funding problem solved for the present: By raising US$640m through compulsorily convertible preference shares (CCPS) as an investment into its subsidiary Aditya Birla Telecom Limited (ABTL), Idea has reduced its debt-equity ratio to 0.6x. Idea can raise its cash reserves to nearly Rs130bn within a debt–equity ratio of 2x. With this, network growth in its current 11 circles as well as rollout in new circles can be executed for the first year, especially since rollout in the new circles will be staggered. While Idea will need more funds to fund its longer-term capex for the remaining seven circles, the dilution of stake in Indus is a positive move, especially as no dilution of rights in Indus Towers is involved. Operations in existing circles strong, rollout to accelerate: By managing to raise usage minutes on its network by 9% sequentially in 4Q, Idea managed to increase its ARPU by nearly 3%, leading to a strong revenue growth of 15% QoQ.
With subscriber additions now averaging more than 1.1m per month, we raise our subscriber forecast for Idea (in its current circles plus Mumbai and Bihar), for FY09 by 5% to 36m and for FY10 by 4% to 46m. We continue to model declining ARPU as we believe that for the present, new subscriber addition will continue to be strong and drag ARPU down. Spectrum in three new circles obtained; expect service launch by December 2008: Spectrum in Tamil Nadu (including Chennai) and Orissa has already been obtained and the company expects to start service by December. We expect spectrum in the remaining seven circles, including the prominent Punjab and Karnataka circles, to come Idea’s way in the next 12 months. We are adding these two circles in our model.
By Indiainfoline
