Idea Cellular (NSE: IDEA.NS) – Long · PDF fileIdea Airtel Vodafone Reliance ... with...

M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Shreyas Hariharan | 04/15/2014

Idea Cellular (NSE: IDEA.NS) – Long

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

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Business Overview

Misperception Macro Tailwinds VAR

TAM & Valuation

Catalyst & Recommendation

M c I n t i r e I n v e s t m e n t I n s t i t u t e 3

“ Other operators service India. We service Bharat. ”

Himanshu Kapania CEO of Idea Cellular

1) Idea Cellular (IDEA): listed on the National Stock Exchange, India 2) Current Price: Rs. 140.10 ($2.4)


OVERVIEW

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16%

23%

19% 10%

31%

Revenue Market Share

Idea Airtel Vodafone Reliance Others

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

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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


MISPERCEPTION #1

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.

Why will rural subscriptions increase manifold in the next 1-2 years?

1) The urban market is oversaturated (139%), while rural market (857 million people) is largely unpenetrated 2) National Telecom Policy estimated that rural tele-density 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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Misperception: Main telecom revenue growth in next 1-2 years will be from urban market


UNDERVALUATION

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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.

IDEA AIRTEL VODAFON RELIANCE PEER AVERAGE

EV/EBITDA

5.9 6.16 7.5 8.44 7.64


MISPERCEPTION #2

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

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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Misperception: 2G spectrum scam and TRAI regulations affects Idea’s growth


CHURN RATE

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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.


ARPU AND ARPM

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IDEA PEER AVERAGE (top 7)

ARPU (INR) 169 105 ARPM (paise) 44.9 36

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


OPERATIONAL EFFICIENCY

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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


RECENT GROWTH

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RURAL MARKET PROSPECTS

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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.


VALUE ADDED RESEARCH

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Ø  Survey conducted by: Srushti NGO Ø  Location: Hatti village, Raichur district, North Karnataka, India. Ø  Number of respondents: 76 Ø  Age group surveyed: 21-38 Ø  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

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20

40

60

80

Idea Airtel Vodafone Reliance


VAR: BRAND RECOGNITION

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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.


VALUE ADDED RESEARCH

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Q2. Do you have a mobile subscription?

Idea 52%

Airtel 17%

Reliance 2%

Vodafone 29%

Service Provider

Cell Phone 68%

No Cell

Phone 32%

Respondents

Q3. Which mobile subscription do you use?


STRATEGIC ACQUISITIONS

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Ø  Spice Communications 1)  Idea acquired Spice telecom to become a pan-India player Ø  Indus Towers 1)  Idea initiated a Joint Venture to form Indus Towers, the largest tower company in the world. 2)  Idea has a 16% shareholding in Indus. 3)  Indus has 112,100 towers, with tenancy ratio of 2.1 4)  “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


MARKET CONSOLIDATION

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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.

“Telecom market is ripe for consolidation.” Vodafone CEO Marten Pieters

“There are dozens of telecom players making losses. In the long-run, I see only Vodafone, Idea and Airtel operating.” Vodafone Sales Manager (VAR)


DEBT AND CAPEX

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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.


FUTURE POSITION

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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


URBAN MARKET SUSTAINABILITY

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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.


GROWTH OPPORTUNITY

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Ø  Focus areas for expansion in the next 1-2 years are: 1)  West Bengal 2)  North East 3)  Jammu & Kashmir 4)  Assam 5)  Orissa 6)  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


TAM: BASE CASE

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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.


TAM: GROWTH CASE

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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.


CATALYST

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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


PEOPLE

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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.


RECOMMENDATION

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Initiate a long position on Idea Cellular at an entry price below Rs. 150.

Idea Cellular (NSE: IDEA.NS) – Long · PDF fileIdea Airtel Vodafone Reliance ... with...

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