IIP

POOP
Prrooffiillee-- Idea Cellular Ltd (SUBSCRIBE) February 9, 2007

Issued Details
Bid / Issue opens: February 12, 2007
Bid / Issue closes: February 15, 2007
Price Band: Rs 65-75
Minimum Application: 90 equity shares, and in multiples of 90 equity shares thereafter

Capital Structure

Authorized Capital: 377.5 crore shares of Rs 10 each

Equity shares outstanding prior to issue: 274.25 crore shares of Rs 10 each
Equity shares outstanding after the issue: 263.54 – 268.55 crore shares of Rs 10 each (including Green
shoe option)

Background

Idea Cellular was incorporated in 1995 as Birla Communication Ltd with licenses for providing GSM-based
services in the Gujarat. In 1996, the name was changed to Birla AT&T Communications Ltd after it became
a joint venture company of Grasim Industries and AT&T Corporation. In 2000, the company merged with
Tata Cellular, thereby acquiring the original license for the Andhra Pradesh circle. In 2001, it acquired RPG
Cellular Ltd and consequently the license for the Madhya Pradesh (including Chattisgarh) circle and
changed the name to Birla-Tata- AT&T Ltd. In the same year, it obtained a license for providing GSM-
based services in the Delhi circle. At this time, the “Idea” brand was also created. It is now is the sixth
largest wireless operator in India with an 8.5% market share in total wireless subscribers. The company is
currently operating in 11 circles (Maharashtra, Uttar Pradesh (West), Madhya Pradesh, Haryana, Gujarat,
Kerala, Andhra Pradesh, Delhi, Himachal Pradesh , Rajasthan , Uttar Pradesh (East) and it has got the
licenses for the two more circles (Bihar & Mumbai).

Objective of the issue

Activity Amount (Rs cr)

Building, strengthening and expanding our network and related services in the New
978.8
Circles
Entry Fee and capital expenditure for NLD operations 80.8
Roll out for services in Mumbai Circle 647.0
Redemption of preference shares 741.0
Issue Expenses 82.5
Total 2530.1

Key Investment Rationale

High growth industry

The Indian telecom market (including GSM and CDMA) is one of the fastest growing in the world, adding
nearly six million subscribers a month. Mobile subscribers are estimated to increase to approximately 210
million by FY08, from 146.54 million subscriber’s end-December 2006. Factors like falling handset costs,
attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus,
expanded the market available to telecommunication service providers.

The reasons for the stupendous growth in the telecom market are:

➢ Increase in demand from both urban and rural areas due to strong GDP growth and increase in
per capita incomes.
➢ Entry of a fourth operator in several circles which lead to increased competition, reduced tariffs
and broadened the addressable market size.
➢ The calling party pays (CPP) regime that was introduced in May 2003 made incoming calls free of
charge for the receiving party.
➢ Entry of CDMA operators in 2003, particularly Reliance Communication, lowered entry barriers for
customers through innovative and attractive tariff schemes.
➢ Decrease in handset costs.
➢ Reduction in the cost of telecommunications infrastructure equipment.
➢ Large investments by operators in networks and coverage, as well as enhancements of existing
distribution networks
➢ Introduction of micro pre-paid plans and some form of extended validity cards by all operators

Exhibit 1: Mobile subscribers base (in ‘000)

FY07E FY08E FY11E
All India 137,815 184,231 319,486
Urban 117,436 144,621 210,051
Rural 20,379 39,610 109,435
Net Annual Additions 48,168 46,416 44,727
Urban 34,050 27,185 21,222
Rural 14,119 19,231 23,506
Source: CRIS INFAC

Higher growth in subscriber base for next two years

Idea Cellular provides mobile services to 1.28 crore subscribers in established circles as on end
December 2006. This subscriber base gives the company advantages of economies of scale in several
operations like equipment procurement, sales and marketing, billing & customer service and support. It
has successfully expanded into a number of additional circles, including circles where substantial
competitors were already in place. It is expected to leverage its expertise and strong brand when rolling
out its network in new circles in future. In the first half of FY07, the company notched the highest number
of net additions in established circles. For the period of FY07E-FY09E its subscriber base is estimated to
grow at a CAGR of 44.3% higher than its peers Reliance Communication (41.2%) and Bharti Telecom
(35.5%)

Increasing market share

Over the past 9-12 months (since the stake consolidation by Birla’s), increased focus on the business as
well as expanding footprint has helped Idea increase its market share from 7.7% as of end-CY05 to 8.3%
end of -CY06. Idea, at present, has a presence in 11 circles, covering about 60% of the total geographical
area of the country. Factoring in Mumbai and Bihar circles (expected to be operational in 9-12 months)
this would go up to 70-75%.

Strong distribution channels

The company has developed distribution network to maximize the breadth and depth of its distribution
channels. Efficient distribution helps the company to cater to it’s approximately 86.1% of its subscribers,
which are pre-paid subscribers. These subscribers pay for mobile services by means of purchasing pre-
paid cards, which are sold through approximately 142,440 retail outlets. These retail outlets are serviced
through approximately 1,227 exclusive distributors, many of whom have long-term relationships with the
company. The breadth of the distribution network has grown by over 30% in the past year. In addition the
company operate approximately 589 Idea ‘n U and other showrooms which supplement the distribution
channels and provide customer service.

Early-mover advantage in key circles to provide competitive edge

The company is having leading position in eight established circles (Delhi, Maharashtra, Gujarat, Andhra
Pradesh, Kerala, Haryana, Uttar Pradesh (W) and Madhya Pradesh), which in turn was due to early entry in
these circles, would help Idea maintain competitive advantage over others in terms of access to higher
Average Revenue Per User (ARPU) customers in cities like Mumbai where it has recently acquired
licenses and provide strong brand visibility. Of these eight circles, Idea has the leading revenue share in
four circles. Average Revenue per User for the company (ARPU) as on September 2006 was Rs 348.

Key Concerns
Increasing competition
The company faced significant competition from companies that have a pan-India footprint such as Bharti
Airtel, Tata Teleservices Limited and Reliance Communications. Increasing competition may affect its
subscriber growth and profitability by causing subscriber base to decline and cause decrease in tariff
rates and revenue.

Dependant on limited number of vendors

The company is highly dependant on a few suppliers and vendors to supply critical network and other
equipment and services. For example, Ericsson is the sole supplier for the Gujarat, Himachal Pradesh,
Madhya Pradesh, Maharashtra and Rajasthan circles. Nokia is the sole supplier for the Andhra Pradesh,
Delhi and Haryana circles. Siemens is the company’s exclusive supplier for the Kerala, Uttar Pradesh
(East) and Uttar Pradesh (West) circles. If the company is unable to negotiate favorable terms for
equipment and services or fails to obtain adequate supplies of equipment in a timely manner, it could
have an adverse impact on its operations and performance.

Financials
Total income has grown by 31.13% from 2267.45 crore in FY05 to 2973.3.38 crore in FY06, whereas net
profit has grown by 197.41% from 68.27 crore to Rs 203.043 crore. Total income for the nine-month
period ended Dec 2006 has grown to Rs 3,063.59 crore while net profit has grown to Rs 301.56 crore. Net
profit margins have grown by 566 basis points to 9.84%. The gestation period in the telecom industry is
very long and Idea’s Financials, at present, are not as strong as larger peers such as Bharti and Reliance
Communication. However, as the company forays into newer circles, we expect margins to improve. We
expect company to turn free cash flow positive by end of FY07.

Valuations

At the issue price of Rs 65 to Rs 75, the stock discounts its FY08E EPS of Rs 2.8 at 22.2x-26.7x the upper
and lower price band. Even in terms of EV/EBITDA the stock seems reasonable at 10.5x FY08 EBITDA as
against Reliance Communication (12.5x) and Bharti Airtel (13.8x). Idea’s implied valuations of
US$234/sub, which is at the higher end of the price band, are at a discount of 56% to Bharti Airtel’s
valuations which seems undervalued when compared with 22% differential in ARPUs and 450bps
difference in operating margins. The company is likely to post good earning in future led by the growth in
the sector with key triggers coming with increase in FDI/FII which is currently at 23% and Ideas ability to
roll out services faster than expected. Investors can subscribe to the issue and add it to their core investment
portfolio as it would be a wealth creator in the long run and offer fair capital appreciation.

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