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  • DECEMBER 29, 2006

Idea Cellular: First cut

Idea was originally incorporated as Birla Communications Limited, with the license to provide cellular services in Maharashtra and Gujarat. Later on, stake acquisitions by AT&T and the Tata Group, the company was renamed Birla-Tata-AT&T, with operations spread in Andhra Pradesh and Chattisgarh. The company seeking brand positioning changed its name to Idea Cellular Limited in 2001 and breached the 1 m subscriber mark. The company has, in the past few years, seen exponential growth in terms of additions to its subscriber base. However, as is evident, the additions have not been enough to help it sustain its market share. Idea currently caters to 11 circles in India, effectively covering around 70% of the country's population.

Footprint of Idea Cellular's growth in India
YearNo. of
Subscribers (m)
No of
Circles covered
Total
Circles in India
19970.1222
20021.0522
20032.0523
20045.0823
## 200611.81123
## Data for November 2006
Source: Company Website, COAI

The mantra for growth
Idea, like its peers Bharti Airtel and Hutch-Essar, has, at the centre of its focus, aggressive growth in subscriber base going forward. Currently, the company commands a market share of 11.7% consolidated for the 11 circles where it operates. While the company has not been able to grow at the pace at which its peers have grown in the past few years, it has managed a growth, which has been in line with the overall industry growth rate. With a market share of net adds of approximately 21% and plans to have a pan India presence soon, the good show in performance is likely to continue. What is also encouraging is that although it had been a late entrant in Delhi (the only metro in which it currently operates), it has managed to notch up a good 11% market share in just four years of its operations there.

Subscriber data comparison of Idea and India GSM subscribers
YearNo. of
Subscribers (m)
Growth
(%)
Total Subscribers
in India
Growth
(%)
19970.1 0.8
20021.0785.8%10.51219.6%
20032.0100.0%22.0109.8%
20045.0150.0%37.470.0%
## 200611.8136.8%100.8169.6%
## Data for November 2006
Source: COAI, Equitymaster Research

Eyeing India!
Idea has outlined a large expansion plan over the next few years, in order to offer its services across the length and breadth of the country. With operations spanning across 11 circles currently, the company is already charting its course of action for a nationwide coverage. Towards this, in July 2006, the company applied for additional licenses to offer its services in the remaining 12 circles. Of this, it has already received clearances from the Department of Telecommunication (DoT) for the Mumbai and Bihar circles. Services in these circles are likely to be rolled out by early 2007. Also a portion of the funds raised from its forthcoming public issue is likely to be used to fund such plans. Having a pan India presence will not only lead to reduced inter connection usage charges as the company will be less dependent on other cellular mobile service providers for carrying its calls, it will also result in it having a greater leverage in negotiating network equipment deals as also in its revenue sharing agreements with other operators.

Snapshot of financials
The company has been able to grow its topline at a CAGR of over 50%, over the past three years, which has been come on the back of sustained expansion efforts. Although impressive, the rate may have been a little slow on relative basis, but it also needs to be understood that most of it has come by way of organic expansion. The improvement in EBIDTA and net profit margins, in recent times is also very heartening. We expect the net profit margins to improve even further as growth in revenues from increased subscriber base will directly flow to the bottomline. As far as the strength of balance sheet is concerned, the Debt to equity ratio of 0.76, which is expected to comedown even further post the company's IPO, which gives us comfort regarding the company's ability to tap the capital markets for further expansion. However, the ratio should not be so low as to negatively impact the RoE. Here also growth in subscriber additions holds the key so far as the return on equity (RoE) is concerned. Any decline on this front, is likely to keep the RoE depressed.

Financial snapshot
UnitFY 2004FY 2005FY 200630-Sep-06
RevenuesRs m13,11422,67529,73419,127
EBIDTARs m39,1118,28110,8266,597
OPM%29.8%36.5%36.4%34.5%
PAT/(Loss)Rs m(2,009)6712,0011,919
NPM% 3.0%6.7%10.0%
RoE% 2.4%7.3%7.0%
D/Ex0.50.81.10.8
Source: Company's draft red herring prospectus

Conclusion
While we believe that the company possesses one of the strongest balance sheets amongst its peers, the low return ratios are indeed worrying. It is here that the company's plans of rolling out a pan India presence and targeting aggressive subscriber additions will most likely decide to what extent the returns improve. So far, the company seems to be on the right track of increasing its subscriber base, which is the magic mantra of cellular business in India. However there are a few factors that need to be noted and watched out for. Particular worrisome is the fact that it has not been able to match the pace of growth in the over all GSM subscriber base in the country. What is also disturbing is that, its market share since its existence has been unstable, owing to high churn in its subscribers.

Market share of Idea Cellular Ltd.
YearNo. of
Subscribers
(m)
Total
Subscribers
in India
Idea's share in
India's subscriber
base (%)
19970.10.814.2%
20021.010.59.5%
20032.022.09.1%
20045.037.413.4%
## 200611.8100.811.7%
## Data for November 2006
Source: COAI, Equitymaster Research

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