Idea Cellular INDIA 10 July 2008 IDEA IN Outperform Stock price as of 09 Jul 08 Rs 87.65 12-month target Rs 100.00 Upside/downside % +14.1 Valuation Rs 100.00 - DCF (WACC 12.0%, beta 1.0, ERP 6.0%, RFR 9.0%, TGR 3.5%) GICS sector telecommunication services Market cap Rs m 227,264 30-day avg turnover US$ m 32.6 Market cap US$m 5,261 Number shares on issue m 2,593 Investment fundamentals Year end 31 Mar 2008A 2009E 2010E 2011E Total revenue bn 67.2 89.6 111.2 135.1 EBITDA bn 22.5 31.7 40.7 48.6 EBITDA growth % 53.8 40.6 28.6 19.3 EBIT bn 13.7 18.9 24.0 28.6 Adjusted profit bn 10.4 12.6 16.0 18.7 EPS rep Rs 3.96 4.79 6.05 7.09 EPS adj Rs 3.96 4.79 6.05 7.09 EPS adj growth % 107.5 21.1 26.4 17.1 PE adj x 22.2 18.3 14.5 12.4 Total DPS Rs 0.00 0.00 0.00 0.00 ROE % 36.4 23.1 19.5 18.9 EV/EBITDA x 12.7 9.0 7.0 5.9 Net debt/equity % 153.8 88.5 90.1 79.5 Price/book x 6.5 3.1 2.6 2.1 IDEA IN rel SENSEX performance, & rec history Source: Datastream, Macquarie Research, July 2008 (all figures in INR unless noted) Analysts Shubham Majumder 91 22 6653 [email protected]Nitin Mohta 91 22 6653 3050 [email protected]Tim Smart 852 2823 3565 [email protected]Refreshing Idea but rich valuation Event Idea Cellular has acquired Spice Communications (SPCM IN, Rs72.35, Not rated) to become the fifth-largest Indian wireless operator. We present a comprehensive analysis of the combined entity with detailed pro forma financial statements. We are reducing our target price to Rs100 from Rs140 due to an increased WACC of 12% (vs 11.5% earlier) and we no longer add the value of Idea’s stake in Indus Towers to arrive at our TP. Given the market’s current low risk appetite we are not factoring in value of tower assets since towers have long duration cashflows with minimal near-term earnings. Impact Idea-Spice-TMI merger reduces number of players; marks the beginning of the in-market wireless consolidation. We see this deal as positive for the sector on two counts. It reduces the number of players in the market and TM International’s stake in Idea reduces the threat of TM International’s entry in India as majority player at a later date. Synergy benefits from the deal will result in EPS accretion. Assuming that the merger will result in savings of Rs500m by cutting Spice’s advertising and promotion costs, we see 3% dilution, 5% and 5% accretion to our pre merger EPS estimate for FY3/09, FY3/10 and FY3/11 estimates respectively. Synergy benefits and interest income generated by the cash infusion in Idea from TM International (TI MK, RM6.9, OP, TP: RM8.8) are the key reasons for EPS accretion. For details please refer to page 2. Scale is a virtue in Indian wireless, in our view. Our pro forma financials do not include any benefit from ARPU uplift or reduction in network operating costs and there could be a potential uplift in pro forma EPS due to either or both of these factors. Raising standalone wireless subscriber forecast for Idea. Based on revised India wireless subscriber forecast reaching 475m by March 2010, we are raising our wireless subscriber forecast for Idea by 7% and 12.5% for the next two years. We assume 16%/11% YoY decline in ARPU for Idea in FY09/10, compared to 15%/10% YoY ARPU decline factored in for Bharti. Earnings revision We have raised our EPS forecasts for standalone Idea by 10% for FY3/09E to Rs4.8 primarily to account for a year’s delay in the first cash tax payments by Idea. Our revised FY3/10E EPS of Rs6.1 is 2% higher than our previous estimate on the back of a higher subscriber forecast. Our FY3/11E EPS is Rs7.1. Price catalyst 12-month price target: Rs100.00 based on a DCF methodology. Catalyst: Launch of service in Mumbai and Bihar circles in 2Q FY09 and spectrum allocation in all nine proposed circles. Action and recommendation We prefer Bharti and RCOM over Idea due to their better earnings outlook in next two years and lower relative valuations. (BHARTI IN, Rs747, OP, TP: Rs975) and (RCOM IN, Rs441.00, OP, TP: Rs575). Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/research/disclosures.
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Idea Cellular INDIA
10 July 2008
IDEA IN Outperform Stock price as of 09 Jul 08 Rs 87.65 12-month target Rs 100.00 Upside/downside % +14.1 Valuation Rs 100.00 - DCF (WACC 12.0%, beta 1.0, ERP 6.0%, RFR 9.0%, TGR 3.5%) GICS sector telecommunication services Market cap Rs m 227,264 30-day avg turnover US$ m 32.6 Market cap US$m 5,261 Number shares on issue m 2,593
Refreshing Idea but rich valuation Event Idea Cellular has acquired Spice Communications (SPCM IN, Rs72.35, Not
rated) to become the fifth-largest Indian wireless operator. We present a comprehensive analysis of the combined entity with detailed pro forma financial statements.
We are reducing our target price to Rs100 from Rs140 due to an increased WACC of 12% (vs 11.5% earlier) and we no longer add the value of Idea’s stake in Indus Towers to arrive at our TP. Given the market’s current low risk appetite we are not factoring in value of tower assets since towers have long duration cashflows with minimal near-term earnings.
Impact Idea-Spice-TMI merger reduces number of players; marks the beginning
of the in-market wireless consolidation. We see this deal as positive for the sector on two counts. It reduces the number of players in the market and TM International’s stake in Idea reduces the threat of TM International’s entry in India as majority player at a later date.
Synergy benefits from the deal will result in EPS accretion. Assuming that the merger will result in savings of Rs500m by cutting Spice’s advertising and promotion costs, we see 3% dilution, 5% and 5% accretion to our pre merger EPS estimate for FY3/09, FY3/10 and FY3/11 estimates respectively. Synergy benefits and interest income generated by the cash infusion in Idea from TM International (TI MK, RM6.9, OP, TP: RM8.8) are the key reasons for EPS accretion. For details please refer to page 2.
Scale is a virtue in Indian wireless, in our view. Our pro forma financials do not include any benefit from ARPU uplift or reduction in network operating costs and there could be a potential uplift in pro forma EPS due to either or both of these factors.
Raising standalone wireless subscriber forecast for Idea. Based on revised India wireless subscriber forecast reaching 475m by March 2010, we are raising our wireless subscriber forecast for Idea by 7% and 12.5% for the next two years. We assume 16%/11% YoY decline in ARPU for Idea in FY09/10, compared to 15%/10% YoY ARPU decline factored in for Bharti.
Earnings revision We have raised our EPS forecasts for standalone Idea by 10% for FY3/09E to
Rs4.8 primarily to account for a year’s delay in the first cash tax payments by Idea. Our revised FY3/10E EPS of Rs6.1 is 2% higher than our previous estimate on the back of a higher subscriber forecast. Our FY3/11E EPS is Rs7.1.
Price catalyst 12-month price target: Rs100.00 based on a DCF methodology. Catalyst: Launch of service in Mumbai and Bihar circles in 2Q FY09 and
spectrum allocation in all nine proposed circles.
Action and recommendation We prefer Bharti and RCOM over Idea due to their better earnings outlook
in next two years and lower relative valuations. (BHARTI IN, Rs747, OP, TP: Rs975) and (RCOM IN, Rs441.00, OP, TP: Rs575).
Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/research/disclosures.
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 2
Analysis Although we have removed the value of the tower company from our formal target price, this remains a key source of longer-term potential value upside. Key to realising this will be: 1) build-up of third-party tenancy (non-promoter tenants taking up tower space on Indus towers after signing 10–15 year master services agreement) and 2) IPO of Indus Towers.
Key positives of the Idea-Spice-TMI deal Spice has strong presence in two existing circles. Spice is currently operational in the Punjab
and Karnataka circles. Spice Communications is the no.2 wireless operator in Punjab with a subscriber base of 2.73m implying a 22.3% subscriber market share in the state. In Karnataka the company has 1.77m subscribers with 9.8% subscriber market share. Idea is yet to roll out its services in these two circles and as such there is no overlap in the existing operations of the two companies.
Idea’s strength in neighbouring circles strengthens the strategic rationale for the deal. We note that Idea is market leader in two of the four neighbouring states of Karnataka with 24% market share of subscribers in both Maharashtra and Kerala.
Merger accelerates the time line for Idea’s pan Indian presence. With the Spice acquisition and launch of Mumbai and Bihar circles in 2Q FY3/09 and Orissa and Tamil Nadu by Dec’08 we believe Idea will be able to expand its coverage ahead of launch of operations by new greenfield operators.
Economies of scale will result in margin improvements for Idea. EBITDA margins for Spice Communications were 23% for the full year CY07 and 27% for the quarter ending March 2008. We note that merging Spice with a much bigger telco has the potential to create meaningful uplift in the EBITDA margins. However, realisation of these synergy benefits will take some time to materialise and are dependent to a large extent on the execution of the integration process.
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10 July 2008 3
Fig 1 Idea is expected to have presence in 18 of the 23 circles by end of 2008
Source: TM International presentation, Macquarie Research, July 2008
900 MHz spectrum asset valuable. Idea currently has 900MHz spectrum in 7 of its 11 operational circles, so the addition of two more circles in the same spectrum band will increase operational synergies on account of lower operating and capital expenditure.
Uncertainty surrounding spectrum in the newly licensed circles. On the conference call post the merger announcement, management noted that as of now there is no clarity on the status of the spectrum that Idea is entitled for in the Punjab and Karnataka circles and Spice is entitled for in the four new circles of Delhi, Haryana, Andhra Pradesh and Maharashtra. Spice has recently been allocated 4.4MHz spectrum for the Andhra Pradesh circle, together with Idea’s existing spectrum of 8.2MHz in the circle this will take the total spectrum holding of the combined entity to 12.6MHz. As per the new subscriber-linked spectrum allocation norms issued by the DoT (please refer to our note New Spectrum policy out finally published on 22 October 2007), a telco should have over 8 million subscribers in a circle to be eligible to hold on to the 12.4 MHz of radio frequencies. Idea management mentioned on the conference call that they will have to return 4.4MHz of spectrum in the Andhra Pradesh circle. Further clarity on this matter will emerge following the DoT’s comments on the merger deal.
Pro forma financials (For details please refer figures 13 to 15) Synergy benefits make up for lower EBITDA margins at Spice. A quick snapshot comparison
of the combined Idea+Spice entity and our standalone Idea estimates is presented in Fig 2 below. Since Spice’s EBITDA margins are lower than Idea’s, the combined entity’s pre synergy margin is lower than our standalone Idea margins. Layering in the synergy benefits from the merger, we expect a slight margin expansion from Idea’s standalone margin estimate.
Idea has strong presence in Maharashtra and Kerala circles, adjoining Spice’s current operations in Karnataka circle
Idea is expected to launch Mumbai and Bihar circles in next three months and Tamil Nadu and Orissa circles within CY09, giving it a near national footprint.
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10 July 2008 4
TMI cash infusion will help Idea to reduce total interest cost. A US$1.7bn cash infusion from TMI results in substantial interest income, boosting our pro forma EPS estimate.
Fig 2 Comparison of standalone and pro forma financials Idea+Spice Idea pre merger Change
Spice cost structure provides opportunity for margin improvement We believe there is scope for Idea management to take costs out of the Spice cost structure and
improve margins. Key areas where scale benefits will help Idea to cut Spice expenditure are: sales and marketing costs (19% of total opex for CY07), operating costs (52% of total opex for CY2007) and administrative costs (10% of total opex for CY07).
A detailed cost breakdown of Spice Communications for the past five quarters is given in Fig 3. We believe there is definitely scope for a reduction in branding and advertisement costs. Our pro forma financials have assumed elimination of advertising and branding costs as the only synergy benefits (Rs500m) and no reduction in the network operating and administrative costs.
Expenditure Operating costs 1,580 3,832 915 967 996 953 1,195(% of total opex) 52.6 51.9 54.3 52.1 52.7 49.9 55.1Personnel costs 228 501 140 120 150 91 99(% of total opex) 7.6 6.8 8.3 6.4 7.9 4.8 4.6Revenue sharing licence fees 210 848 188 208 223 229 267(% of total opex) 7.0 11.5 11.2 11.2 11.8 12.0 12.3Administrative costs 421 810 179 194 168 230 227(% of total opex) 14.0 11.0 10.6 10.4 8.9 12.0 10.5Sales and marketing costs 566 1,391 262 367 354 408 382(% of total opex) 18.8 18.8 15.6 19.8 18.7 21.4 17.6 Total opex 3,005 7,382 1,685 1,855 1,891 1,910 2,170Source: Company data, Macquarie Research, July 2008
Scale benefits will help in faster margin expansion for Spice. EBITDA margins of Spice at 27% for the latest March 2008 quarter are significantly below Idea’s margins of 33.5% in the corresponding quarter.
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10 July 2008 5
Potential uplift in ARPU profile of Spice subscribers by virtue of being part of wider network. We believe there is scope for synergy benefits on the revenue side as well. By virtue of being part of a wider network Idea can target high ARPU profile customers that are more inclined to be part of a network that has wider coverage and presence than the current two state coverage of Spice in Punjab and Karnataka.
Fig 4 Merger has significant scope for synergies Idea+Spice Jun-07 Sep-07 Dec-07 Mar-08 FY07 FY08
Total sales and service 14,773 15,622 17,081 19,724 43,473 67,199Total operating EBITDA 5,128 5,107 5,672 6,606 14,653 22,517EBITDA margin (%) 34.7 32.7 33.2 33.5 33.7 33.5
Spice Standalone Subscribers (m) 3.2 3.5 3.8 4.2 2.7 4.2Gross ARPU (Rs) 264 253 234 249 277 250Total network minutes (m minutes) 3,321 3,555 3,954 4,479 13,148 15,309Avg. monthly MoUs per subscriber 375 356 362 373 470 367ARPM (Rs) 0.70 0.71 0.65 0.67 0.59 0.68Avg. EBITDA per minute (Rs) 0.15 0.18 0.16 0.18 0.13 0.17VAS as % of total revenue na na na na na na
Total sales and service 2,339 2,522 2,556 2,998 7,736 10,415Total operating EBITDA 483 632 644 815 1,748 2,574EBITDA margin (%) 20.6 25.1 25.2 27.2 22.6 24.7Source: Company data, Macquarie Research, July 2008
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Our standalone estimate changes tied to our revised subscriber forecast
Fig 5 Idea Cellular – New estimates, old estimates and change in estimates Particulars New Estimates Old Estimates Change (%)
Amount in Rs m, unless otherwise stated FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E
India Wireless Subscribers incl. fixed wireless (m) 375.0 475.0 553.0 362.9 450.0 na 3.3% 5.6% na
Idea Cellular – Key operating metrics Consolidated Idea's Wireless Subscribers (m) 36.5 47.9 57.1 34.1 42.6 na 7.0% 12.5% naIdea's market share (%) 9.7% 10.1% 10.3% 9.4% 9.5% na 3.6% 6.5% naImplied monthly subscriber net additions (m) 1.04 0.95 0.77 0.88 0.71 na 19.1% 34.4% naWireless ARPU (Rs per month) 247 220 214 247 227 na -0.2% -3.2% na 8 original circles Idea's Wireless Subscribers (m) 32.2 40.0 45.4 30.5 36.7 na 5.8% 9.0% naIdea's market share (%) 18.8% 18.7% 18.5% 18.2% 18.1% na 3.0% 3.2% naImplied monthly subscriber net additions (m) 0.84 0.65 0.45 0.73 0.52 na 14.8% 24.3% naWireless ARPU (Rs per month) 252 226 221 252 231 na -0.1% -2.5% na 3 acquired circles Idea's Wireless Subscribers (m) 3.8 5.5 6.8 3.2 4.6 na 18.5% 19.9% naIdea's market share (%) 7.5% 8.3% 8.4% 6.5% 7.3% na 15.2% 13.6% naImplied monthly subscriber net additions (m) 0.16 0.14 0.10 0.10 0.12 na 53.3% 23.1% naWireless ARPU (Rs per month) 206 192 185 200 187 na 2.9% 2.9% na 2 licensed circles Idea's Wireless Subscribers (m) 0.5 1.5 2.4 0.5 1.3 na 8.1% 22.2% naIdea's market share (%) 1.4% 3.4% 4.4% 1.4% 2.9% na 2.9% 15.8% naImplied monthly subscriber net additions (m) 0.09 0.09 0.07 0.04 0.07 na 116.2% 30.8% naWireless ARPU (Rs per month) 193 185 186 186 235 na 3.9% -20.9% na 9 proposed circles Idea's Wireless Subscribers (m) - 0.8 2.6 - 0.0 na na na naIdea's market share (%) 0.0% 0.6% 1.5% 0.0% 0.0% na na na naImplied monthly subscriber net additions (m) 0.00 0.07 0.15 0.00 0.00 na na na naWireless ARPU (Rs per month) 0 190 187 0 51 na na na na
Idea Cellular – Financials Consolidated Idea’s Total Revenues 89,608 111,229 135,077 85,665 104,453 na 4.6% 6.5% naTotal EBITDA 31,652 40,719 48,565 30,834 39,104 na 2.7% 4.1% naEBITDA margin (%) 35.3% 36.6% 36.0% 36.0% 37.4% na -1.9% -2.2% naTotal Capex 69,090 57,457 52,915 47,750 45,537 na 44.7% 26.2% naDiluted EPS (Rs) 4.79 6.05 7.09 4.36 5.91 na 9.8% 2.5% na 8 original circles na naTotal Revenues 82,226 97,776 113,257 78,967 93,298 na 4.1% 4.8% naTotal EBITDA 31,253 38,957 46,854 30,351 37,437 na 3.0% 4.1% naEBITDA margin (%) 38.0% 39.8% 41.4% 38.4% 40.1% na -1.1% -0.7% naTotal Capex 34,590 31,559 25,662 30,844 26,800 na 12.1% 17.8% na 3 acquired circles Total Revenues 6,982 10,683 13,635 6,165 8,703 na 13.2% 22.8% naTotal EBITDA 42 2,079 4,420 529 1,866 na -92.1% 11.4% naEBITDA margin (%) 0.6% 19.5% 32.4% 8.6% 21.4% na -93.0% -9.2% naTotal Capex 9,987 5,921 4,859 4,007 4,840 na 149.3% 22.3% na 2 licensed circles Total Revenues 401 2,296 4,364 534 2,446 na -24.9% -6.1% naTotal EBITDA (743) (1,084) 108 (1,055) (1,197) na -29.6% -9.5% naEBITDA margin (%) -185.4% -47.2% 2.5% -197.7% -48.9% na -6.3% -3.5% naTotal Capex 11,513 3,976 2,953 11,900 2,897 na -3.3% 37.3% na 9 proposed circles Total Revenues - 473 3,822 - 6 na na na naTotal EBITDA - (652) (4,470) - (302) na na na naEBITDA margin (%) - -137.7% -117.0% 0.0% 0.0% na na na naTotal Capex 12,000 15,000 18,606 - 10,000 na na na na Weighted Average Cost of Capital for DCF (%) 12.0 11.5 Source: Macquarie Research, July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 7
Impact of increased wireless subscriber forecast offset by steeper ARPU decline forecast
Raising subscriber forecast. We have revised our India wireless subscriber forecast by 3.3% for FY3/09E and 5.6% for FY3/10E. As a result of our increased wireless subscriber forecast and Idea’s strong net addition run-rate for past three months we have increased standalone Idea’s subscriber estimate by 7% and 12.5% respectively for FY3/09E and FY3/10E.
Downward revision to ARPU. We now forecast 16.4% YoY ARPU decline in FY3/09E followed by another 11% YoY decline in ARPU for FY3/10E. This compares with 15% and 10% ARPU decline that we have assumed for Bharti in FY3/09E and FY3/10E respectively.
Three acquired circles not likely to achieve EBITDA breakeven before 3Q FY3/09E. In the 4Q FY08 earnings call, company management mentioned that they received spectrum in three large districts of Rajasthan and a couple of districts in UP (E) only towards the end of the last quarter. As a result, Idea has now guided to breakeven in these three circles in 3Q FY3/09E, later than its earlier guidance of 1Q FY3/09E. We have also updated our capex assumptions for the three acquired circles to take into account the aggressive roll out plans for recently received spectrum.
Comfortable leverage position will support high capital intensity. Cash infusion of US$640m from the Providence deal has placed Idea in a comfortable position with net debt to equity at 0.76x. Our full-year capex assumption for FY3/09E (excluding the capex for nine proposed circles) is US$1.4bn, in line with management guidance.
Our EPS forecast is in line with consensus EPS In contrast to Bharti and RCOM we see little upside risk to consensus estimates for Idea.
Fig 6 Below consensus on revenues, in line with consensus on EBITDA and EPS (Rs m) Revenue EBITDA EPS
Valuation: DCF based fair value of Rs100 for the base business ex-towers Revising DCF based core business value to Rs100 from Rs118 earlier. The downward
revision in the core business valuation is due to a higher WACC of 12% (up from 11.5% earlier).
16.5x FY3/10E PER multiple at our target price of Rs100. Based on PER, our target price for Idea Cellular (Rs100) works out to be 20.9x FY3/09E and 16.5x FY3/10E. On an EV/EBITDA basis this implies 10.1x FY3/09E EBITDA and 8.2x FY3/10E EBITDA.
Idea’s stake in Indus Towers valued at Rs22 per share. For arriving at our TP, we are however not factoring in value of tower assets in Idea, given the current low risk appetite in the market since towers have long duration cash flows with minimal near term earnings.
Fig 7 Idea’s stake in Indus Towers valued at Rs22 Details Rs per shareValuation of Indus Towers (Rs m) 614,064Idea Cellular’s stake in Indus Towers (%) 13%Valuation of the tower business (Rs) 22Source: Macquarie Research, July 2008
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⇒ Idea’s stake in Indus Towers has come down to 13% from 16% post the deal with Providence Equity Partners (Not listed). Under the deal announced in last week of May, Providence has agreed to purchase 20% stake in Aditya Birla Telecom Limited (ABTL, Not listed) for US$640m. ABTL owns the telecom Unified Access Service (UAS) licence for the Bihar circle and 16% stake in Indus Towers.
⇒ We arrive at an equity valuation of Rs614bn (US$14.3bn) for Indus Towers based on a DCF base analysis. Our two stage DCF assumes a discount rate (WACC) of 10% and terminal growth rate of 3%.
⇒ We arrive at Idea’s Rs22 per share value for 13% stake in Indus Towers after applying a 26% holding company discount.
Pro forma valuation: DCF based fair value of Rs100 for the base business Our pro forma valuation for the base business of the combined Idea+Spice entity also comes in at
Rs100. We have used 12% (same as our standalone Idea model) as the discount rate for our two staged DCF valuation. Please see Fig 12.
Per share contribution of the towers business falls to Rs18 per share due to 22.7% equity dilution.
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ellular
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Fig 8 Idea Cellular: DCF valuation model for the base business, fiscal year-end March Year-end Mar (Rs m) FY09E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Total PV of FCF till 2020 {a} 113,708 Unadjusted cost of debt 10.00 Cost of debt = Rd 8.15 2. Terminal value calculation Equity = We 55.0 Growth from 2020 to perpetuity (%)
3.5% Debt = Wd 45.0
FCF in FY2020 59,962 WACC = Re x We + Rd x Wd 12.0% Exit FCF multiple (X) 12.2 Terminal value 731,081 Sensitivity of 12-month DCF to WACC and Terminal Growth Implied exit EV/EBITDA (X) 5.8 WACC PV of terminal value {b} 204,352 10% 11% 12% 13% 14% 2.5% 138 112 91 75 62 3.0% 146 118 96 78 64 Total company value {a} + {b}
318,061 3.5% 156 124 100 82 67
Net debt/(cash) 54,501 4.0% 167 132 106 86 70 Value to equity holders 263,560
Term
inal
G
row
th
4.5% 180 140 112 90 73 Value to equity holders (Rs/share)
100
Source: Macquarie Research, July 2008
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Fig 9 Idea Cellular+Spice: Pro forma DCF valuation model for the base business, fiscal year-end March Year-end Mar (Rs m) FY09E FY10E FY11E FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Cost of debt = Rd 8.15 2. Terminal value calculation Equity = We 55.0 Growth from 2020 to perpetuity (%)
3.5% Debt = Wd 45.0
FCF in FY2020 61,781 WACC = Re x We + Rd x Wd 12.0% Exit FCF multiple (X) 12.2 Terminal value 753,261 Sensitivity of 12-month DCF to WACC and Terminal Growth Implied exit EV/EBITDA (X) 5.6 WACC PV of terminal value {b} 210,552 10% 11% 12% 13% 14% 2.5% 132 110 92 79 67 3.0% 139 115 96 81 69 Total company value {a} + {b}
352,881 3.5% 147 120 100 84 71
Net debt/(cash) 30,891 4.0% 156 126 104 87 74 Value to equity holders 321,991
Term
inal
G
row
th
4.5% 167 134 109 91 76 Value to equity holders (Rs/share)
100
Source: Macquarie Research, July 2008
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Expect Bharti and RCOM to bridge the valuation gap Idea’s lower earnings growth does not justify 18% premium to Bharti’s PER. Idea is trading
at PERs of 18.3x FY09E and 14.5x FY10E. This is an 18% premium to Bharti’s multiples despite two year earnings growth of 24% (vs 31% at Bharti). We believe Bharti and RCOM should get premium multiples to Idea for their better earnings growth profile.
Fig 10 Idea’s lower earnings growth does not justify richer valuation multiple
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Fig 11 Idea one year forward rolling EV/EBITDA
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Fig 12 Idea Cellular+Spice Communications – income statement, fiscal year-end March FY09E FY10E FY11E
Total liabilities and stockholders' equity 294,189 337,574 380,364
RatiosRoE (%) na 13% 13%RoCE (%) na 9% 9%
Net debt 30,891 42,695 42,809 Net Debt / Equity 0.21 0.25 0.22 Gross Debt/Equity 0.61 0.60 0.6 Net Debt / EBITDA 0.86 0.93 0.79 Source: Macquarie Research, Company Data, July 2008
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Fig 14 Idea Cellular+Spice Communications – cash flow statement, fiscal year-end March
FY09E FY10E FY11EParticulars
Cash Flow from Operating Activities
Net Profit/(Loss) after Tax 15,012 20,579 24,103
Adjustments ForDepreciation, Amortisation of assets (14,918) (19,107) (22,539) Net Interest income/(expense) (5,188) (4,090) (5,064) Provision for Fringe Benefit Tax (170) (336) (165) Provision for Tax (Net of Current Tax, Deferred Tax & MAT Credit) - (2,324) (3,150) Operating profit before working capital changes 35,288 46,436 55,021
Changes in Current Assets and Current Liabilities(Increase)/Decrease in Sundry Debtors (1,158) (986) (562) (Increase)/Decrease in Inventories (70) (99) (79) (Increase)/Decrease in Other Current Assets (372) (529) (417) (Increase)/Decrease in Loans and Advances 741 (1,406) (2,236) Increase /(Decrease) in Current Liabilities 9,788 12,806 12,687
Tax paid (170) (2,660) (3,314) Net cash from operating activities 44,048 53,562 61,098
Cash Flow from Investing ActivitiesCapexTotal (73,565) (61,276) (56,147) Investments in Subsidiaries - - - Proceeds from sale of Fixed assets - - - Sale/ (purchase) of Other Investments ( Net ) - - - Interest and Dividend Received - - - Net cash used in investing activities (73,565) (61,276) (56,147)
Cash Flow from Financing ActivitiesProceeds/ Advance received from issue of Share Capital 72,944 - - Redemption of preference sharesProceeds/(Repayment) from Long term borrowings 11,060 10,000 6,000 Interest paid (5,188) (4,090) (5,064) OthersNet cash from financing activities 78,816 5,910 936
Net increase / (decrease) in cash and cash equivalentCash and cash equivalent at the beginning 13,111 61,048 59,244 Add : 49,298 (1,804) 5,886 Cash and cash equivalent at the end 61,048 59,244 65,130
Source: Macquarie Research, Company Data, July 2008
Company Name Ticker lcy FY09E FY10E FY11E FY09E FY10E FY11E FY2008-10E FY09E FY10E FY11E FY09E FY10E FY11E FY2008-10E (FY09E, %) (FY08-10E, %) (FY08-10E, %)Bharti Airtel BHARTI IN OP 746.4 156161 194713 228955 9.7 7.7 6.6 0.3 47.9 60.4 69.8 15.6 12.3 10.7 0.5 33.9 30.9 30.8Reliance Comms RCOM IN OP 440.8 123123 157810 189635 8.5 6.7 5.5 0.2 32.3 41.7 49.3 13.7 10.6 8.9 0.5 23.0 38.7 29.8Idea Cellular IDEA IN OP 87.8 31652 40719 48565 9.0 7.0 5.9 0.3 4.8 6.1 7.1 18.3 14.5 12.4 0.8 23.1 34.5 23.6
Bharat Heavy Electricals BHEL IN OP 1,575.3 55322 83199 104917 12.6 8.4 6.6 0.3 82.0 122.0 153.2 19.2 12.9 10.3 0.4 32.2 48.5 44.5Dabur DABUR IN OP 83.8 5188 6023 7239 13.4 11.5 9.6 0.7 4.8 5.6 6.8 17.3 15.0 12.4 1.0 55.6 19.5 16.5Hindustan Unilever HUVR IN UP 215.6 24243 27224 30526 18.3 16.3 14.6 1.5 11 12 13 20.3 18.1 16.1 1.6 108.4 12.6 12.9ICICI Bank ICICIBC IN OP 621.9 76810 102253 138327 8.6 6.4 4.8 0.2 52 68 90 11.9 9.2 6.9 0.3 12.0 42.2 34.8Infosys Technologies INFO IN OP 1,821.1 66140 84453 108840 14.5 11.4 8.8 0.5 99 116 151 18.4 15.6 12.1 0.9 33.1 27.0 19.5ITC Ltd ITC IN OP 183.5 53101 66948 79741 12.1 9.6 8.1 0.5 10 12 15 19.1 15.2 12.5 0.8 27.4 22.7 22.5Jaiprakash Associates JPA IN OP 173.3 19556 23358 28766 15.6 13.1 10.6 0.9 5.7 7.2 9.6 30.5 24.0 18.0 0.6 11.7 17.3 52.5Kotak Mahindra Bank KMB IN OP 520.0 19755 26350 0 9.0 6.7 nmf 0.3 39.2 52.9 0.0 13.3 9.8 nmf 0.4 20.7 35.0 35.9Larsen & Toubro LT IN OP 2,513.0 51770 70949 89485 15.3 11.2 8.9 0.4 119.0 162.3 203.6 21.1 15.5 12.3 0.5 35.6 43.5 46.5Marico MRCO IN OP 53.5 3138 3918 4865 10.9 8.7 7.0 na 3.1 4.0 5.0 17.2 13.2 10.6 0.7 60.4 21.5 24.9NIIT Ltd NIIT IN OP 102.0 1741 2442 3211 10.5 7.5 5.7 0.2 8.3 12.0 15.8 12.3 8.5 6.5 0.2 29.2 49.5 51.2Pantaloon PF IN OP 389.3 4910 7298 10742 13.3 9.0 6.1 0.2 13.1 20.7 35.1 29.8 18.8 11.1 0.4 17.6 54.7 72.3Reliance Industries Ltd RIL IN OP 1,978.6 290346 408033 412146 11.3 8.0 7.9 0.3 112.5 163.6 168.4 17.6 12.1 11.7 0.6 15.9 32.8 30.0Tata Consultancy Services TCS IN OP 826.7 78818 98667 135845 10.3 8.2 5.9 0.4 66.2 77.6 106.9 12.5 10.6 7.7 na 52.9 28.9 23.0Average 11.9 9.3 7.7 18.1 13.9 11.3 Source: Bloomberg, Macquarie Research, July 2008. Prices as of 9 July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 18
Fig 7 Idea Cellular – Income statement, fiscal year-end March Particulars (Rs m except EPS) FY07 FY08 FY09E FY10E FY11E
Revenues Service Revenue 43,473 67,199 89,608 111,229 135,077Sales of Trading Goods 191 - - - -Total Revenues 43,664 67,199 89,608 111,229 135,077 Operating Expenses Cost of Trading Goods (52) (0) - - -(% of revenues from trading goods) 27.1% Personnel Expenditure (2,609) (3,464) (4,436) (5,340) (6,141)(% of total revenues) 6.0% 5.2% 5.0% 4.8% 4.5%Network Operating Expenditure (5,336) (10,470) (11,371) (13,159) (16,935)(% of total revenues) 12.2% 15.6% 12.7% 11.8% 12.5%License and WPC Charges (4,487) (6,851) (9,269) (11,457) (13,778)(% of total revenues) 10.3% 10.2% 10.3% 10.3% 10.2%Roaming & Access Charges (7,321) (11,334) (13,302) (16,154) (17,560)(% of total revenues) 16.8% 16.9% 14.8% 14.5% 13.0%Subscriber Acquisition & Servicing Expenditure (5,532) (6,978) (8,513) (12,791) (16,885)(% of total revenues) 12.7% 10.4% 9.5% 11.5% 12.5%Advertisement and Business Promotion Expenditure (2,118) (2,671) (4,161) (5,005) (6,619)(% of total revenues) 4.8% 4.0% 4.6% 4.5% 4.9%Administration & other Expenses (1,558) (2,914) (6,904) (6,603) (8,594)(% of total revenues) 3.6% 4.3% 7.7% 5.9% 6.4%Total Operating Expense (29,011) (44,682) (57,956) (70,509) (86,512)(% of total revenues) 66.4% 66.5% 64.7% 63.4% 64.0% EBITDA 14,653 22,517 31,652 40,719 48,565EBITDA Margin 33.6% 33.5% 35.3% 36.6% 36.0%Other Income 209 175 514 514 514Depreciation (5,579) (7,784) (11,062) (15,091) (18,337)Amortisation of Intangible Assets (1,139) (984) (1,717) (1,602) (1,601)Amortisation of Miscellaneous Expenditure - 0 0 0 0 EBIT 8,144 13,924 19,388 24,541 29,142 EBIT Margin 18.7% 20.7% 21.6% 22.1% 21.6% Interest Income 53 1,282 1,675 1,214 997Interest and Financing Charges (3,104) (4,058) (7,087) (7,476) (8,628) Profit Before Taxes (PBT) 5,093 11,147 13,975 18,279 21,511Income tax (expense) / benefit (70) (725) (1,352) (2,326) (2,830)Exceptionals (83) 0 0 0 0Profit After Taxes (PAT) 4,939 10,422 12,623 15,953 18,681 Adjusted Net Profit (pre-exceptionals) 5,022 10,422 12,623 15,953 18,681Diluted EPS 2.15 3.96 4.79 6.05 7.09 YoY Growth (%) Service Revenues 47.4 54.6 33.3 24.1 21.4Total Revenues 47.2 53.9 33.3 24.1 21.4Personnel Expenditure 46.5 32.8 28.1 20.4 15.0Network Operating Expenditure 68.9 96.2 8.6 15.7 28.7License and WPC Charges 48.6 52.7 35.3 23.6 20.3Roaming & Access Charges 47.5 54.8 17.4 21.4 8.7Subscriber Acquisition & Servicing Expenditure 69.0 26.1 22.0 50.3 32.0Advertisement and Business Promotion Expenditure 69.0 26.1 55.8 20.3 32.2Administration & other Expenses 6.9 87.0 137.0 (4.4) 30.2Operating Expenses 52.8 54.0 29.7 21.7 22.7EBITDA 37.3 53.7 40.6 28.6 19.3Net Profit After Taxes 137.2 107.5 21.1 26.4 17.1Diluted EPS 129.4 84.2 20.9 26.4 17.1Source: Company data, Macquarie Research, July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 19
Fig 8 Idea Cellular – balance sheet, fiscal year-end March Particulars (Rs m) FY07 FY08 FY09E FY10E FY11E
ASSETS Cash and cash equivalents 18,199 12,095 12,730 7,555 8,521Sundry Debtors 1,525 2,299 3,291 4,118 4,533Inventories 179 325 395 494 574Loans and Advances 4,000 5,098 5,903 7,047 9,042Other Current Asset 758 1,734 2,106 2,636 3,053Total Current Assets 24,660 21,550 24,426 21,850 25,723 Gross Block 70,627 110,141 179,031 236,288 289,003Less: Depreciation (26,372) (31,242) (42,304) (57,394) (75,731)Property and Equipment, net 44,254 78,899 136,728 178,894 213,272 Acquired intangible assets, net 11,776 17,890 16,373 14,971 13,570Capital Work in progress 5,069 10,372 10,372 10,372 10,372Other fixed assets 16,845 28,262 26,745 25,343 23,942 Goodwill 61 61 61 61 61Investments 12 9,056 9,056 9,056 9,056Deferred taxes (net) - 661 661 661 661Total Assets 85,834 138,489 197,676 235,865 272,715 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Sundry Creditors 16,109 27,389 33,757 42,557 52,216Bank overdraft 665 1,442 1,688 2,128 2,429Advances from Customers 2,565 4,768 6,582 8,236 10,002Deposits from Customers 570 1,593 2,278 2,850 3,461Other Liabilities 1,066 2,162 2,954 3,724 3,555Interest accrued but not due 18 - - - -Total Current Liability 20,993 37,355 47,259 59,495 71,664 Provisions 538 534 534 534 534 Total Current Liabilities 21,531 37,889 47,793 60,029 72,198 Secured Loans 35,398 35,398 35,398 35,398 41,398Unsecured Loans 7,107 29,756 40,816 50,816 50,816Total Borrowings 42,505 65,154 76,214 86,214 92,214 Stockholders' equity Equity Share Capital 25,928.6 26,391 26,391 26,391 26,391Preference Share Capital - - 25,600 25,600 25,600Share Capital 25,928.6 26,391 51,991 51,991 51,991Advance against Share capital - - - - -Reserves and Surplus 20,371 23,134 23,134 23,134 23,134Profit and Loss Account (24,502) (14,079) (1,456) 14,497 33,178Total stockholders' equity 21,798 35,446 73,669 89,622 108,303Total liabilities and stockholders' equity 85,834 138,489 197,676 235,865 272,715 Key Ratios RoE (%) 30% 36% 23% 20% 19%RoCE (%) 11% 12% 12% 11% 11% Net debt 24,958 45,445 68,846 79,286 85,587Net Debt / Equity 1.14 1.28 0.93 0.88 0.79Gross Debt/Equity 1.95 1.84 1.03 0.96 0.9Net Debt / EBITDA 1.7 2.0 2.2 1.9 1.8Working Capital ex cash/Revenues (%) -33% -42% -40% -41% -40%Net working capital days <Days of Gross Sales> -121.5 -151.5 -144.9 -148.3 -147.2Source: Company data, Macquarie Research, July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 20
Fig 9 Idea Cellular – cash flow statement, fiscal year-end March Particulars (Rs m) FY07 FY08 FY09E FY10E FY11E
Cashflow from operating activities Net Profit/(Loss) after Tax 4,939 10,422 12,623 15,953 18,681 Adjustments For Depreciation, Amortisation of assets 6,718 8,768 12,779 16,692 19,937Interest charge and Forex 3,104 4,468 7,087 7,476 8,628Profit on sale of current investment 0 0 0 0 0Provision for Bad & Doubtful Debts/Advances 0 0 0 0 0Provision for Gratuity, Leave Encashment & ARO 244 -4 0 0 0Provision for Fringe Benefit Tax 79 74 152 315 141Provision for Tax (Net of Current Tax, Deferred Tax & MAT Credit) -9 652 1,200 2,011 2,689Dividend income 0 0 0 0 0Interest received -53 -1,697 -1,675 -1,214 -997(Profit)/ Loss on sale of fixed assets/ assets discarded 0 0 0 0 0Operating profit before working capital changes 15,023 22,683 32,166 41,234 49,080 Changes in current assets and current liabilities (Increase)/Decrease in Sundry Debtors -217 -774 -993 -827 -415(Increase)/Decrease in Inventories -65 -146 -70 -99 -79(Increase)/Decrease in Other Current Assets -79 -976 -372 -529 -417(Increase)/Decrease in Loans and Advances -1,606 -1,099 -805 -1,144 -1,995Increase /(Decrease) in Current Liabilities 7,499 11,281 6,368 8,800 9,659 Cash generated from operations 20,555 30,969 36,295 47,434 55,832Tax paid ( FBT & TDS ) -70 -1,386 -1,352 -2,326 -2,830Net cash from operating activities 20,484 29,583 34,942 45,108 53,002 cashflow from investing activities Purchase of Fixed assets (including CWIP ) -29,018 -54,521 -69,090 -57,457 -52,915Investments in Subsidiaries 0 0 0 0 0Proceeds from sale of Fixed assets 0 28 0 0 0Sale/ (purchase) of Other Investments ( Net ) -12 -9,044 0 0 0Interest and Dividend Received 53 1,697 1,675 1,214 997Net cash used in investing activities -28,977 -61,841 -67,416 -56,243 -51,918 Cashflow from financing activities Proceeds/ Advance received from issue of Share Capital 25,000 3,188 0 0 0Redemption of preference shares -7,563 0 25,600 0 0Proceeds from Long term borrowings 35,398 0 0 0 0Repayment of Long Term Borrowings -15,709 0 0 0 6,000Proceeds from Short Term Loan 0 25,051 11,060 10,000 0Repayment of Short Term Loan -10,040 -2,402 0 0 0Proceeds from borrowings- Net 1,506 5,099 3,536 3,436 2,510Short Term Loan from / to subsidiary & other Body Corporates 0 0 0 0 0Dividends including dividend tax 0 0 0 0 0Interest Paid -3,094 -4,486 -7,087 -7,476 -8,628Others 611 0 0 0 0Net cash from financing activities 26,109 26,450 33,109 5,961 -117 Net increase / (decrease) in cash and cash equivalent 17,616 -5,808 635 -5,175 966Cash and cash equivalent at the beginning 1,493 18,199 12,391 13,027 7,852Add : Cash and cash equivalents taken over on acquisition 0 0 0 0 0Cash and cash equivalent at the end 18,199 12,391 13,027 7,852 8,818Source: Company data, Macquarie Research, July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 21
Idea Cellular (IDEA IN, Outperform, Target price: Rs100.00)Quarterly Results 4Q/08A 1Q/09E 2Q/09E 3Q/09E Profit & Loss 2008A 2009E 2010E 2011E
Revenue m 19,724 20,788 21,901 22,960 Revenue m 67,200 89,608 111,229 135,077Gross Profit m 11,051 12,776 13,556 14,308 Gross Profit m 38,574 55,666 70,459 86,804Cost of Goods Sold m 8,673 8,012 8,345 8,652 Cost of Goods Sold m 28,626 33,942 40,769 48,273EBITDA m 6,606 7,326 7,737 7,988 EBITDA m 22,513 31,652 40,719 48,565Depreciation m 2,218 2,304 2,626 2,899 Depreciation m 7,405 11,062 15,091 18,337Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0Other Amortisation m 379 428 433 437 Other Amortisation m 1,363 1,717 1,601 1,601EBIT m 4,009 4,593 4,679 4,652 EBIT m 13,744 18,873 24,028 28,628Net Interest Income m -1,206 -1,320 -1,537 -1,204 Net Interest Income m -2,771 -5,413 -6,262 -7,631Associates m 0 0 0 0 Associates m 0 0 0 0Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0Other Pre-Tax Income m 129 129 129 129 Other Pre-Tax Income m 176 514 514 514Pre-Tax Profit m 2,932 3,402 3,271 3,576 Pre-Tax Profit m 11,149 13,975 18,280 21,511Tax Expense m -165 -328 -334 -341 Tax Expense m -725 -1,352 -2,326 -2,830Net Profit m 2,767 3,074 2,937 3,235 Net Profit m 10,424 12,623 15,954 18,681Minority Interests m 0 0 0 0 Minority Interests m 0 0 0 0
Reported Earnings m 2,767 3,074 2,937 3,235 Reported Earnings m 10,424 12,623 15,954 18,681Adjusted Earnings m 2,767 3,074 2,937 3,235 Adjusted Earnings m 10,424 12,623 15,954 18,681
PE (rep) x 22.2 18.3 14.5 12.4 PE (adj) x 22.2 18.3 14.5 12.4
EBITDA Margin % 33.5 35.2 35.3 34.8 Total DPS 0.00 0.00 0.00 0.00EBIT Margin % 20.3 22.1 21.4 20.3 Total Div Yield % 0.0 0.0 0.0 0.0Earnings Split % 26.5 24.4 23.3 25.6 Weighted Average Shares m 2,635 2,636 2,636 2,636Revenue Growth % 50.7 40.7 40.2 34.4 Period End Shares m 2,636 2,636 2,636 2,636EBIT Growth % 54.1 41.7 50.9 37.0
Profit and Loss Ratios 2008A 2009E 2010E 2011E Cashflow Analysis 2008A 2009E 2010E 2011E
Revenue Growth % 53.9 33.3 24.1 21.4 EBITDA m 22,513 31,652 40,719 48,565EBITDA Growth % 53.8 40.6 28.6 19.3 Tax Paid m -1,386 -1,352 -2,326 -2,830EBIT Growth % 73.6 37.3 27.3 19.1 Chgs in Working Cap m 8,286 4,128 6,200 6,752Gross Profit Margin % 57.4 62.1 63.3 64.3 Net Interest Paid m -4,468 -7,087 -7,476 -8,628EBITDA Margin % 33.5 35.3 36.6 36.0 Other m 4,640 7,602 7,990 9,142EBIT Margin % 20.5 21.1 21.6 21.2 Operating Cashflow m 29,584 34,942 45,108 53,002Net Profit Margin % 15.5 14.1 14.3 13.8 Acquisitions m 0 0 0 0Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -54,521 -69,090 -57,457 -52,915EV/EBITDA x 12.7 9.0 7.0 5.9 Asset Sales m 28 0 0 0EV/EBIT x 20.8 15.1 11.9 10.0 Other m -7,347 1,675 1,214 997
Investing Cashflow m -61,841 -67,416 -56,243 -51,918Balance Sheet Ratios Dividend (Ordinary) m 0 0 0 0ROE % 36.4 23.1 19.5 18.9 Equity Raised m 3,188 25,600 0 0ROA % 12.3 11.2 11.1 11.3 Debt Movements m 27,748 14,596 13,436 8,510ROIC % 27.5 19.0 15.1 14.6 Other m -4,486 -7,087 -7,476 -8,628Net Debt/Equity % 153.8 88.5 90.1 79.5 Financing Cashflow m 26,450 33,109 5,961 -117Interest Cover x 5.0 3.5 3.8 3.8 Price/Book x 6.5 3.1 2.6 2.1 Net Chg in Cash/Debt m -5,806 635 -5,175 966Book Value per Share 13.4 28.0 34.0 41.1
Balance Sheet 2008A 2009E 2010E 2011E Cash m 12,095 12,730 7,555 8,521 Receivables m 2,299 3,291 4,118 4,533 Inventories m 325 395 494 574 Investments m 9,056 9,056 9,056 9,056 Fixed Assets m 107,161 163,472 204,237 237,214 Intangibles m 61 61 61 61 Other Assets m 7,493 8,670 10,344 12,756 Total Assets m 138,489 197,676 235,865 272,715 Payables m 27,389 33,757 42,557 52,216 Short Term Debt m 1,442 1,688 2,128 2,429 Long Term Debt m 65,154 76,214 86,214 92,214 Provisions m 534 534 534 534 Other Liabilities m 8,524 11,814 14,810 17,019 Total Liabilities m 103,043 124,007 146,243 164,412 Shareholders' Funds m 35,446 73,669 89,622 108,303 Minority Interests m 0 0 0 0 Other m 0 0 0 0 Total S/H Equity m 35,446 73,669 89,622 108,303 Total Liab & S/H Funds m 138,489 197,676 235,865 272,715
All figures in INR unless noted. Source: Macquarie Research, July 2008
Macquarie Research Equities - Flyer Idea Cellular
10 July 2008 22
Important disclosures: Recommendation definitions Macquarie – Australia/New Zealand Outperform – return >5% in excess of benchmark return (>2.5% in excess for listed property trusts) Neutral – return within 5% of benchmark return (within 2.5% for listed property trusts) Underperform – return >5% below benchmark return (>2.5% below for listed property trusts) Macquarie – Asia Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie – Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return Macquarie – USA Outperform (Buy) – return >5% in excess of benchmark return Neutral (Hold) – return within 5% of benchmark return Underperform (Sell)– return >5% below benchmark return Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations
Volatility index definition* This is calculated from the volatility of historic price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ stocks only
Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 30 June 2008 AU/NZ Asia RSA USA CA Outperform 41.88% 66.96% 66.13% 50.82% 71.01% Neutral 42.96% 16.30% 22.58% 44.26% 24.64% Underperform 15.16% 16.74% 11.29% 4.92% 4.35%
Transport & Infrastructure Anderson Chow (Asia, China) (852) 2823 4773 Jonathan Windham (Asia, China) (852) 2823 5417 Tim Bacchus (Asia, China) (852) 2823 3586 Wei Sim (China, Hong Kong) (852) 2823 3598 Eunsook Kwak (Korea) (822) 3705 8644 Sunaina Dhanuka (Malaysia) (603) 2059 8993
Utilities Carol Cao (China, Hong Kong) (852) 2823 4075 Deepak Jain (India) (9122) 6653 3157 Adam Worthington (Indonesia) (6221) 515 7338 Prem Jearajasingam (Malaysia) (603) 2059 8989 Dante Tinga (Philippines) (632) 857 0815
Commodities Jim Lennon (4420) 7065 2014 Adam Rowley (4420) 7065 2013 Jonathan Butcher (4420) 7065 5938 Max Layton (4420) 7065 2000 Bonnie Liu (8621) 2412 9008 Henry Liu (8621) 2412 9005 Rakesh Arora (9122) 6653 3054
Data Services Andrea Clohessy (Asia) (852) 2823 4076 Henry Hon (Asia) (852) 2823 3593
Economics Bill Belchere (Asia) (852) 2823 4636 Richard Gibbs (Australia) (612) 8232 3935 Paul Cavey (China) (852) 2823 3570 Richard Jerram (Japan) (813) 3512 7855