We have an ‘overweight’ rating on Idea Cellular shares with a 12-month target price of Rs 166. We have a DCF valuation of Rs 205, assuming a cost of equity of 13%, cost of debt of 10% and WACC of 12%. Our target price includes a negative adjustment of Rs 39, which captures the regulatory pay-outs, including license extension and one-time spectrum charges.
We expect the company’s FY14 Ebitda to grow 23%. Our industry checks suggest that revenue per minute should improve cR1.5 paisa in Q1FY14e across operators. Given this, even if assume cR2 paisa improvement in voice realisations with no minute growth, it would imply an incremental ebitda of Rs 740 crore (accounting for c54% of incremental Ebitda growth).
Further, revenue market share expansion in Mumbai and Bihar will reduce Ebitda losses in new circles that could narrow to -16% in FY14e .The company’s new circle margins were negative c21.2% in Q4FY13. Operators become Ebitda breakeven around revenue market share of 10%-12%. Idea Cellular’s RMS in Bihar is c10% and for FY14e we estimate it at 11.5%. Similarly, we expect Mumbai margins to improve from c8.6% to c10%.
Both circles combined account for c56% of new circle revenues. Expanding RMS in Mumbai and Bihar circles will be key to reducing Ebitda losses for new circles.