Motilal Oswal recommends 'buy' on Idea, target Rs 140

The brokerage expects wireless traffic momentum to sustain given 1) seasonal strength, 2) specific circle-wise exits of certain operators and 3) limited demand elasticity.

Voice minutes growth is expected to maintain a steady momentum despite lower discounting and thus highlighting limited demand elasticity. Idea's 4QFY13E QoQ traffic growth is expected to better 3QFY13 growth of 3%. Further, exit of certain operators from specific circles (Uninor, MTS) would have positively contributed to the volume growth for incumbents like Idea, Motilal Oswal said in a research report.

Revenue per minute outlook is positive and maintain our expectation of ~1% QoQ RPM growth in 4QFY13E and ~2% YoY growth in FY14E. We expect blended RPM to improve from 41.3p in FY13E to 43.2p in FY15E, the report said.

FY13E is set to be the second consecutive year of EBITDA margin expansion, with an estimated 50bp YoY accretion in FY13E on top of 160bp expansion in FY12. We assume a further 140bp margin improvement in FY14E for Idea as we expect
operating leverage, yield improvement and lower sales & distribution costs to more than offset the increase in network/fuel costs.

Receding competitive intensity can provide upside risks to our RPM estimates. Every 1p hike in RPM drives a 9% increase in Idea's valuation, assuming 8x EV/EBITDA and no elasticity.

The brokerage expects 18% EBITDA CAGR and 59% PAT CAGR over FY13-15E, driven by 11% traffic CAGR, 2% RPM CAGR and ~230bp cumulative EBITDA margin expansion. We expect FY14E FCF of ~INR23b, implying an FCF yield of 6.5%. The brokerage recommends 'Buy' with a target price of INR140 based on 8x FY15E EV/EBITDA, ex-Indus, INR5m/tower for stake

in Indus Towers, and Rs129b (Rs39/share) for potential spectrum liability.