Why Idea Cellular continues to be a good investment

Near-term concerns on spectrum and data pricing, but execution and attractive valuations make it a good bet

The Idea Cellular stock is down 17 per cent over the past fortnight on concerns of overbidding in the upcoming auctions and business impact from any aggressive pricing by Reliance Jio. With spectrum reserve prices expected to see an increase of 15-20 per cent, coupled with higher bids, could translate into higher cash outgo for the company.

Unlike competition, licence renewal for Idea is taking place in circles that contribute 72 per cent of revenues. The numbers for Bharti and Vodafone are 34 per cent and 39 per cent, respectively. If Idea is unable to acquire any 900 MHz spectrum, it could lead to some disruptions in its services.

Most analysts believe overbidding remains the key risk limiting any near-term gains in the stock despite good execution and consistent market share gains. While auction risk remains, analysts at Citi Research believe with defence swapping 15 MHz of 2,100 MHz, which, coupled with the available 900/1,800 MHz, should cap high bidding for 900 MHz, given telecom companies will be keen to complete their 3G footprint.

The other issue is of competitive pressures from new players, which could impact both Bharti and Idea. However, Bank of America Merrill Lynch analysts say the impact would be relatively lower for Idea, given its smaller presence in metros and larger presence in rural areas. Impact from R-Jio would relatively be lower due to fewer rural data subscribers.

The Street is also concerned about the price cuts by Bharti Airtel for 4G and the convergence of prices of 3G and 4G prices. If the trend (lower pricing, 4G launch on 1,800 MHz) continues, analysts at Credit Suisse believe a situation will arise where 3G networks will be competing against newer networks of far superior capability on speed, coverage and cost. This will hurt (lower pricing even before the launch of R-Jio) as 3G data has accounted for nearly 60 per cent in mobile Ebidta for Bharti over the past two years. The Bharti Airtel stock is also under pressure and is down 15 per cent over the past two weeks.

While there is pressure on incumbents, analysts at Sharekhan believe the Street is reading too much into the risks. They say the market is ignoring the improving industry dynamics, strong data growth potential and robust execution capability of Idea Cellular. With revenues growing at an annual rate of 21 per cent over FY10-14, the company has outperformed the sector with revenue market share growing from 11.5 per cent in FY10 to 16.7 per cent at the end of September quarter of FY15. Most analysts believe the company will outperform its listed peers Bharti and RCom by growing its FY14-17 revenues annually by 15-18 per cent, while the two peers are expected to grow by 4-8 per cent during the period.

About 60 per cent of analysts covering the Idea stock have a 'buy' on it with a consensus target price of Rs 82. Given the current market price of Rs 146, this offers a 25 per cent upside.