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Conflicting Ideas on Idea Cellular

October 28, 2007

Idea Cellular released disappointing results for 2Q FY08, with key disappointments on ARPU, network operating expenses, subscriber acquisition costs and deferred tax. Due to a sharp fall in ARPU, revenue grew 5.7% QoQ and 54.7% YoY to Rs15.6bn against our estimate of Rs16.4bn (expected growth of 11.3% QoQ). EBITDA margins also disappointed and fell 202bp on QoQ basis to 32.7%. A sharp reduction in margins led to a marginal reduction in EBITDA, which fell 0.4% QoQ to Rs5.1bn. EBITDA was 11% lower than estimates. PAT fell 28.6% QoQ to Rs2.2bn.

All the brokerage houses have conflicting ideas about Idea cellular. Macquarie wireless research expects the company to report an EPS of Rs 5.20 and Rs 6.75 for FY08 and FY09 and has set a target price of Rs 192.

UBS expects EPS to be Rs 3.82 and Rs 4.63 for FY08 and FY09 and has a target price of Rs 175 which is very expensive compared to its EPS projections.

Citigroup expects Idea to report an EPS of Rs 5.1 and Rs 6.0 for FY08 and FY09 and has set a target price of Rs 155.

Conflicting to all the above views, Sharekhan/SSKI and Credit Suisse estimate Idea to report very poor results and EPS of Rs 3.44 and 4.65 for FY08 and FY09. They have set a target price of Rs 108 based on DCF. Our analyst feels that this stock will likely under perform the Telecom sector, especially in the light of Reliance communications joining the GSM mobile operations.

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