We are upgrading our FY08-09CL subscriber targets for Idea by 6-12%, as the company’s current monthly net add run-rate is running ahead of our forecasts led by market-share gains. This in turn led us to lift FY08- 09CL EPS by 9-10%. With subscriber growth picking up, newly launched service areas are contributing rapidly to revenue growth. Network expansion continues and the company has also decided to hive off its tower assets to fully-owned subsidiary. We remain BUYers.

Raising earnings 9-10%

With Idea’s current monthly net add run-rate (705,000 in 1QFY08) running ahead of our forecasts we are upgrading FY08-09CL subscribers by 6-12%, driving an 9-10% EPS upgrade. Our current monthly net add run-rate assumption of 761,000 for the remaining nine months of the financial year is still lower than the 860,000 achieved by the company in June-07 and we see upside risk to our upgraded forecasts. However, a delayed granting of 2G GSM spectrum would adversely impact Idea’s planned Mumbai and Bihar
launches

Strong operating performance in 1Q08

Idea’s strong 1QFY08 performance (136bps margin expansion to 34.7%) was led by a 1% QoQ rise in Arpu – a key positive surprise. Operating profit was also aided by lower losses from new circles, which are now making a greater revenue contribution (42% QoQ). While the 1QFY08 tax rate fell well short of our estimates, we are factoring in an effective FY08-10CL tax rate of 9-20%.

Tower company on the cards

Idea’s board has approved the formation of a 100% subsidiary for the possible transfer of passive infrastructure. Its mobile network currently covers 13,160 cell sites, of which it owns 9,000. Not only does Idea share towers with other mobile operators, but 25% of its own towers are also shared (tenancy ratio of 1.3). In 1QFY08 capex was Rs 11 billion, and the company has expanded cell sites by 30%, half of which have been for new population coverage. This network expansion is in turn reflected in monthly net add
ramp-up and market-share gains.

Robust growth ahead

Idea remains a pure-play GSM mobile story and a key beneficiary of the Indian mobile sector boom. Driven by a 46% mobile subscriber Cagr to 43m by FY10CL, we forecast a 42% revenue and 45% Ebitda Cagr over FY07- 10CL, which should sustain premium valuations.