We believe accelerated 3G/4G investments by Idea Cellular would hit operating margins in FY16/17 as the company strives to improve coverage/ quality of data services in key circles.
Also, there is an upside risk to capex intensity in the following years. We have cut our FY16-17E Ebitda by 1-7% as we lower margin assumption for FY17 by ~150 bps to 35.5%. Also, we have lowered our target FY17 Ebitda multiple to 6x as we account for macro headwinds like: i) Reliance Jio launch and its potential impact on the business model, ii) accelerated network investment and iii) increasing regulatory interventions in the recent past.
Idea has decided to adopt single RAN technology, which would enable running multiple technologies (2G+3G or 2G+4G) in a given band with the same radio equipment. For instance, both 2G and 3G services would be offered on 900 MHz using the same radio equipment.
Idea is set to launch 4G services in the 10 circles in which it has FD-LTE spectrum from Jan 2016. Over the following six months, the network would cover 750 towns which account for ~60% of Idea’s revenues. Idea would launch FD-LTE network on the 1800MHz band, which is the most accepted band globally with ~40% share of deployment.
The management indicated that its 3G/4G network coverage would grow two-fold to 60-65K sites by end-FY16.
This is led by faster-than-expected evolution of the ecosystem, which is reflected in a strong increase in smartphone penetration within the Idea network. Idea endeavours to cover an additional 175-200 million with its mobile broadband network.
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