Idea Cellular, part of the Aditya Birla Group, is the third largest telecommunication service provider in India in terms of revenue. The company provides mobile services in all the 22 telecommunication circles of the country and has 116 million subscribers. Idea had won 3G licenses in 11 out of the 22 circles and won back in all its seven circles in the 2G auction conducted by the Government in Nov’12, for which licenses had been quashed by the Supreme Court. The company also holds a 16% stake in Indus Towers, which is a joint venture between Airtel, Vodafone and Idea. In spite of recent regulatory changes in sharing of 3G spectrum among companies and other regulatory uncertainties

Company Snapshot

AnalysisWe also included brief fundamentals of telecom sector to back our recommendation.Fundamentals: Idea has gained around 210bps market share in last 3 years. There is continuous improvement in EBITDA margin as compared to flat to declining margins of RCOM and Airtel. This shows how Idea has better cost management as compared to its peers even though it has to play a role of new entrant in around 8 of its new circles. The key factors determining a telecom firm’s future cash flows are Average Revenue per Minute (ARPM) and Minutes of Usage (MOU), which in turn depends on its consumer base. With the firm’s churn rate going down to comfortable levels of 6.9% in the most recent quarter and its ARPM steady around ₹0.41, the firm has a definitive growth perspective in the short-term. Heavy cost structure inherent to the industry and regulatory uncertainties are posing as major threat to the recent positive performance of the stock.

CMP (INR)142.4

Stop Loss Target – 6 Month128 169.85

Pot. Upside Ab. Rating19.3% BUY

Market Info as on 2nd July, 2013BSE Sensex 19,463Nifty S&P 5,857

Stock DetailsBSE Group ABSE Code 532822NSE Code IDEABloomberg Code IDEA INMarket Cap (Rs. bn) 468.61Free Float (%) 25%52 week Hi/Low 150/72Avg. Daily Vol. (NSE) 6853216Shares Outstanding 3314 mn

Financial Snapshot (INR mn)Y/E March 2013Net Sales 225949Y-o-Y Growth 17%EBITDA 53714EBITDA Margin 24%PAT (Adjusted) 10078PAT Margin 4%EPS 3.32

Rel. Perf. Idea % Sensex %1Mth 9.2 (.07)3Mths 26.8 2.26Mths 36.2 (1.3)1Yr 83.4 11.9

Technical AnalysisIDEA CELLULAR LTD.

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Technical AnalysisThe technical analysis has been done on the past two years’ price-volume information (i.e., July’11 to June’13). The analysis was carried out using tools such as price-volume chart, candlestick patterns, RSI, Stochastic, MACD, point and figure chart & Bollinger Bands in order to provide recommendation.

The stock performed really well in this period, moving up from a price level of ₹80 to ₹140, as of 2nd July, 2013. Major upward movement has happened in the beginning of this year only. Moreover, a strong trade volume has supported the current move. Prior to that, the stock was in consolidation phase with lower volumes.

Section – A 2Term – IV, PGP 28

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Candlestick Patterns

Looking at this year’s (July’12 – June’13) pattern, we can clearly see that market is majorly in consolidation phase with upward bias. For the first 3 months, it traded in the ₹100 – ₹120 range before going upward, reflecting strong support range in case market tries to come to this level. Moreover, market continued creating higher highs pattern.In beginning of May, it moved upward with gap with decent volume, thus reducing chances of gap filling in near term. Moreover, green candles are supported by a healthy volume. Now for the past 2 months (May – June), it has traded in the ₹130 – ₹150 range. As such, there is no definitive pattern forming for reversal in the candlestick chart currently; thus it is necessary to investigate other indicators to predict future movement.

Relative Strength Index (RSI)RSI measures the relative strength of price movements. For purpose of this analysis, 20–80 levels have been considered as decision criteria for overbought–oversold state of the stock rather than 30-70 levels as it would lead to frequent decisions with lower success ratio.

Section – A 3Term – IV, PGP 28

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Back testing on past data, it can be seen that there were three buy indications during Jan’12 (at ₹82), May’12 (at ₹80) and Feb’13 (at ₹110). In the first instance, it moved up to ₹100 in 2 month level (providing >15% return); in the second instance, it first came down to ₹75 and then moved upwards; and in the final instance, it moved to ₹140 after touching ₹103.On the other hand, it provided sell indications on 5 occasions during July’12, Sep’12, Nov’12, Jan’13 and May’13. But, market didn’t move in the expected direction in any of the occasions within 2 months.Thus, RSI cannot be applied in isolation and it needs to be combined with other indicators to confirm the move. However, currently, RSI is at 40% levels and is near oversold range but it is not indicating any significant price movements.

Stochastic

Section – A 4Term – IV, PGP 28

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Stochastic chart has been drawn based on 5-day moving average of fast stochastic to smoothen the chart. It can also be seen that, stochastic has given almost similar indications of buy and sell as RSI. Hence, we will be using other technical indicators for forecast. Moreover, currently, it doesn’t give any significant indication of movements.

MACDIn the past, MACD gave up direction on two occasions during Jan’12 & Jun’12 and sell indication during Feb-Apr’12 and Jan’13. Market moved upwards as per MACD direction in both the time and moved downwards in one of the two instances. MACD is currently in positive range and has been in this range for the past 1 month. And as can be observed from past price movement, it is expected to remain in positive range. One caveat, at 4-5 positive levels, MACD is making double top pattern, hence quite likely that MACD may come to negative range before prices move upside.MACD explains market moves (at least for this stock) very well and hence, it remains to be seen whether other indicators are also implying a probable reversal in the recent future.

Point and Figure chartPoint and figure chart captures major price moves and does not consider time. While price chart is showing major consolidation in the range leading to difficulty in predicting the future movements, it is pretty clear from PF chart that the stock till now have been in mostly in an upward trend and no major trend reversal has not occurred (Slight

Section – A 5Term – IV, PGP 28

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different to what MACD is indicating). It is also clearly visible from chart that the prices will have healthy support at price range of ₹115 – ₹120 going forward, if it does come down.155 151 147 X 143 X O 139 X O 135 X X X 131 X O X O X 127 X O O 123 X X 119 X O X X 115 X O X O X 111 X O X O X 107 X O O X 103 X X X O 99 X O X O X X 95 X O X O X O X 91 X O X O X O X 87 X O O X O X X 83 X O X O X X O X 79 O O X O X O X 75 O X O X O 71 O X O 67 O 63

Bollinger Bands

Bollinger bands can be used for range-bound stocks as well trending stocks. Currently, band is of normal width and it is trading upwards. As market is consolidating currently in the range of ₹120 – ₹140, so it is likely that, it will face slight resistance at ₹140 from upper band and expected to stay in upper part of range. Despite resistance, positive bias can easily be observed.

Moving AveragesMAs for various periods have been studied to present the strength of recent bullish movement. As can be seen from Sept’12, it moved up from price levels of ₹80 and has never touched the 200-day MA and has touched 50-day MA only twice. Currently, it is trading around 10-Section – A 6Term – IV, PGP 28

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day MA and finds decent supports over the 30-day MA. So, only when it crosses at least the 50-day MA in near term, then it can be confirmed that reversal has happened. So, we can easily go long in the stock with stop loss near 50-day MA

Recommendation – BuyCMP (2nd July 2013) – 142.4Stop Loss – 128Target – 169.85

Based on this analysis, we recommend a “Buy” on the stock for an investment horizon of next 6 months. We need to constantly track fundamental developments in the telecom sector to exit from the trade in case target/stop loss does not get triggered in given time horizon

Key Supports (Stop Loss levels) and Extension Levels (Probable Target)

Ratios Fibonacci Retracement

 Ratios Extension

38.2% ₹ 98.11 138.2% ₹ 169.8550.0% ₹ 108.15 161.8% ₹ 181.3561.8% ₹ 118.19

The table below provides summary of the technical analysis performed. Technical Strength: 6.5/10 (BUY)Indicator Analysis Signal (0 - Strong

Sell, 10 - Strong Buy)

RSI/Stochastic 5.0Section – A 7Term – IV, PGP 28

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Both RSI and stochastic are near 50 (Hence Neutral)

MACDMACD: 2.90 and Signal Line: 2.93. According to MACD analysis, idea is slightly weak.

4.0

Exponential Moving Average

Price traded above all major Moving averages which is a positive signal. According to this, idea is in a strong uptrend. Major support levels are 136, 132, 114.

9.0

Bollinger Bands 

Up trending and prices in upper part of range 6.5

Point and Figure Chart

No discernible reversal pattern, Strong bullish trend in recent period 8.0

Section – A 8Term – IV, PGP 28