Idea Cellular: Muted Q2, lower tower valuations disappoint

The tower sale will help bring down debt

The Idea stock fell 3.6 per cent in trade on disappointing September quarter (Q2) results and the sale of standalone towers at lower-than-estimated valuations. The company announced on Monday it had sold its portfolio of about 10,000 towers housed in fully owned subsidiary Idea Cellular Infrastructure Services to ATC Telecom Infrastructure for an enterprise value of Rs 4,000 crore or $611 million. While this is in line with the company’s strategy of monetising its tower assets and will help bring down its net debt as of September at Rs 54,000 crore, the valuations of the deal are lower than the $1 billion that analysts had earlier estimated. 

Analysts had pegged a higher value (over Rs 70 lakh a tower) for the tower portfolio given that a higher proportion (63 per cent) was ground-based and thus could fetch higher tenancies. The 40 per cent reduction than estimates means that ATC will be getting the towers at an enterprise value of about Rs 40 lakh a tower. This is lower than the tower deals such as ATC’s purchase of 51 per cent stake in Viom which had a valuation of Rs 50 lakh a tower. Nevertheless, given the high level of debt, the deal should help bring down standalone debt going ahead. Vodafone, too, is selling its standalone towers to ATC for Rs 3,850 crore, taking the combined deal size to Rs 7,850 crore. 

On the operational front, while the trend of increasing pricing pressure witnessed in the prior three quarters continued, what compounded matters in a seasonally weak quarter was higher indirect tax rates. The goods and services tax (GST) of 18 per cent increased the tax burden given the earlier 15 per cent service tax rate. In the quarter, Idea in particular faced revenue pressures given a larger proportion of rural subscribers as compared to other incumbents. 

Data compiled by BS Research Bureau

On the back of a 10 per cent fall in voice realisations per minute to 22 paise on a sequential basis and a halving of data realisations for the second quarter in a row to 2.7 p per megabyte (MB), revenues declined by nearly nine per cent to Rs 7,465 crore. While voice volumes grew by 1.7 per cent to 255 billion minutes, what stood out was the strong 73.5 per cent growth in data volumes to 438.6 billion MBs over the June quarter. This is better than Bharti Airtel’s 65 per cent growth in data volumes for Q2. But, unlike the leader which added 1.4 million subscribers during the quarter, Idea lost about 6 million subscribers. While Bharti’s average revenue per user (ARPU) stood at Rs 145, down six per cent quarter-on-quarter, Idea’s sequential ARPU fall was similar at 6.4 per cent to Rs 132. 

Falling revenues and higher operational costs (largely roaming and access fee) and employee costs (increments) led to a 20 per cent fall in operating profit to Rs 1,501 crore. Margins thereby shrunk nearly 300 basis points over the June quarter to 20.1 per cent and almost 10 percentage points over the year-ago period. 

The operational stress, depreciation and amortisation costs on account of network roll-out, coupled with higher interest costs of Rs 1,182 crore, led to the company to report its fourth consecutive quarter of loss which crossed the Rs 1,000-crore mark. Net debt has increased from Rs 50,000 crore at the end of FY17 (including deferred spectrum liabilities) to the current Rs 54,050 crore. The company had reported a profit of Rs 91 crore in the September quarter last year and a loss of Rs 815 crore in the June quarter. 

While the tower sale is a positive, the next important trigger for the company would be closure of its merger deal with Vodafone which is currently on track and going according to plan.