Idea Cellular: Not a good idea

The company needs to improve operational parameters to get a positive rerating on bourses.

The 20-per cent rise in the Idea Cellular stock price over the past one month is expected to moderate, or even consolidate, at lower levels. The rally in the stock price was more of a correction after telecom stocks were consistently battered over a year.

In the recently-concluded June quarter, the company’s revenues rose 12 per cent sequentially, as it managed a 13 per cent rise in minutes on the network, though average revenues per month (ARPM) declined seven per cent. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins were lower by around 330 basis points sequentially, as the company saw a 24 per cent rise in the network operating expenses.

The management holds that margins will stabilise in the coming months, as the ARPM slide – that was over seven per cent for the past three quarters – will abate, and the tariff wars will shift to the international calling front. Moreover, network operating expenses and spectrum charges will also stabilise at higher levels. According to analysts, Idea provided for higher spectrum charges, which had a 90-basis-point impact on margins.

The company needs to spruce up its operations as Ebitda margins in its existing circles have dipped from 30 per cent levels last year to around 27 per cent in the June quarter. The new circles are already making losses at the operational level. With its net debt-to-Ebitda remaining high at around three times, concerns on the debt front may persist.

The company had budgeted high-capacity expansion plan of around Rs 4,000 crore for 2G and 3G rollouts to maintain market share. Also, increase in advertisement spends may take its toll. This may strain the company’s balance sheet. Hence, analysts reckon that the share price will tend to remain subdued.