The stock of mobile telephony services provider Idea Cellular saw a jump of 3.1 per cent since Monday (through Thursday) in a declining market (the Sensex was down 1.7 per cent). The reason for this outperformance was the company’s better-than-expected performance in the December quarter, which came on the back of stabilising tariffs and growth in network minutes.
Due to slower decline in revenues per minute, the company was able to post an 8 per cent sequential rise in consolidated revenues at Rs 3,960 crore. Revenue increase and lower interest costs helped it register a 35 per cent surge in net profits to Rs 243 crore.
The Street welcomed the numbers, which have come on the back of a weak September quarter. The revenue growth for that quarter were flat with profits falling 10 per cent on increased costs, subdued seasonal demand and attractive competitive offers.
| REVENUE GROWTH, STABLE MARGINS | ||
| In Rs crore | FY11E | FY12E |
| Sales | 15,543 | 19,666 |
| Ebitda | 3,678 | 4,622 |
| Ebitda mgn (%) | 23.70 | 23.50 |
| Net profit | 831 | 834 |
| EPS (Rs) | 2.52 | 2.53 |
| P/E (x) | 28.60 | 28.50 |
| E: Estimates Source: HSBC | ||
While there are early signs that the competitive intensity has lessened and established pan-India players such as Idea are in a strong position vis-à-vis new players over the long term, there would be pressures in the near to medium term on account of mobile number portability and 3G rollout challenges on the customer acquisition front as well as higher costs surrounding the launch. Given that analysts have targets between Rs 65 and Rs 75, there is a little upside from current levels of Rs 70.75 .
Q3: Stable margins
Despite higher promotional and subscriber acquisitions costs, which went up by 2 per cent over the previous quarter, the company was able to maintain Ebidta margins at 24 per cent due to scale benefits. A look at the trend over the last 4-5 quarters suggests that the pressures are bottoming out. While higher level of competitive intensity and subsequent pricing has meant that the average realised rate per minute (ARR) has declined over 18 per cent over the last one year, Idea has been able to bring down its cost per minute by 16 per cent over the same period thus restricting the losses. Moreover, the fall in ARR on a sequential basis has declined from a steep 9 per cent in the March 2010 quarter to just over a per cent in the December quarter.
Cost per minute for the December quarter, has come down by a sharper 1.7 per cent.
While the management believes that the worst is over and the bottoming out of competitive intensity is happening, analysts believe overcapacity and delay in consolidation will mean that pricing power is some time away.
Valuations
On a sum-of-parts valuation (core business Rs 55 and Indus Tower JV at Rs 20), Idea is valued at Rs 75. IDFC in a recent report believes that Bharti is a better bet (EV/Ebidta of 7.4 times to Idea's 7.2 times) as the impact of 3G-related depreciation and interest cost on Idea will be more pronounced on Idea's profitability in the coming quarters. Triggers for the stock include consolidation in the sector as well as the monetising of Idea's tower assets while the response to its 3G services is among key monitorables .
