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No early respite for Idea

Source : BUSINESS_STANDARD
Last Updated: Tue, Jul 24, 2012 19:11 hrs

Rising competitive intensity took a toll on Idea Cellular Ltd’s June quarter results, wherein revenues and operating parameters came below analyst expectations. Even as the network traffic increased and the subscriber base grew, a decline in average revenues per minute (RPM) restricted the revenue growth to 2.5 per cent, compared to the March quarter.

With earnings before interest, taxes, depreciation and amortisation (Ebitda) falling, Idea’s net profit slipped two per cent sequentially. Given the disappointing performance, the stock fell 1.7 per cent to Rs 79 on Tuesday on NSE as against a marginal rise in the markets.

Given that telecom players are looking to consolidate and grow their market share, the operating metrics is unlikely to improve in the seasonally weak September quarter. Analysts expect Ebitda margins to be flat or lower in the current quarter due to likely decline in minutes of usage as well as lower RPMs.
 

MUTED SHOW
In Rs crore Q1' FY13 % chg q-o-q FY13E
Net sales  5,503 2.5 23,379
Ebitda* 1,435 -4.8 6,076
Ebitda (%) 26.1

-200 bps

26.0
Net profit* 258 -21.6 1,244
P/E (x) FY13E 21.4
E: Estimates               *Adjusted for one-offs                Source: Nomura

“With network and other costs fixed in nature, we could see a drop in margins in the current quarter for Idea,” says a telecom analyst with a foreign research house. The key concerns for the Street continues to be regulatory, price to be paid for spectrum in the seven cancelled circles, excess spectrum and licence renewal charges. Overall, with pricing environment getting worse and regulatory concerns continuing, most analysts are cautious on the stock.

Q1: Subpar performance
The company reported a 2.4 per cent drop in average RPM to 41.2 paise, its second consecutive quarter of decline. The RPM decline also rubbed off on revenues and Ebitda growth. Thus, despite the traffic growth (up five per cent sequentially) and five million incremental subscribers added in the June quarter, revenues grew only 2.5 per cent sequentially. The company’s Managing Director Himanshu Kapania attributed the muted revenue growth to the Telecom Regulatory Authority of India’s (Trai) consumer protection regulation (processing fee capped at Rs 3 for high value vouchers) and the rise in competitive intensity.

Ebitda, too, saw a fall of five per cent sequentially with margins down 198 basis points adjusted for Rs 150 crore licence fee in the last quarter. The Street would also be monitoring the minutes of usage (MoU) as despite the fall in RPM, MoU was flat at 379. Bhuvnesh Singh and Vaibhav Dhasmana of Barclays Research say the results highlight a deviation from the elasticity of demand seen in the previous quarter, the RPM decline in the June quarter failing to lift the MoU.

Competitive intensity rising
With market leader Bharti Airtel going aggressive in a bid to recoup its revenue market share since the start of the current calendar year, other players in the market are feeling the heat. Discounted minutes, higher dealer commissions and falling tariffs are hurting players. While there was an improvement in the revenues per minute following price hikes a year ago led by Bharti, there was a decline in talk time. Smaller players cut tariffs and the price war started all over again. With Bharti Airtel losing about 200 basis points in revenue market share over the last two years to about 30 per cent now and unlikely to lower its guard, the going ahead will get tougher forthe rest of the players with smaller players feeling the heat the most.

Outlook
For Idea, revenue growth is likely to be muted as the company acquires size. Says an analyst: “Idea, which used to achieve six-eight per cent revenue growth on a consistent basis over the last few quarters, is likely to achieve lower growth (three-five per cent), going ahead.

” Positively, the company continues to improve its revenue market share, which has gained 140 basis points in FY12 to 15 per cent.

However, the margin pressure is unlikely to ease. Hence, profit growth, too, is expected to be muted.

While there are short-term challenges, analysts believe Idea being a stronger player and counted in the league of the Big 3 (others being Vodafone and Bharti) and generating a cash profit of about Rs 1,000 crore per quarter, is likely to benefit as the pricing power game plays out and weaker players bow out in the medium to long term.




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