IDEA Cellular

While Idea Cellular's stock may suffer in the short run due to low tariffs and competition, the company is poised to benefit from its recent expansion in the long term

 
   IDEA Cellular's stock has underperformed the benchmark indices over the past six months following the investor concerns over the lower-tariff regime in the domestic telecom space and increasing competition from new entrants. The stock, however, has recovered from its lows in February 2010 and has witnessed a renewed buying in the overall buoyant market.

BUSINESS:

Similar to its bigger peers, such as Bharti Airtel and Reliance Communications, Idea Cellular, the country's sixth largest mobile service provider, has become a pan-India telecom player with presence in all the 22 circles. In the current fiscal, the telco added seven circles in its repertoire. 

   With 62.1 million customers at the end of February 2009, Idea commands a 10.7% market share of the country's total subscriber base of 579.3 million. It has been adding over 2.2 million users every month, one of the fastest in the sector. 

   Idea operates the circles of Punjab and Karnataka through its subsidiary Spice Communications, in which it had acquired a 41.1% stake in 2008. Idea also holds 16% in telecom tower company, Indus Towers, along with other two shareholders, including Bharti Infratel and Vodafone Essar. Effective from January 1, 2009, the telco transferred its passive infrastructure in nine circles to its subsidiary ICTIL.

FINANCIALS:

The Aditya Birla Group-controlled Idea's business has grown rapidly since the financial year 2005. Revenue has grown at a fouryear compounded annual growth rate (CAGR) of 48% and net profit has increased by 84.6%. 

   In the quarter ended December 2009, the company reported a robust sequential growth of 6% in sales at Rs 3,149.5 crore. Its profit before interest, depreciation and tax remained stable at Rs 814.1 crore. At Rs 170, net profit dropped by 23% compared to that in the previous quarter. 

   Its operating margin in the 11 established circles remained constant at over 30%. This is despite a 10% sequential drop in per minute realisation due to the tariff cuts. A 4% jump in per user minutes of usage (MoU) supported margins.

GROWTH PROSPECTS:

Idea has launched its operations in the seven services during the nine months ended December 2009. These operations initially will be loss making thereby reducing overall profitability of the company. However, as the company wins more subscribers and its operations stabilise in these circles over a period of time, this would improve its bottom line. Also, now that the company is a pan-India player, its capital expenditure on 2G technologies would taper down gradually while its revenue and profits reflect growth from its new operations.

CONCERNS:

Erosion in realisations on per user and per minute basis, rising percentage of subscriber outflow or churn and widening loss of its subsidiary, Spice Communications, are the major concerns that may continue to cast a shadow on Idea's performance in the short term.

VALUATIONS:

At the current price of about Rs 65, Idea's enterprise value is 7.2 times its earnings before interest, depreciation and taxes. Its valuation lies between that of the country's largest telco Bharti Airtel (7.4) and the second biggest player RCOM (6.1). Based on P/E multiples, Idea's stock with a P/E of 21 looks expensive than its peers Bharti (12.5) and RCOM (6.6). This needs to be seen in the backdrop of the fact that its profit had suffered in the past four quarters due to losses from its new service launches. The situation is expected to change gradually as the company starts generating more business from these circles. Mobile number portability (MNP) is likely to be launched in the next three months. 

   Though its exact impact is difficult to ascertain at the moment, Idea is expected to weather the storm given its national presence and good branding strategy. The stock is likely to see some weakness in the near term due to uncertainties over MNP and the launch of 3G services. However, investors can use dips in the stock's price to accumulate it with a horizon of two years.