Stock Review: IDEA Cellular

IDEA Cellular surprised the Street on Monday with a high single-digit sequential growth in revenue and net profit during the third quarter. Also, the rate of decline in its average revenue per minute was the lowest in at least the last six quarters. This should hearten investors. This could also mean that the impact of cut-throat tariff rates is now behind the company. But given its heavy 3G investments, future growth will depend heavily on how well it takes advantage of the 3G opportunities. Things look positive for its 2G business. Network utilisation in Idea's nine new circles has increased. Revenue from the new circles has grown twice as fast as from older circles. Also, operating loss in these new areas reduced marginally from the previous quarter.

   But it is still too early to consider this as a reversal in the subdued trend in its key mobile segment. The robust 19% sequential growth in its earnings before interest and taxes (EBIT) is due to increased contribution from the other divisions, including long distance telephony and tower infrastructure.

   The company has started incurring interest costs on the loan it had raised for the 3G auction fee. However, its impact was not felt on the bottom line in the December quarter because the company realised the outgo of 124.2 crore on its balance sheet. Had that not been the case, its net profit would have fallen sequentially by over 29%.

   The company would start reporting the interest outgo pertaining to the 3G auction fees once it launches these services. This means its future profit growth, to a large extent, depends on how fast and how well it serves the 3G opportunities. The company has stated that it would launch 3G services in the 11 service areas in the next few months. Given this, the higher interest expenses are expected to put pressure on its net profit in the next few quarters until the 3G launch stabilises.

   The countrywide launch of the service to change the mobile operator without changing the mobile number, or mobile number portability, would be another key concern. The new facility is expected to escalate advertising and promotional budgets of operators as they try to retain existing customers and also attract those their rivals seeking change.

   For instance, Idea's subscriber acquisition costs relative to sales rose by 2.5% sequentially in the December quarter. This was largely offset by lower staff costs and network expenses, but the company may find it difficult to squeeze these costs further.

   Given these factors, the performance of telecom players is expected to fluctuate in the near term, which means investors may have to wait for a while to see a turnaround in the telecom stock valuations.