Stock Review: IDEA CELLULAR

Idea Cellular's stock rose by nearly 4% on Tuesday in an otherwise sluggish broader market. It caught investors' attention after media reports about the possibility of a stake sale by one of its shareholders, Axiata, a Malasian group with investments in communications companies across Asia.

Just like its peers, Idea Cellular, too, has been grappling with lower profitability due to intense competition despite impressive subscriber additions. This has impacted its stock returns in the past year, frequently trading below its 2007 IPO offer price of . 75.
Against the backdrop, investors would expect a re-rating of India's third-largest publicly listed telecom company if one of its shareholders were to sell the stake. The news, however, was not confirmed. The Birla Group, which is the biggest shareholder in Idea with close to 47% stake, has also denied reports that it was looking to sell its stake in the company.

Axiata had purchased 19.1% stake in Idea for nearly . 157 per share in August 2008 at a time when valuations of the domestic telecom players were at their peak. The sector was riding high on faster subscriber additions and expanding telecom penetration in the country.

In subsequent years, however, the entry of new telecom operators and intense tariff war eroded growth. As a result, operators' valuations took a hit. For instance, Idea's stock traded at . 70.9 on Tuesday, at a hefty 55% discount to what Axiata had shelled out.
Idea's retail investors, who had subscribed to the IPO, had paid much less than Axiata for each share, but the return on their investment, too, has remained paltry. Further, the possibility of a strong recovery in the stock price looks bleak since some analysts feel the stock looks richly valued at current valuations. The extent of 3G-related expansion would be crucial for Idea's growth in future. 3G services, given their value-added nature, are expected to improve per user revenue of telcos. On the flip side, with the 3G launch, Idea would have to account for interest expenses pertaining to the loan it took to obtain 3G licences. This would curtail its net margin at least until 3G services start contributing significantly to its top-line.