Stock Review: IDEA CELLULAR

Idea Cellular's fourth quarter performance came in better than expectations, with revenues growing seven per cent sequentially on the back of robust traffic growth, up nine per cent. The company also posted strong subscriber growth of nine per cent in the fourth quarter.

In April, most telecom companies reported a double digit fall (16-49 per cent) in month-on-month slowdown in net subscriber addition. Idea did better, recording a net addition of 2.5 million, down 9 per cent over March. This helped it to increase its market share by net addition from 18.6 per cent to 22.1 per cent in April 2011.

Improving operational and subscriber metrics have helped the stock outperform broader markets in the recent past. Currently, at `71.95, there is some room for upside given that analysts have pegged the stock's price target between `75-79. This includes core business as well its stake in Indus Towers, as well as the cash outgo on account of spectrum and license renewal charges.

IMPROVING PROFITABILITY

Profitability was higher with Ebitda growing 13 per cent on the back of improved performance at its established operations (13 circles) while reducing losses at the newer service areas (9). While Ebitda for established circles were higher by just over a per cent to `1,066 crore, losses at the new areas was down by `21 crore to `117 crore.

Ebitda margins expanded 140 bps to 25.4 per cent on the back of flat network costs and lower other expenses. Net profit also saw a growth of 12 per cent on the back of lower interest costs. However, lower interest costs were also due to the company capitalising interest costs on its recently rolled out 3G operations.

Nevertheless, analysts sounded positive and believe that the operating performance was strong and helped the company improve its margins as well as earnings sequentially.

LOWER RPMS

While the company's subscriber base increased and its minutes on network, were also good, revenues per minute (RPM) were down three per cent to 40.6 paise. Analysts believe that with the exception of Reliance Communications, others also saw a fall in RPMs. Free minutes on the network could be one of the reasons for the fall.

However, the biggest disappointment is the fall in value-added services revenues as a percentage of mobility revenues, to 12.1 per cent from 13 per cent in the previous quarter.

In contrast, major competitors have seen VAS revenues move up. While average revenues per user have fallen four per cent sequentially, analysts believe these could improve due to 3G. Enam analysts Priya Rohira and Nivedan Reddy say that its 3G circles cover 80 per cent of revenue base and a faster uptake of 3G services will enable it to increase its ARPUs via higher data usage and further aid market share gains.

OUTLOOK

Idea Cellular for the third consecutive quarter has registered increase in revenue market share from 13.4 per cent to 13.6 per cent in the March quarter.

It has been the only incumbent to post consistent gains in revenue market share on the back of Spice acquisition and launching its services across nine circles in 2008.

While the company on an operational basis has done well thus far, key risk according to a Citigroup Global Markets include higher than expected regulatory charges, as well as stiff competition, which will have a bigger impact on Idea vis-à-vis players such as Bharti, due to its smaller balance sheet size as well as scale.