Stock Review: IDEA CELLULAR

A strong growth in the 13 established telecom circles continued to boost overall performance of Idea Cellular in the June 2011 quarter. The company was also able to sell minutes on its network at a slightly higher rate after a long period of stagnation in per-minute rates.

To retain the growth momentum, the company will now have to focus on its recently launched circles and services. And whether it succeeds or not will largely depend upon how fast it turns around operations in the nine circles it added in the past two years and how quickly revenue from the newlylaunched 3G services more than offset costs involved.
The country's fourth largest telecom operator by revenue has been reporting a gradual revival in its established 13 circles. Since the September 2010 quarter, revenue from these regions has increased by nearly 22%. Not only that, the growth is accompanied by higher profitability notwithstanding the pressure on tariff rates. Its operating margin has expanded by 260 basis points to 29.6% despite a 3% fall in perminute revenue during the period.

However, the strong momentum in the relatively older circles is partially offset by its operations in the nine new circles, including Mumbai, Bihar, and TN among others. Though revenue in these circles has increased by a strong 42% in the past 12 months, it is not enough to cover operating expenses. The new operations are yet to break even. The fact that the operating loss from these operations widened to . 139.7 crore during the June 2011 quarter from . 117.3 crore in the previous quarter raises concern. This restricted the overall operating margin improvement to 124 basis points for the quarter even though older circles reported a two-fold improvement in margins. Having a firm foothold in the domestic telecom market is a big positive. The company boasts of having one of the highest proportions of active subscribers among peers.

According to Telecom Regulatory Authority of India (TRAI), nine out of every 10 Idea subscribers had an active account as defined by the regulator in May 2011. This combined with a stable trend in its per-minute revenue and the launch of new services under 3G technology puts Idea in the sweet spot. This should support its stock in the near term, which has gained 40% in the past three months.