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Idea Cell.: Taxes spoil the show - Views on News from Equitymaster

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Idea Cell.: Taxes spoil the show

Jan 23, 2012

Idea Cellular declared the results for third quarter results for the financial year 2011-2012 (3QFY12). The company has reported a 27.2% YoY increase in total revenues but a 17.3% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 27.2% YoY during 2QFY12. The growth was led by a growth in the subscriber base as well as by higher minutes on the network during the quarter. For the 9 month period ended December 2011 (9MFY12), net sales grew by 25.8% YoY.
  • Mobile subscriber base grew by 30.1% YoY during the quarter. Total count of subscribers stood at around 106.4 m at the end of December 2011.
  • Operating margins improved by 2.8% YoY during the quarter due to the savings in nearly all the expense heads (as percentage of sales). For 9MFY12, operating margins improved by 2.3% YoY.
  • Net profit declined by 17.3% YoY during the quarter. This was on account of huge jump in tax outgo as well as higher interest costs during the quarter.

Consolidated financial performance snapshot
Sales 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 39,556 50,308 27.2% 112,685 141,715 25.8%
Expenditure 30,074 36,862 22.6% 85,530 104,362 22.0%
Operating profit (EBITDA) 9,483 13,446 41.8% 27,155 37,352 37.6%
Operating profit margin (%) 24.0% 26.7%   24.1% 26.4%  
Other income - -   - -  
Interest expense/(income) 941 2,880 206.1% 3,111 8,283 166.3%
Depreciation 5,925 7,575 27.8% 17,401 21,970 26.3%
Exceptional items - -   - -  
Profit before tax 2,616 2,991 14.3% 6,643 7,100 6.9%
Tax 186 981 428.8% 401 2,260 463.7%
Net profit 2,431 2,010 -17.3% 6,242 4,840 -22.5%
Net profit margin (%) 6.1% 4.0%   5.5% 3.4%  
No. of shares       3,301.5 3,307.6  
Diluted Earnings per share (Rs)*         2.29  
P/E ratio (x)*         37.6  
*On a trailing 12 months basis

What has driven performance in 3QFY12?
  • Idea reported a 27.2% YoY growth in its revenues during 3QFY12. The growth was led by the 27.2% YoY growth in total subscriber base as well as the 21.9% YoY increase in the minutes of usage (on an aggregate basis). This offset the 5.4% YoY decline in ARPU during the same period.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) stood at about Rs 159 per month. The same figure stood at Rs 168 during 2QFY11 and at Rs 155 during 2QFY12. During 3QFY12, the average revenue per minute (ARPM) stood at 43.3 paisa, which was slightly higher than the 42.7 paisa seen during the previous quarter (2QFY12). It was 41.8 paisa during 3QFY11. The positive movement was due to higher proportion of VAS (value added services), higher roaming revenue as well as higher promotional tariffs offered in some circles. The minutes of usage (MoU) on a per subscriber basis stood at 369 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 364 and 401 respectively.

    Key indicators
      3QFY11 3QFY12 Change
    Revenue (Rs m) 39,556 50,308 27.2%
    Subscribes (m) 81,779 106,380 30.1%
    ARPU (Rs) 168 159 -5.4%
    Minutes billed (m) 93,503 113,964 21.9%
    Revenue per minute (Rs) 0.42 0.43 3.6%
    EBITDA (Rs) 9,483 13,446 41.8%
    EBITDA margin 24.0% 26.7%  
    EBITDA per minute (Rs) 0.10 0.12 16.3%

  • Idea's operating margins stood at 26.7% during 3QFY12, as compared to 24% in 3QFY11. This 2.8% YoY improvement in margins was mainly due to lower operating expenses (as percentage of sales). There were savings in nearly all the heads of expenses.

  • Interest costs have more than doubled during the quarter. Interest costs were higher as the company can no longer capitalize the interest costs related to 3G as these operations have been launched now. In addition to this, depreciation & amortization charges were higher as well. This was due to the additional amortization related to the 3G operations.

  • Profits declined by 17.3% YoY during quarter. This was mainly on account of higher tax expenses during the quarter. Tax rates were higher during the quarter due to the absence of the MAT (Minimum Alternate Tax) credit that the company received during the same period last year.

What to expect?
At the current price of Rs 86.15, the stock is trading at a multiple of 33.8 times our estimated FY14 earnings.

The company had revised its pricing upwards in some of the circles. This has resulted in an upward movement in its average realized rate per minute (ARPM). ARPM was also helped by the higher percentage of VAS in total revenues as well as higher roaming revenues during the quarter. However, the voice realized rates have remained flat.

The management reiterated that due to the under-penetration (mobile usage as a percentage of GDP) of mobile services in India, the market still offers a huge scope for growth. Growth is expected to be led by growth on the data side. While the company has increased its promotional base tariffs, it is still skeptical that it would be possible to have another round of rate hike. This is on account of the hyper competition and overcapacity that still exists in the telecom market. However, the management feels that the competition would now be based on the quality of services as well as on marketing by each of the operators rather than being on the basis of price.

With regards to the ongoing litigations with regards to the orders of DOT (Department of Telecommunication) for cancellation of Spice licenses as well as on the discontinuation of 3G roaming agreements, the management stated that these matters are subjudice.

At the current valuations we believe that most of the near term upsides are priced into the stock. We maintain our 'Sell' view on the company.

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