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Idea Cellular: Results receive a minutes boost

Jan 25, 2011

Idea Cellular has announced its 3QFY11 results. The company has reported a 26% YoY growth in sales and a 43% YoY growth in profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 26% YoY during 3QFY11. The growth was led by a 42% YoY growth in the subscriber base, which offset the impact of lower average revenue per user (ARPU) during the quarter.
  • Mobile subscriber base grew by 42% YoY during the quarter. Total count of subscribers stood at around 82 m at the end of December 2010.
  • Operating margins declined by 1.6% YoY during the quarter owing to higher access charges, license costs and selling and administration costs (as percentage of sales).
  • Net profit increased by 43% YoY during the quarter. This was mainly due to lower tax expenses during the quarter.

Consolidated financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9MFY10 9MFY11 Change
Sales 31,358 39,526 26.0% 90,789 112,397 23.8%
Expenditure 23,353 30,074 28.8% 66,157 85,530 29.3%
Operating profit (EBDIT) 8,005 9,452 18.1% 24,632 26,867 9.1%
Operating profit margin (%) 25.5% 23.9% -1.6% 27.1% 23.9%  
Other income 137 30 -77.9% 521 288 -44.7%
Interest expense/(income) 938 941 0.3% 2,864 3,111  
Depreciation 5,131 5,925 15.5% 14,482 17,401 20.2%
Exceptional items - -   - -  
Profit before tax 2,073 2,616 26.2% 7,806 6,643 -14.9%
Tax 372 186 -50.1% 933 401 -57.0%
Net profit 1,701 2,431 42.9% 6,873 6,242 -9.2%
Net profit margin (%) 5.4% 6.1%   7.6% 5.6%  
No. of shares       3,100.4 3,301.5  
Diluted Earnings per share (Rs)*         2.70  
P/E ratio (x)*         26.7  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 3QFY11?
  • Idea reported a 26% YoY growth in its revenues. The growth was led by a 42% YoY increase in the company’s subscriber base. This offset the 10% YoY decline in ARPU during the same period. On a sequential basis, Idea’s revenues grew by 9% QoQ aided by a 9% QoQ growth in subscriber base and a 0.6% QoQ growth in ARPU.

  • Coming to the key parameters relating to the company’s mobile service business, the average revenue per user (ARPU) stood at about Rs 168 per month. The same figure stood at Rs 188 during 3QFY10 and at Rs 167 during 2QFY11. During 3QFY11, the average revenue per minute (ARPM) stood at 42 paisa, which was flat on a QoQ basis. It was 49 paisa during 3QFY10. The minutes of usage (MoU) ended their downward trend and ended at 401 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 395 and 385 respectively.

    The upward trend in the ARPU is encouraging as it indicates that the competitive pressure on pricing has started to ease to some extent. The increase in MOU is another encouraging sign for the company.

    Key indicators
      3QFY10 3QFY11 Change
    Revenue (Rs m) 31,358 39,526 26.0%
    Subscribes (m) 57,612 81,779 41.9%
    ARPU (Rs) 188 168 -10.8%
    Minutes billed (m) 64,158 93,503 45.7%
    Revenue per minute (Rs) 0.49 0.42 -13.5%
    EBITDA (Rs) 8,005 9,452 18.1%
    EBITDA margin 25.5% 23.9%  
    EBITDA per minute (Rs) 0.12 0.10 -19.0%

  • Idea’s operating margins stood at 23.9% during 3QFY11, as compared to 25.5% in 3QFY10. This 1.6% YoY decline in margins was mainly due to higher access charges, higher license costs as well as higher selling and administration related expenses (as percentage of sales). The increase in selling costs is mainly on account of higher subscriber acquisition costs related to the larger subscriber base of the company. Marketing expenses were high in line with the company’s branding exercise. It is important to note that the administrative costs included a Rs 75 m one off charge.

  • Profits increased by a whopping 42.9% YoY during quarter. This was mainly on account of lower tax expenses during the quarter which offset the decline in other income, higher depreciation charges as well as lower operating margins. Effective tax rate for the quarter was 7.1% as against the 17.9% rate during the same period last year.

What to expect?
At the current price of Rs 72, the stock is trading at a multiple of 26.7 times our estimated FY13 earnings (Research Pro subscribers please click here). The management has stated that the rate of decline in rates is a healthy sign that competition on the price front maybe cooling off. However, they did reiterate the fact that it would be too early to be sure of this. The company also sees 3G as a major opportunity. The management expects 3G to be a major growth driver as it would lead to an increase in data related revenues as well as decongestion of the 2G networks.

With regards to mobile number portability (MNP), the management states that they while do not expect MNP to be major game changer for the industry; however, they still believe that in the long term better companies like Idea would stand to gain from it. With regards to their post-paid subscriber base, they stated that while rates have come down on the post-paid side as well, however, they do not expect them to decline to the levels of the prepaid rates. At least not in the near future.

At the current prices, we have a cautious view on the company due to its high valuations and limited margin of safety.

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