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Idea Cellular: A strong performance

Jan 28, 2014

Idea Cellular declared the results for the third quarter of the financial year 2013-2014 (3QFY14). The company has reported an 18.5% YoY increase in total revenues and a whopping 104.6% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 18.5% YoY during 3QFY14. Growth was led by an increase in total subscriber base as well as a 9.4% YoY growth in total minutes billed during the quarter.
  • Mobile subscriber base grew by 1.2% QoQ during the quarter. Total count of subscribers stood at around 128.7 m at the end of December 2013.
  • Operating margins improved to 31.1% from 26.4% seen during the same period last year.
  • Net profit increased by a whopping 104.6% YoY during the quarter. This was due to the higher operating margins as well as lower interest costs during the quarter. Net profit margins improved to 7.1% as compared to 4.1% during 3QFY13.

Consolidated financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 55,786 66,131 18.5% 163,963 194,751 18.8%
Expenditure 41,052 45,574 11.0% 120,648 133,716 10.8%
Operating profit (EBITDA) 14,734 20,557 39.5% 43,315 61,035 40.9%
Operating profit margin (%) 26.4% 31.1%   26.4% 31.3%  
Other income - -   - -  
Interest expense/(income) 2,416 1,575 -34.8% 7,250 5,735 -20.9%
Depreciation 8,836 11,666 32.0% 25,686 33,814 31.6%
Exceptional items - -   - -  
Profit before tax 3,482 7,316 110.1% 10,379 21,487 107.0%
Tax 1,196 2,639 120.6% 3,351 7,706 130.0%
Net profit 2,286 4,677 104.6% 7,028 13,781 96.1%
Net profit margin (%) 4.1% 7.1%   4.3% 7.1%  
No. of shares         3318.2  
Diluted Earnings per share (Rs)*         5.1  
P/E ratio (x)*         27.5  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • Idea reported an 18.5% YoY growth in its revenues during 3QFY14. The growth was led by the 11.5% YoY growth in total subscriber base as well as the 9.4% YoY increase in the minutes of usage (on an aggregate basis). The improvement in the realized rate per minute (RPM) that the company saw in the previous quarter (2QFY14) continued in this quarter as well. RPM increased by 9.2% YoY in 3QFY14.

  • Coming to the key parameters relating to the company’s mobile service business, the average revenue per user (ARPU) increased to Rs 169 per month from Rs 158 seen during the same period last year. On a sequential basis too, the ARPU figure was higher than the Rs 164 seen in 2QFY14. During 3QFY14, the average rate per minute (ARPM) stood at 44.9 paisa, which was higher than the 41.1 paisa seen during the same period last year (3QFY13). It was also marginally higher as compared to the 44.7 paisa during the previous quarter (2QFY14). The minutes of usage (MoU) on a per subscriber basis stood at 376 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 368 and 384 respectively. It is heartening to note that the MoU has increased sequentially despite the rise in ARPM.

    Key indicators
      3QFY13 3QFY14 Change
    Revenue (Rs m) 55,786 66,131 18.5%
    Subscribers (m) 115.5 128.7 11.5%
    ARPU (Rs) 158 169 7.0%
    Minutes billed (m) 132,181 144,571 9.4%
    Revenue per minute (Rs) 0.41 0.45 9.2%
    EBITDA (Rs) 14,734 20,557 39.5%
    EBITDA margin 26.4% 31.1%  
    EBITDA per minute (Rs) 0.11 0.14 27.6%

  • Idea's operating margins stood at 31.2% during 3QFY14, as compared to 26.4% in 3QFY13. This improvement in margins was driven by a saving in all of the cost heads as a percentage of sales.

  • Net profits grew by 104.6% YoY during quarter due to a better performance at the operating level as well as lower interest costs during the quarter. Consequently, net margins stood at 7.1% in 3QFY14 as compared to 4.1% seen in 3QFY13.
What to expect?
At the current price of Rs 140, the stock is trading at a multiple of 27.5 times its trailing 12 month earnings.

The realized rate for the company continued to improve. The company has more or less completed the process of cutting down various promotional plans and offers as well as free and discounted minutes. This clampdown has, over the last few quarters, led to an improvement in rates. The company has significant operating leverage i.e. a small increase in the ARPM can lead to a big jump in margins. This was however not seen during this quarter as the company spent heavily on advertising and brand building programs.

The management re-iterated their long term focus about the telecom business in India. They stated their opinion that, just like the rest of the world, India would first see a big jump in 3G usage before the advent of 4G technologies. The company has invested heavily in its network up-gradation activities to prepare itself for the same.

The management has stated that the aggressive price competition in voice services is well and truly behind the industry. However they cautioned that a similar price war in data services could not be ruled out completely. They stated that data usage was growing at an exponential rate of over 20% QoQ and that most of the future growth for the sector would come from data services.

The management had no update about their plans for raising funds via a Qualified Institutional Placement (QIP). The company had passed an enabling resolution to raise Rs 30 bn via a QIP in the last quarter. They stated that the resolution was valid for a year and that they would take a call at an appropriate time.

The fundamentals of the company have been improving steadily over the last few quarters. However at these levels the stock price discounts most of the potential upside as per the fundamentals. Therefore, we maintain our 'Sell' view on the company.

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