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Idea Cell.: Regulatory concerns loom large

Apr 30, 2012

Idea Cellular declared the results for fourth quarter and full year results for the financial year 2011-2012 (4QFY12 and FY12). The company has reported a 26% YoY increase in total revenues but a 25.8% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone sales grew by 26% YoY during 4QFY12. The growth was led by a growth in the subscriber base as well as by higher minutes on the network during the quarter. For full year (FY12), net sales grew by 25.6% YoY.
  • Mobile subscriber base grew by 25.9% YoY during the quarter. Total count of subscribers stood at around 112.7 m at the end of March 2012.
  • Operating margins improved marginally to 21.8% from 21.4% seen during the same period last year. This was on account of savings in network operating expenses as well as selling and marketing expenses (as percentage of sales). For FY12, operating margins improved by 2% YoY to 22.3%.
  • Net profit declined by 25.8% YoY during the quarter. This was on account of huge jump in tax outgo as well as higher interest costs during the quarter. For FY12, net profits declined by 31.7% YoY.

Standalone financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 42,014 52,946 26.0% 153,890 193,223 25.6%
Expenditure 33,031 41,392 25.3% 122,609 150,095 22.4%
Operating profit (EBITDA) 8,983 11,555 28.6% 31,281 43,128 37.9%
Operating profit margin (%) 21.4% 21.8%   20.3% 22.3%  
Other income - -   - -  
Interest expense/(income) 486 1,954 301.7% 2,487 9,078 265.0%
Depreciation 5,438 6,813 25.3% 19,730 25,628 29.9%
Exceptional items - -   - -  
Profit before tax 3,059 2,788 -8.9% 9,063 8,423 -7.1%
Tax 500 888 77.6% 617 2,657 330.5%
Net profit 2,559 1,900 -25.8% 8,446 5,765 -31.7%
Net profit margin (%) 6.1% 3.6%   5.5% 3.0%  
No. of shares       3,303.5 3,309.0  
Diluted Earnings per share (Rs)*         1.74  
P/E ratio (x)*         46.5  
(*On a trailing 12-month basis)

What has driven performance in 4QFY12?
  • Idea reported a 26% YoY growth in its revenues during 4QFY12. The growth was led by the 25.9% 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 marginal decline of 0.5% YoY 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 160 per month. The same figure stood at Rs 161 during 4QFY11 and at Rs 159 during 3QFY12. During 4QFY12, the average rate per minute (ARPM) stood at 42.2 paisa, which was higher than the 40.6 paisa seen during the same period last year (4QFY11). However, it was lower than the 43.3 paisa during the previous quarter (3QFY12). The minutes of usage (MoU) on a per subscriber basis stood at 379 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 369 and 397 respectively.

    Key indicators
      4QFY11 4QFY12 Change
    Revenue (Rs m) 42,014 52,946 26.0%
    Subscribers (m) 89,503 112,723 25.9%
    ARPU (Rs) 161 160 -0.6%
    Minutes billed (m) 101,960 124,305 21.9%
    Revenue per minute (Rs) 0.41 0.42 3.9%
    EBITDA (Rs) 8,983 11,555 28.6%
    EBITDA margin 21.4% 21.8%
    EBITDA per minute (Rs) 0.09 0.09 5.5%

  • Idea's operating margins stood at 21.8% during 4QFY12, as compared to 21.4% in 4QFY11. This marginal improvement in margins was mainly due to lower network operating expenses as well as lower selling and marketing expenses (as percentage of sales). This offset the increase in license and WPC charges as well as in roaming and access charges. License charges were higher due to an extra provisioning of Rs 1.5 bn which the company has made on account of regulatory changes. However, the company has clarified that this is just a provisioning and not indicative of any sustained increase in license charges. The matters related to 2G spectrum license fees are yet to be finalized by the government.

  • Interest costs have more than tripled 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 25.8% 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.

  • For FY12, total revenues increased by 25.6% YoY while net profits declined by 31.7% YoY.

  • Net debt to equity stood at 1.02 x at the end of March 2012.

What to expect?
At the current price of Rs 81.1, the stock is trading at a multiple of 50.1 times our estimated FY14 earnings and an EV/EBITDA of 9.3 times (FY14 EBITDA).

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 and increased penetration in tier II and tier III cities. They also expect positive growth on the rural front to drive future gains.

With regards to the ongoing litigations with regards to the orders of DOT (Department of Telecommunication) on Spice merger deal, cancellation of 2G licenses as well as on the discontinuation of 3G roaming agreements, the management stated that these matters are subjudice or the judgment is reserved.

The latest proposals by TRAI (Telecom Regulatory Authority of India) on the 2G license fee and auctions have come as a blow to the entire sector. Though these are just proposals and not the final thing, one thing is for sure that 2G licenses are set to become more expensive for the entire sector. In light of this we feel that at the current valuations the stock offers very little upside. Therefore, we maintain our 'Sell' view on the company.

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