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  • Jun 21, 2011 - Idea Cell.: Subscriber additions don't filter into profits

Idea Cell.: Subscriber additions don't filter into profits
Jun 21, 2011

Idea Cellular declared the results for fourth quarter and financial year 2010-11 (FY11). The company has reported a 25% YoY increase in total revenues and a 6% YoY decline in net profits during the year. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 24.6% YoY during FY11. The growth was led by a 40.2% YoY growth in the subscriber base, which offset the impact of lower average revenue per user (ARPU) during the year. Sales grew by 26.5% YoY during the fourth quarter (4QFY11).
  • Mobile subscriber base grew by 40% YoY during the year. Total count of subscribers stood at around 89.5 m at the end of March 2011.
  • Operating margins declined by 2.9% YoY during the year owing to higher access charges and license costs (as percentage of sales). Operating margins declined by 2.2% YoY during 4QFY11.
  • Net profit declined by 5.8% YoY during the quarter. This was on account of lower operating margins as well as higher depreciation charges during the year.


Consolidated financial performance snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 33,478 42,347 26.5% 124,471 155,032 24.6%
Expenditure 24,242 31,595 30.3% 90,399 117,126 29.6%
Operating profit (EBDIT) 9,236 10,752 16.4% 34,072 37,907 11.3%
Operating profit margin (%) 27.6% 25.4% -2.2% 27.4% 24.5% -2.9%
Other income 519 -   836 -  
Interest expense/(income) 1,141 854 -25.1% 4,005 3,965 -1.0%
Depreciation 5,667 6,572 16.0%   20,149 23,973 19.0%
Exceptional items - -   - -  
Profit before tax 2,947  3,326 12.8% 10,754 9,969 -7.3%
Tax 281 581 106.4%  1,214 982 -19.2%
Net profit 2,666 2,745 3.0% 9,539 8,987 -5.8%
Net profit margin (%) 8.0% 6.5%   7.7% 5.8%  
No. of shares       3,300.1 3,303.5  
Diluted Earnings per share (Rs)*         2.72  
P/E ratio (x)*         28.7  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 4QFY11 and FY11?
  • Idea reported a 27% YoY growth in its revenues during 4QFY11. The growth was led by a 40% YoY increase in the company's subscriber base. This offset the 13% YoY decline in ARPU during the same period. For FY11, revenues increased by 25% YoY. This was again led by the spectacular growth in the company's subscriber base which offset the decline in 13% YoY decline 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 161 per month. The same figure stood at Rs 185 during 4QFY10 and at Rs 168 during 3QFY11. During 4QFY11, the average revenue per minute (ARPM) stood at 40.6 paisa, which was lower than the 41.8 paisa seen during the previous quarter (3QFY11). It was 46.6 paisa during 4QFY10. The minutes of usage (MoU) declined to 397 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 401 and 398 respectively.

    Key indicators
      4QFY10 4QFY11 Change FY10 FY11 Change
                 
    Revenue (Rs m) 33,478 42,347 26.5% 124,471 155,032 24.6%
    Subscribes (m) 63,825 89,503 40.2% 63,825 89,503 40.2%
    ARPU (Rs) 185 161 -13.0% 194 169 -13.2%
    Minutes billed (m) 68,275 101,960 49.3% 225,184 362,565 61.0%
    Revenue per minute (Rs) 0.49 0.42 -15.3% 0.55 0.43 -22.6%
    EBITDA (Rs) 9,236 10,752 16.4% 34,072 37,907 11.3%
    EBITDA margin 27.6% 25.4% 27.4% 24.5%
    EBITDA per minute (Rs) 0.14 0.11 -22.0% 0.15 0.10 -30.9%

  • Idea's operating margins stood at 25.4% during 4QFY11, as compared to 27.6% in 4QFY10. This 2.2% YoY decline in margins was mainly due to higher access charges as well as higher license costs (as percentage of sales). For FY11, operating margins declined by 2.9% YoY on account of higher license charges and access charges (as percentage of sales).

  • Profits increased by 3% YoY during quarter. This was mainly on account of lower interest expenses during the quarter which offset the increase in depreciation charges as well as higher tax outflow. For FY11, net profits declined by 6% YoY on account of lower operating margins as well as higher depreciation charges. This offset the decline in tax outflow for the year.

What to expect?
At the current price of Rs 78, the stock is trading at a multiple of 27.9 times our estimated FY14 earnings.

The management has stated that the rate of decline in rates is a healthy sign that competition on the price front maybe cooling off. 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. The management has given a capex guidance of Rs 40 bn for the financial year 2011-2012. This is higher than the capex of Rs 32 bn invested during FY11. Part of the capex would be targeted towards increasing the company's 3G coverage.

With regards to mobile number portability (MNP), the management has stated that although there are not many subscribers who have opted for MNP, however, Idea has emerged in the top two operators in terms of net subscriber additions.

In recent times, the company has faced headwinds with regards to its spectrum license in Punjab and Karnataka circles. The regulatory authorities have demanded that the overlapping licenses should be cancelled and the company should pay a huge fine for the same. In addition to this it has also been penalized for not rolling out the services on time in some of the new circles. At the current valuations we believe that most of the near term upsides are priced into the stock. However, investors could consider buying into the stock once the valuations are more reasonable. We will shortly update our buy-sell targets for the company.

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