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Idea Cellular: Bridging the gap? - Views on News from Equitymaster
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Idea Cellular: Bridging the gap?
Jul 25, 2007

Performance summary
  • Consolidated topline grows by 64% YoY for 1QFY08, led by 89% YoY increase in GSM subscriber base.

  • Operating margins expand by 120 basis points, led by lower (as percentage of sales) employee and advertising expenses.

  • Consolidated net profits surge 259% YoY, led by operating margin expansion and lower interest expenses.

    Financial performance snapshot
      Standalone Consolidated
    (Rs m) 1QFY07 1QFY08 Change 1QFY07 1QFY08 Change
    Sales 5,973 9,086 52.1% 9,002 14,773 64.1%
    Expenditure 3,927 5,853 49.1% 5,982 9,645 61.2%
    Operating profit (EBDIT) 2,046 3,234 58.1% 3,020 5,128 69.8%
    Operating profit margin (%) 34.3% 35.6%   33.5% 34.7%  
    Other income 2 2 -9.5% 20 4 -82.8%
    Interest 663 151 -77.2% 721 143 -80.1%
    Depreciation 1,076 1,143 6.2% 1,456 1,887 29.6%
    Profit before tax 309 1,942 528.8% 863 3,101 259.2%
    Tax 8 9 4.9% 4 16 292.5%
    Profit after tax/(loss) 301 1,933 542.9% 859 3,085 259.0%
    Net profit margin (%) 5.0% 21.3%   9.5% 20.9%  
    No. of shares         2,592.8  
    Diluted Earnings per share (Rs)*         2.8  
    P/E ratio (x)*         47.2  
    * On a trailing 12-months basis

    What is the company’s business?
    Idea Cellular, a part of the Aditya Birla Group, is India’s fourth largest GSM mobile services provider and has licenses to operate in 13 telecom circles. With the planned expansion into Mumbai, Bihar and Jharkhand, Idea’s footprint will cover nearly 70% of India’s telephony potential. The company also has a license to provide national long distance services (8% of 1QFY08 revenues) and carries part of its own traffic under the license. It had 16.1 m subscribers at the end of June 2007, representing a share of 12% of the country’s GSM market.

    What has driven performance in 1QFY08?
    Subscriber additions propel topline: The 89% YoY growth in subscriber base was the leading factor for Idea’s strong 64% YoY topline growth during 1QFY08. Against the robust growth in the subscriber base, the company, in line with its peers, has recorded a consistent decline in its average revenue per user per month (ARPU), which has declined by 12% YoY, from Rs 362 in 1QFY07 to Rs 320 in 1QFY08. However, against this decline in ARPU, the minutes of usage (MOU) per month has increased by 11% YoY, thus almost covering up the decline in the former. As a matter of fact, Idea’s ARPU and MOU are nearly 20% lower than the market leader Bharti Airtel, indicating the differences in mobile business profitability for the two companies.

    Lower staff, advertising costs aid margins: Idea recorded a 120 basis points (1.2%) expansion in its consolidated operating margins in 1QFY08. This was on the back of lower staff and advertising costs. While the former declined from 6.2% of 1QFY07 sales to 4.8% in 1QFY08, the latter contracted from 17.1% to 15.5%. The expansion in operating margins would have been higher but for the increase in network costs and license fees.

    Margin expansion, lower interest aids bottomline: Idea’s consolidated net profits increased by a substantial 259% YoY, led by expansion in operating margins and lower interest expenses. The decline in interest expenses seems a result of lower debt, as the company repaid some of its short-term loans during the quarter by using a part of the IPO proceeds.

    As a matter of fact, Idea has utilised nearly 50% of the funds that it had raised through its recent IPO in February 2007 (see table below). The remaining funds are to be utilised largely towards expansion for NLD operations, rollout for services in the Mumbai circle and expansion into new circles.

    Use of IPO proceeds
    (Rs m) Planned financing
    through IPO proceeds
    Actual utilisation by
    end of June 2007
    Utilisation
    Network expansion in new circles 9,708 2,972 30.6%
    Capital expenditure for NLD operations 808 - 0.0%
    Roll out for services in Mumbai Circle 6,470 40 0.6%
    Redemption of preference shares 7,567 7,563 100.0%
    IPO expenses 825 620 75.2%
    General corporate purpose 2,810 2,810 100.0%
    Total funds raised 28,188 14,005 49.7%
    Source: Company report

    What to expect?
    At the current price of Rs 132, the stock is trading at a multiple of 47.2 times its trailing 12 months consolidated earnings. Idea’s first quarter performance has been in line with what is expected out of mobile services companies in India, considering that subscriber additions remain strong. Improvement in profitability comes in as a positive for the company, given that it is on an aggressive expansion spree. The Mumbai rollout will be a real test of the company’s growth capabilities, considering that this market is already saturated and highly competitive.

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