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Idea Cell.: Tax dampener

Jul 29, 2011

Idea Cellular declared the results for first quarter results for the financial year 2011-2012 (1QFY12). The company has reported a 23.7% YoY increase in total revenues and a 12% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 23.7% YoY during 1QFY12. The growth was led by a growth in the subscriber base, which offset the impact of lower average revenue per user (ARPU) during the quarter.
  • Mobile subscriber base grew by 38.1% YoY during the quarter. Total count of subscribers stood at around 95.1 m at the end of June 2011.
  • Operating margins improved by 2.3% YoY during the year owing to lower network operating expenses which offset the marginal increase in access charges and selling & marketing costs (as percentage of sales).
  • Net profit declined by 12% YoY during the quarter. This was on account of huge jump in tax outgo as well as higher interest costs during the quarter.

Consolidated financial performance snapshot
(Rs m) 1QFY11 1QFY12 Change
Sales 36,537 45,207 23.7%
Expenditure 27,653 33,167 19.9%
Operating profit (EBDIT) 8,884 12,040 35.5%
Operating profit margin (%) 24.3% 26.6% 2.3%
Other income - -  
Interest expense/(income) 1,142 2,463 115.8%
Depreciation 5,656 7,026 24.2%
Exceptional items - -  
Profit before tax 2,087 2,550 22.2%
Tax 73 778 973.0%
Net profit 2,014 1,773 -12.0%
Net profit margin (%) 5.5% 3.9%  
No. of shares 3,300.2 3,303.8  
Diluted Earnings per share (Rs)*   2.65  
P/E ratio (x)*   35.7  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • Idea reported a 23.7% YoY growth in its revenues during 1QFY12. The growth was led by a 32% YoY increase in the minutes of usage (on an aggregate basis). This offset the 12.1% YoY decline 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 182 during 1QFY11 and at Rs 161 during 4QFY11. During 4QFY11, the average revenue per minute (ARPM) stood at 41 paisa, which was slightly higher than the 40.6 paisa seen during the previous quarter (4QFY11). It was 43.8 paisa during 1QFY11. The minutes of usage (MoU) on a per subscriber basis declined to 391 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 397 and 415 respectively.
  • Key indicators
      1QFY11 1QFY12 Change
    Revenue (Rs m) 36,537 45,207 23.7%
    Subscribes (m) 68,887 95,109 38.1%
    ARPU (Rs) 182 160 -12.1%
    Minutes billed (m) 82,274 108,630 32.0%
    Revenue per minute (Rs) 0.44 0.41 -6.4%
    EBITDA (Rs) 8,884 12,040 35.5%
    EBITDA margin 24.3% 26.6% -
    EBITDA per minute (Rs) 0.11 0.11 2.6%

  • Idea's operating margins stood at 26.6% during 1QFY12, as compared to 24.3% in 1QFY11. This 2.3% YoY improvement in margins was mainly due to lower network operating expenses (as percentage of sales). This offset the increase license charges and access charges as well as the increase in the selling & marketing costs (as percentage of sales).

  • Interest costs have more than doubled 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 12% 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.

What to expect?
At the current price of Rs 94, the stock is trading at a multiple of 33.7 times our estimated FY14 earnings.

The company has decided to revise its pricing upwards. The management has stated that this is necessary to help take care of the cost per minute. There are very few operating levers that can be used by the operators now to reduce costs further. Therefore, for sustainability, it is inevitable that operators raise rates. However, the management plans to be cautious in terms of increasing tariffs. They would closely monitor subscriber additions as well as the impact on minutes of usage. They are also cautious of any moves made by the new operators in particular.

Going forward, 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), Idea has emerged the top operator in terms of net subscriber additions. The company also continues to have the highest percentage of active users (as reported by TRAI, the telecom regulator).

With regards to the ongoing litigations with regards to the orders of DOT (Department of Telecommunication) for cancellation of Spice licenses, the management stated that these matters are subjudice.

At the current valuations we believe that most of the near term upsides are priced into the stock. We maintain our ‘Sell' view on the company.

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