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Idea Cellular: Results along expected lines - Views on News from Equitymaster
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Idea Cellular: Results along expected lines
Aug 6, 2015

Idea Cellular has declared the results for the first quarter of FY16. The company has reported a 16.4% YoY increase in total revenues and a 27.8% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 16.4% YoY during 1QFY16. Growth was led by a 16.6% YoY increase in total subscriber base as well as an 18.5% YoY growth in total minutes billed during the quarter.
  • Mobile subscriber base grew by 2.7% QoQ during the quarter. Total count of VLR subscribers stood at around 165.8 m at the end of June 2015.
  • Operating margins improved to 36.7% in 1QFY16 from 33.1% seen during 1QFY15. The operating profit increased by 28.9% YoY.
  • Net profit increased by 27.8% YoY during the quarter. This was due to the good operating performance as well as an over three and a half times YoY jump in other income during the quarter. Net margins improved to 10.6% as compared to 9.6% during 1QFY15.

Consolidated financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 75,610 87,984 16.4%
Expenditure 50,572 55,700 10.1%
Operating profit (EBITDA) 25,038 32,284 28.9%
Operating profit margin (%) 33.1% 36.7%  
Other income 341 1,224 259.1%
Interest expense/(income) 2,616 4,016 53.5%
Depreciation 11,545 15,159 31.3%
Profit before tax 11,219 14,333 27.8%
Tax 3,937 5,025 27.6%
Net profit 7,282 9,308 27.8%
Net profit margin (%) 9.6% 10.6%  
No. of shares   3,598.7  
Diluted Earnings per share (Rs)*    9.4  
P/E ratio (x)*   17.6  
* On a trailing 12 months basis

What has driven performance in 1QFY16?
  • Idea reported a 16.4% YoY growth in its revenues during 1QFY16. The growth was led by the 17.7% YoY growth in VLR subscriber base as well as the 18.5% YoY increase in the minutes of usage (on an aggregate basis). The improvement in the realized rate per minute (ARPM) reversed in 1QFY16. The ARPM decreased by 0.7% YoY. The fall in ARPM is was due to a fall in voice ARPM by 11.3% YoY due to the recent change in interconnect charges as well as the impact of the higher service tax rate. The average revenue per MB or data ARMB fell by 6.5%YoY.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) increased to Rs 182 per month from Rs 181 seen during the same period last year. Sequential too it was up from Rs 179 seen in 4QFY15. During 1QFY16, the average rate per minute (ARPM) stood at 44.5 paisa, which was lower than the 45.1 paisa seen during 1QFY15 as well as 44.8 seen during 4QFY15. The minutes of usage (MoU) on a per subscriber basis stood at 408 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 400 and 401 respectively.

    Key indicators
      1QFY15 1QFY16 Change
    Revenue (Rs m) 75,610 87,984 16.4%
    Subscribers (m) 139.0 162.1 16.6%
    ARPU (Rs) 181 182 0.6%
    Minutes billed (m) 165,239 195,752 18.5%
    Revenue per minute (Rs) 0.46 0.45 -1.8%
    EBITDA (Rs) 25,038 32,284 28.9%
    EBITDA margin 33.1% 36.7%  
    EBITDA per minute (Rs) 0.15 0.16 8.8%

  • Idea's operating margins stood at 36.7% during 1QFY16, as compared to 33.1% in 1QFY15. This sharp improvement in margins was largely driven by savings in network expenses and access charges (both as a percentage of sales).

  • Net profits grew by 27.8% YoY during quarter due to a good performance at the operating level and the jump in the other income figure. Consequently, net margins stood at 10.6% in 1QFY16 as compared to 9.6% seen in 1QFY15.
What to expect?
At the current price of Rs 166, the stock is trading at a multiple of 17.6 times its trailing 12 month earnings.

Idea's 1QFY16 performance was along expected lines. Increasing data usage continues to drive topline growth. Network costs (as a percentage of sales) have been on a downward trend for the last two years and this has aided margin expansion which can be expected to continue for the remainder of FY16. However, there are early signs of a slowdown in the growth momentum even if one were to exclude the impact (Rs 3.17 bn in 1QFY16) of the lower interconnect rates.

However, the most significant event of the quarter was the management's decision to change the capex guidance for the year. It has been increased by Rs 10 bn to Rs 60-65 bn for FY16. This big change is a result of the management wanting to play catch up in the 4G space. The management admitted that they miscalculated the speed at which the 4G services have been adopted across the world. Thus, Idea's plan to roll out 4G services in 4 circles in a phased manner from 2016 may prove to be inadequate.

Considering the exponential growth in data consumption in India and the looming threat of RJio, we believe that the company could end up losing out on the first mover advantage in 4G services. However, it is important to note this will hurt the company only if there is a sizable shift in consumer preference from 3G to 4G. This is precisely what RJio intends to achieve by pricing 4G services aggressively. In such a scenario we believe Idea's capex requirements (due to tower upgradation and auction payouts) could rise significantly. The management seems to have come to the same conclusion. This change in business outlook may not impact fundamentals too much in the short term. However, this uncertainty does cloud the long term growth story of the company to an extent as higher capex would imply lower shareholder returns.

We are closely monitoring the rapidly evolving situation in the Indian telecom space as well as Idea's ability to deal with it. After updating our financial estimates for the company, we believe the stock is overvalued from a long term perspective. Thus, we maintain our view that investors should not buy the stock at these levels.

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