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Idea Cell.: Debt charges weigh down profits
Oct 24, 2011

Idea Cellular declared the results for second quarter results for the financial year 2011-2012 (2QFY12). The company has reported a 26.1% YoY increase in total revenues but a 55% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 26.1% YoY during 2QFY12. 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 26.1% YoY during the quarter. Total count of subscribers stood at around 106.2 m at the end of September 2011.
  • Operating margins improved by 2.1% YoY during the quarter 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 55.5% YoY during the quarter. This was on account of huge jump in tax outgo as well as higher interest costs during the quarter.


(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 36,289 45,772 26.1% 72,585 90,613 24.8%
Expenditure 29,174 35,848 22.9% 57,993 70,520 21.6%
Operating profit (EBITDA) 7,115 9,924 39.5% 14,592 20,093 37.7%
Operating profit margin (%) 19.6% 21.7%   20.1% 22.2%  
Other income - -   - -  
Interest expense/(income) 665 2,538 281.8% 1,429 4,600 221.8%
Depreciation 4,765 6,309 32.4% 9,415 12,269 30.3%
Exceptional items - -   - -  
Profit before tax 1,686 1,077 -36.1% 3,748 3,224 -14.0%
Tax 26 338 1203.1% 72 987 1278.4%
Net profit 1,660 739 -55.5% 3,676 2,237 -39.2%
Net profit margin (%) 4.6% 1.6%   5.1% 2.5%  
No. of shares       3,301.0 3,306.2  
Diluted Earnings per share (Rs)*         2.12  
P/E ratio (x)*         44.3  
* (Book value as on 30th September 2011)

What has driven performance in 2QFY12?
  • Idea reported a 26.1% YoY growth in its revenues during 2QFY12. The growth was led by the growth in total subscriber base as well as the 25.2% YoY increase in the minutes of usage (on an aggregate basis). This offset the 7.2% 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 155 per month. The same figure stood at Rs 167 during 2QFY11 and at Rs 160 during 1QFY12. During 2QFY12, the average revenue per minute (ARPM) stood at 42.7 paisa, which was slightly higher than the 41 paisa seen during the previous quarter (1QFY12). It was 42.3 paisa during 2QFY11. The positive movement was due to higher proportion of VAS (value added services), higher roaming revenue as well as higher promotional tariffs offered in some circles. The minutes of usage (MoU) on a per subscriber basis declined to 364 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 391 and 394 respectively. The seasonal decline was intensified by the higher proportion of rural subscribers.

    Key indicators
      2QFY11 2QFY12 Change
    Revenue (Rs m) 36,289 45,772 26.1%
    Subscribes (m) 74,214 100,180 35.0%
    ARPU (Rs) 167 155 -7.2%
    Minutes billed (m) 84,828 106,224 25.2%
    Revenue per minute (Rs) 0.42 0.43 0.9%
    EBITDA (Rs) 7,115 9,924 39.5%
    EBITDA margin 19.6% 21.7%
    EBITDA per minute (Rs) 0.08 0.09 11.4%

  • Idea's operating margins stood at 21.7% during 2QFY12, as compared to 19.6% in 2QFY11. This 2.13% 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 55.5% 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 36.8 times our estimated FY14 earnings.

The company had revised its pricing upwards in some of the circles. This has resulted in an upward movement in its average realized rate per minute (ARPM). ARPM was also helped by the higher percentage of VAS in total revenues as well as higher roaming revenues during the quarter. The MOUs on the other hand declined during the quarter. This was mainly on account of higher percentage of rural subscribers as well as the seasonal effect. The management expects this trend to reverse to some extent in the coming quarters.

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. The company has already signed its roaming agreements for most of the circles where it does not have 3G spectrum of its own. While this is good for the company as it will help in increasing ARPM further (though increased data usage), it has also led to higher access charges during the quarter which in turn has had a negative impact on the company’s margins.

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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