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Idea Cell.: Better realizations drive gains
Oct 24, 2013

Idea Cellular declared the results for the second quarter of the financial year 2013-2014 (2QFY14). The company has reported a 19% YoY increase in total revenues and a whopping 86.5% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 19% YoY during 2QFY14. Growth was led by an increase in total subscriber base as well as a 10.2% YoY growth in total minutes billed during the quarter.
  • Mobile subscriber base grew by 10% YoY during the quarter. Total count of subscribers stood at around 127.2 m at the end of September 2013.
  • Operating margins improved to 31.2% from 26.8% seen during the same period last year.
  • Net profit increased by a whopping 86.5% YoY during the quarter. This was due to the higher operating margins as well as lower interest costs during the quarter. Net profit margins improved to 7.1% as compared to 4.5% during 2QFY13.

Consolidated financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 53,140 63,233 19.0% 108,177 128,620 18.9%
Expenditure 38,915 43,518 11.8% 79,596 88,142 10.7%
Operating profit (EBITDA) 14,225 19,715 38.6%   28,581 40,479 41.6%
Operating profit margin (%) 26.8% 31.2%   26.4% 31.5%  
Other income - -   -   -  
Interest expense/(income)  2,164  1,949 -9.9% 4,834 4,160 -13.9%
Depreciation  8,526 10,795 26.6%   16,850 22,148 31.4%
Exceptional items - -   -   -  
Profit before tax  3,536  6,971 97.1% 6,897 14,171 105.5%
Tax  1,136  2,495 119.7%  2,155 5,068 135.2%
Net profit 2,400 4,476 86.5% 4,742 9,103 92.0%
Net profit margin (%) 4.5% 7.1%   4.4% 7.1%  
No. of shares         3,310.8   3,317.0  
Diluted Earnings per share (Rs)*          4.36  
P/E ratio (x)*         40.2  
* On a trailing 12 months basis

What has driven performance in 2QFY14?
  • Idea reported a 19% YoY growth in its revenues during 2QFY14. The growth was led by the 10.2% YoY growth in total subscriber base as well as the 10.5% YoY increase in the minutes of usage (on an aggregate basis). The improvement in the realized rate per minute (RPM) that the company saw in the previous quarter (1QFY14) continued in this quarter as well. RPM increased by 8.2% YoY in 2QFY14.

  • Coming to the key parameters relating to the company’s mobile service business, the average revenue per user (ARPU) to Rs 164 per month from Rs 148 seen during the same period last year. However on a sequential basis the ARPU figure was lower than the Rs 174 seen in 1QFY14. During 2QFY14, the average rate per minute (ARPM) stood at 44.7 paisa, which was higher than the 41.3 paisa seen during the same period last year (2QFY14). It was also marginally higher as compared to the 43.7 paisa during the previous quarter (1QFY14). The minutes of usage (MoU) on a per subscriber basis stood at 368 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 398 and 359 respectively. The management has stated that 2Q is essentially a seasonally weaker quarter. Therefore sequential declines in both MOU as well as the ARPU are not worrisome indicators.

    Key indicators
      2QFY13 2QFY14 Change
     
    Revenue (Rs m) 53,140 63,233 19.0%
    Subscribers (m) 115,465 127,228 10.2%
    ARPU (Rs) 148 164 10.8%
    Minutes billed (m) 125,646 138,827 10.5%
    Revenue per minute (Rs) 0.41 0.45 8.2%
    EBITDA (Rs) 14,225 19,715 38.6%
    EBITDA margin 26.8% 31.2%  
    EBITDA per minute (Rs) 0.11 0.14 25.4%

  • Idea's operating margins stood at 31.2% during 2QFY14, as compared to 26.8% in 2QFY13. This improvement in margins was driven by a saving in all of the cost heads barring license & WPC charges and employee related expenses which saw marginal increases during the quarter (all as percentage of sales).

  • Net profits grew by 86.5% YoY during quarter due to a better performance at the operating level as well as lower interest costs during the quarter. Consequently, net margins stood at 7.1% in 2QFY14 as compared to 4.5% seen in 2QFY13. The company's debt to equity ratio declined to 0.9 times from the 1.0 times seen at the end of FY13.
  • For the six months ended September 2013 (1HFY14), Idea reported an 18.9% YoY growth in revenues and a 92% YoY increase in net profits.

What to expect?
At the current price of Rs 175, the stock is trading at a multiple of 40.2 times its trailing 12 month earnings.

The company saw an improvement in realized rates during the quarter. This was a result of activities that it had undertaken from December 2012 onwards where the company had started clamping down on promotional schemes like free and discounted minutes. This clampdown continued in the current quarter and resulted in an increase in the realizations. As of now there has been no negative impact on the usage side due to the increase in realizations. The sequential decline in MOU seen was more seasonal in nature. However, the management has stated that the incremental MOUs have come down as the net subscriber addition has slowed down. But this is a trend for the overall sector and is not exclusive for Idea. There was also some loss in MOU due to lower discounted minutes being offered to existing subscriber as well as lower free minutes being offered to new subscribers. However these two measures are what have contributed to better realizations. Therefore the company plans to continue with them.

In terms of price competition, the management has stated that it has become more regional in nature as some regional operators still tend to continue their aggressive pricing techniques in some regional pockets. However this too is expected to cool down. In our opinion the bigger problem that the company faces now is the aggressive competition being seen on the data tariff side. The management has said that they expect this to cool off because all operators understand that data is what will be the biggest growth driver. However if this does not happen, then we could see another tariff war, this time on the data side.

Going forward, Idea is confident that the major growth would come on the data side. Even on the voice front, they do expect growth albeit not at the stellar levels seen in the past. This would be driven by increase in active subscribers as well as by increasing penetration on the rural side.

The company has passed an enabling resolution for a QIP (Qualified Institutional Placement) of Rs 30 bn. This is just an enabling resolution which would allow the company to raise funds whenever needed. The management has stated that the exact quantum as well as the timing of the QIP would depend on an assessment of the fund requirement by the company. This in turn would depend on a large number of factors that include license fee, spectrum auctions, etc.

Idea's stock has seen a remarkable run up in its stock price in recent times. We had reevaluated the stock after it had crossed our target price of Rs 117 per share. At the current price, we believe that offers very little upside due to expensive valuations. Therefore, we maintain our 'Sell' view on the company.

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