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Idea Cellular: Pains of expansion - Views on News from Equitymaster
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Idea Cellular: Pains of expansion
Oct 26, 2007

Performance summary
  • Consolidated topline grows by 55% YoY during 2QFY08, 59% YoY during 1HFY08. Growth led by robust addition to the subscriber base.
  • Operating margins contract by 2.4% - impacted by higher (as percentage of sales) networking operating expenditure.

  • Consolidated net profits doubles in 2QFY08, grows by 170% YoY in 1HFY08. Lower interest expenses help matters.

  • Proposal to de-merge passive infrastructure (towers) into a wholly owned subsidiary.

Consolidated financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 10,096 15,622 54.7% 19,098 30,395 59.2%
Expenditure 6,548 10,516 60.6% 12,529 20,155 60.9%
Operating profit (EBDIT) 3,548 5,106 43.9% 6,569 10,240 55.9%
Operating profit margin (%) 35.1% 32.7%   34.4% 33.7%  
Other income 33 21 -34.6% 53 24 -55.2%
Interest 773 641 -17.2% 1,495 789 -47.2%
Depreciation 1,700 2,007 18.1% 3,156 3,894 23.4%
Profit before tax 1,108 2,480 123.9% 1,971 5,581 183.2%
Tax 6 277 4441.0% 10 293 2798.0%
Profit after tax/(loss) 1,102 2,203 100.0% 1,961 5,289 169.7%
Net profit margin (%) 10.9% 14.1%   10.3% 17.4%  
No. of shares         2,635.1  
Diluted Earnings per share (Rs)*         3.2  
P/E ratio (x)*         43.6  
* 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 (4% of 2QFY08 revenues) and carries part of its own traffic under the license. It had 18.7 m subscribers at the end of September 2007, representing a share of 16% of the country’s mobile market.

What has driven performance in 2QFY08?
Subscriber additions save day: Idea recorded a 55% YoY growth in sales during 2QFY08. This was made possible by a strong 80% YoY growth in its GSM subscriber base. However, the growth would have been higher but for the fact that its average revenue per user per month (ARPU) declined by 14% YoY, from Rs 335 in 2QFY07 to Rs 288 in 2QFY08. What is, however, more surprising is that the company also recorded lesser minutes of usage (MOU) per month during 2QFY08. The management, in the conference call, indicated the following reasons for lower ARPU and MoU:
  • Large proportion of new subscribers is from the low income profile;

  • Incidence of non-usage of mobile services among existing subscribers;

  • Seasonality issues – people stay indoors during monsoons and thus there is a low usage of mobile services; and

  • July to September being lean months for roaming.

Higher network operating costs pare margins: Idea recorded a 2.4% contraction in operating margins during 2QFY08. This was largely a result of higher networking operating expenditure, which increased from 11.5% of sales in 2QFY07 to 15.2% of sales in 2QFY08. The management has indicated that since the company is currently on an aggressive expansion spree, and since the network costs are front ended (incurred before revenue starts flowing in), the margins have been impacted negatively.

Lower interest aids bottomline: Despite the contraction in operating margins, Idea managed to strongly ramp up its bottomline during 2QFY08. This was owing to a 17% YoY decline in interest costs. This 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.

What to expect?
At the current price of Rs 138, the stock is trading at a multiple of 43.6 times its trailing 12 months consolidated earnings. The sharp decline in MoU comes as a surprise, especially when Idea’s peers are witnessing a higher number with each passing quarter. We believe that the Mumbai rollout will be a real test of the company’s growth capabilities, considering that this market is already saturated and highly competitive. We shall soon initiate our research coverage on the company.

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