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Idea Cellular: Yet another good quarter - Views on News from Equitymaster
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Idea Cellular: Yet another good quarter
Nov 5, 2014

Idea Cellular has declared the results for the second quarter of the financial year 2014-2015 (2QFY15). The company has reported a 19.7% YoY increase in total revenues and a 68.9% YoY growth in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 19.7% YoY during 2QFY15. Growth was led by a 13.6% YoY increase in total subscriber base as well as a 17% YoY growth in total minutes billed during the quarter.
  • Mobile subscriber base grew by 4% QoQ during the quarter. Total count of subscribers stood at around 144.5 m at the end of September 2014.
  • Operating margins improved to 32.9% in 2QFY15 from 31% seen during the same period last year.
  • Net profit increased by 68.9% YoY during the quarter. This was due to the higher operating margins as well as slower growth in interest costs and depreciation (compared to the sales growth) during the quarter. Net profit margins improved to 10% as compared to 7.1% during 2QFY14.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 63,233 75,699 19.7% 128,620 151,309 17.6%
Expenditure 43,652 50,792 16.4% 88,506 101,364 14.5%
Operating profit (EBITDA) 19,581 24,907 27.2% 40,115 49,945 24.5%
Operating profit margin (%) 31.0% 32.9%   31.2% 33.0%  
Other income  627 1,166 86.0% 1,074 1,507 40.3%
Interest expense/(income) 2,441 2,610 6.9% 4,869 5,226 7.3%
Depreciation 10,795 11,788 9.2% 22,148 23,333 5.3%
Profit before tax 6,971 11,674 67.5% 14,171 22,893 61.6%
Tax 2,495 4,116 64.9% 5,068 8,052 58.9%
Net profit 4,476 7,559 68.9% 9,103 14,841 63.0%
Net profit margin (%) 7.1% 10.0%   7.1% 9.8%  
No. of shares         3,597  
Diluted Earnings per share (Rs)*         7.1  
P/E ratio (x)*         23.0  
* On a trailing 12 months basis

What has driven performance in 2QFY15?
  • Idea reported a 19.7% YoY growth in its revenues during 2QFY15. The growth was led by the 13.6% YoY growth in total subscriber base as well as the 17% YoY increase in the minutes of usage (on an aggregate basis). The improvement in the realized rate per minute (RPM) that the company has been witnessing for the past several quarters continued in 2QFY15 as well. The RPM increased by 2.7% YoY in 2QFY15.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) increased to Rs 176 per month from Rs 164 seen during the same period last year. On a sequential basis however, due to seasonality of the telecom business, the ARPU figure was lower than the Rs 181 seen in 1QFY15. During 2QFY15, the average rate per minute (ARPM) stood at 45.9 paisa, which was higher than the 44.7 paisa seen during the same period last year (2QFY15). The ARPM figure was also higher than the Rs 45.1 seen in 1QFY15. The minutes of usage (MoU) on a per subscriber basis stood at 384 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 401 and 368 respectively. The MoU has decreased sequentially due to the fact that the July-September quarter is a seasonally weak quarter for telcos.

    Key indicators
      2QFY14 2QFY15 Change
    Revenue (Rs m) 63,233 75,699 19.7%
    Subscribers (m) 127.2 144.5 13.6%
    ARPU (Rs) 164 176 7.3%
    Minutes billed (m) 138,827 162,454 17.0%
    Revenue per minute (Rs) 0.46 0.47 2.3%
    EBITDA (Rs) 19,581 24,907 27.2%
    EBITDA margin 31.0% 32.9%  
    EBITDA per minute (Rs) 0.14 0.15 8.7%

  • Idea's operating margins stood at 32.9% during 2QFY15, as compared to 31% in 2QFY14. This improvement in margins was largely driven by savings in network expenses as a percentage of sales.

  • Net profits grew by 68.9% YoY during quarter due to a good performance at the operating level as well as slower growth in interest costs and depreciation (compared to sales growth) during the quarter. Consequently, net margins stood at 10% in 2QFY15 as compared to 7.1% seen in 2QFY14.
What to expect?
At the current price of Rs 162.25, the stock is trading at a multiple of 23 times its trailing 12 month earnings.

Defying the traditional seasonal weakness of the July-September quarter; Idea delivered strong numbers in 2QFY15. Across several parameters, the company has delivered a very good performance. While ARPU and MoU (per subscriber) have declined sequentially due the seasonality; the company has done well to maintain the increase in RPM and increase the total minutes of use for voice services at the same time.

The growth has quite clearly come from data services. Total data volumes grew by 21.26% QoQ and by nearly 126% YoY. The data ARPU also continues to rise. On a per subscriber basis, the data usage has risen by 9.3% QoQ and 151.1% YoY. It is heartening to note that over the last three quarters, the company has seen stability in realised data rates (on a per MB basis). Idea has plenty of room to grow on this front as only 21.5% of its total customer base is currently using data services. Also 3G customers are just 9.3% of the company’s total customer base. Data revenues contributed 14% of the total revenues in 2QFY15. The same for 1QFY15 was 11.5%.

The sustained good growth has improved the company’s revenue market share to 17.1% in the quarter. The company is certainly on a sound footing with total debt/EBITDA of 1.32 and a net debt of 118.3 bn; both numbers being the lowest in the industry.

The management re-iterated its full year capex guidance of Rs 35 bn. However, this excludes the payout for spectrum won at auctions. The management stated that the consultations for the next round of spectrum auctions were over and now it was up to the government to decide on the course of action.

The fundamentals of Idea Cellular remain strong. However, keeping in mind the valuations as well as the near term uncertainty regarding the spectrum policy, we believe that investors should not buy the stock at these levels.

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