Idea Cellular: Buy :: Business Line

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The company is ringing in revenues. Its active user base ratio is the highest in the industry

As the third-largest telecom operator in the country by revenue as well as subscriber market share, Idea Cellular appears well placed among the top players.

The recent correction linked to the broader market provides the right opportunity to buy the stock. Investors with a two-year perspective can buy Idea Cellular shares, given its strengthening business prospects.

Improvement across key parameters (such as average revenue per minute and user), addition of lucrative data subscribers and focus on maintaining a quality user base are key positives.

At ₹149, the share trades at 16 times its likely per share earnings for 2014-15, much lower than peer Bharti Airtel (35 times), despite the latter’s slower growth in financials.

This multiple is also lower than the 19-20 times that the Idea Cellular stock commands. The Telecom Department had opposed the company’s pact with Bharti Airtel and Vodafone to provide 3G services in areas where it has no spectrum. But this has now been allowed by the telecom tribunal. Though the pact has been challenged in the Supreme Court, operators continue to offer the services.

This pact will help Idea Cellular cater to a pan-India audience. It has also bid selectively in the recent spectrum auction, in the less expensive 1,800 MHz band.

Improving parameters

In the first half of 2014-15, the company’s revenue grew 17.6 per cent over the same period previous fiscal to ₹15,130 crore, while net profit rose 63 per cent to ₹1,484 crore.

The sharp increase in net profit was due to a tight leash on network operational costs and lower interest expenses. The company reduced its net debt by more than ₹7,350 crore in the first half of this financial year and is more comfortably placed on parameters of interest cover and overall leverage compared to peers.

Idea Cellular significantly cut freebies and discounts in tariffs over the past 12-18 months. So, its average revenue per minute (ARPM) improved from 41.2-paise levels about six quarters ago to 45.9 paise now. The average revenue per user (ARPU) increased by ₹12 over the last one year to ₹174 now.

Optimising its user base led to improvement in key parameters. Idea Cellular now has a very active set of subscribers; its active user base is the highest in the industry.

The number of 3G subscribers who opt for both voice and data services has more than doubled over the last year to 13.3 million currently. This data-intensive category now accounts for 9.2 per cent of Idea’s total subscriber base. Data as a percentage of revenues increased from 8.7 per cent of total revenues to 14 per cent currently. This trend is likely to further improve ARPUs and realisations.

Leading in key areas

In as many as eight States, Idea Cellular ranks first or second in terms of revenue market share. These areas contribute 70 per cent of its revenues. The fact that it has both 2G and 3G spectrum in these regions places the company at a strategic advantage.

The company is also making headway in other service areas. Nationally, with only the top three operators reporting reasonable profitability (RCom, although profitable, still has heavy debt woes), Idea remains a strong bet to play the domestic economic revival theme and the expected sharp increase in data usage.

The spectrum auction slated for early 2015, with stiff base prices, could lead to significant outflows. But, going by the earlier experience, most mobile service providers are likely to bid strategically for continuity of operations, rather than splurge as they did in the 3G auction of 2010.

Several new operators have gone out of business or offer only restricted operations. Also, majority of the players are still making losses. This strengthens the belief that operators may not bid recklessly in future auctions.