Idea Cellular: Pace of Vodafone merger, increase in rates to be watched

Idea Cellular surprised the Street by improving its operating profit and margins on a sequential basis for the March quarter. While Bharti Airtel reported a 16 per cent fall in operating profit on a sequential basis, Idea reported an 18 per cent jump due to a 11 per cent drop in operating expenditure.

Two-third of the saving came in the form of lower network and spectrum costs, down 24 per cent. Consequently, margin came in higher at 23.6 per cent, up 478 basis points over the December quarter. 

The operating metrics were boosted by one-offs such as reversal of an excess provision related to network operating expenditure of Rs 2 billion, a Rs 1.4 billion reversal in variable pay and adjustment in licence/spectrum fee. Even after adjusting for these one-offs, analysts believe operating profit was higher than estimates. 

The management believes there is scope for improvement. These could be in sales and general administration, online recharge, electronic Know Your Customer and lower churn rates after consolidation. On the network front, upgrading of the 2G and 3G sites to 4G technology should help contain network expansion costs.

While it operated efficiently in the quarter, Idea Cellular is trailing peers on revenue and in adding customers, especially in the broadband segment. Increased adoption of bundled plans, with unlimited calling and high data usage at lower rates, has dented its voice and data realisations. 

While Bharti’s mobile revenues were down 3.3 per cent, Idea's revenue decline, led by a 9 per cent erosion in average revenue per user, has been 6 per cent. 

Idea’s broadband net additions at 5.2 million are flat (quarter-on-quarter) while Airtel’s additions more than doubled to 14.4 million in the March quarter, compared to 7 million in the December one. Data traffic of Bharti Airtel at 4 billion gigabytes is double of Idea's. 

Reliance Jio is way ahead of both; its subscriber addition is two-six times and data traffic is two-eight times of the other two. While Idea has some catching up to do and has indicated it will not participate in rate wars beyond a point, the key event for the Street is the pace of the merger; before the current quarter will be a big positive. 

Analysts at JM Financial said the buys argument for the company's stock would depend on flawless post-merger integration, savings on spectrum liberalisation charges, tower penalties, and financing of upcoming liabilities. While merger synergies will help, the single biggest trigger continues to be gradual uptick in rates.