Idea Cellular: Mixed signals

The high level of pre-paid churn in an increasingly competitive market is worrying.

If Idea Cellular’s operating profit margins for the June 2009 quarter improved 80 basis points sequentially to 26.7 per cent, it was partly because of lower termination charges and some cost savings. Otherwise, there was no big surprise on the revenues front — they were up just under 1 per cent sequentially to Rs 2,890 crore, though adjusting for cuts in mobile interconnect charges, they would have risen about 5.3 per cent, similar to that reported by market leader Bharti Airtel. If the net profit was ahead of expectations, it was due to some foreign exchange gains and lower depreciation charges.

The fairly sharp fall of 9 per cent in the ARPU (average revenue per user) to Rs 232 during the quarter had more to do with lower access charges, adjusting for which the drop would have been about 3.6 per cent. That was not surprising given the competition and the fact that ARPUs are lower incrementaly. Also, while the fall in minutes of usage was just 0.7 per cent to 399 minutes, it was a bit of a disappointment as there were more days during the quarter.

This suggests that going ahead, with more customers using dual-SIM cards and new players offering free minutes, the minutes of usage could be lower. Also, India’s fifth-largest wireless operator may be taking time to ramp up operations in some areas. However, the bigger concern is the increase in the pre-paid churn of almost 7 per cent — in the March 2009 quarter, the number was a much better 5.3 per cent.

The churn is almost twice that for Bharti (which reported 3.5 per cent churn in the June 2009 quarter). With users remaining price-conscious and the competition increasing, the high churn rate is worrying. Idea rolled out services in Tamil Nadu and Orissa during the quarter and the impact of this is likely to be felt in the September 2009 quarter, implying that operating profits could be under some pressure.

While the inclusion of the stock in the MSCI is a technical plus, the relatively small scale makes the telco more vulnerable to increasing competition. Citigroup has a target price of Rs 80 for the stock with the core business being attributed an EV/EBITDA (enterprise value/ebitda) multiple of 7.8 times for 2009-10, a 15 per cent discount to Bharti.