Idea Cellular: Weak signals

Given bleak revenue prospects and mounting 3G-related costs, the company may post losses for a couple of quarters.

A sustained sequential rise in subscriber usage and flattening of rates saw stocks of incumbent telecom operators, including Idea Cellular, rise. The markets felt competitive rate pressures had peaked and the worst was over.

Idea’s September quarter results belie this. The company’s gross telecom revenues were marginally lower at Rs 3,689 crore, despite a 7.7 per cent sequential growth in the subscriber base.

Operating margins contracted around 72 basis points, as operating expenses rose on the back of a 26 per cent increase in staff expenses. Healthy contribution from its subsidiary, Indus Towers (at 16 per cent), pulled up consolidated profit after tax (PAT) to Rs 180 crore (down 11 per cent sequentially).

The five per cent sequential fall in minutes of usage reflected the seasonal impact, but it was higher than what the Street had factored in. Also, the 4.5 per cent fall in the average realised rate of Rs 0.42 per minute was unexpected, given that there were no obvious rate cuts. The management indicated this was due to continued discounts by new operators, underlining there had been no let-up in pricing pressure. The net impact was an 8.2 per cent sequential dip in the average revenue per user to Rs 167.

In addition to Rs 40 crore in the June quarter, Idea capitalised Rs 121 crore 3G debt-related interest costs in the September quarter. The company is expected to charge interest costs from the fourth quarter of the current financial year after it launches 3G operations and revenues kick in. Given the bleak revenue prospects, analysts see Idea booking an effective loss for a couple of quarters, as mounting 3G-related costs will eliminate pre-tax profits, currently at about Rs 194 crore on a consolidated basis.

However, its potential acquisition-target tag could keep valuations at a premium over the fair value, said analysts. The stock ended 3.3 per cent lower at Rs 67.35 on Wednesday.