Idea: Ringing in good numbers

Idea Cellular’s pricing strategy seems to be paying off. The telco has more than trebled its subscriber base in the Mumbai market in January 2009 compared with December 2008. It has also picked up subscribers in markets such as Karnataka (a circle which came with the acquistion of Spice) to post a 34 per cent m-o-m jump in net additions during the month. With the addition of just over 2 million subscribers in January, Idea’s subscriber base has hit the 40 million mark.

The growing subscriber base has been helping the company’s top line —adjusted revenues grew a strong 14 per cent sequentially in the December 2008 quarter. What’s more, both the average revenue per user (ARPU) and the average revenue per minute (ARPM) grew sequentially, with the cost per minute not rising as much. The ARPM at 64 paise was the same as market leader Bharti’s. Despite that, however, Idea’s operating profit margin (opm) came off by 70 basis points sequentially to 25.5 per cent because of operating losses worth Rs 76.5 crore in Mumbai and Bihar circles.

If the losses are ignored, the opm would have expanded 130 basis points to 29.4 per cent. Margins, however, could come off since the telco will be rolling out its network in Tamil Nadu and Orissa in the next six months or so. Moreover, the entry of newer players could keep ARPUs under pressure. Interestingly, despite calling rates at these levels, there doesn’t seem to be much price elasticity in the service — the minutes of usage (mou) per user actually fell by 2 per cent to 410 in the December quarter.

Idea has spectrum for five new circles and expenses will stay high as it enters new circles. Moreover, it will need cash to bid at the 3G auctions, though it has a strong balance sheet. In the last week of January, the stock rose nearly 10 per cent and currently trades at Rs 48. Interestingly, Idea is valued at a discount of just 10 per cent to Bharti on an enterprise value/ earnings before interest depreciation and tax (EV/ebitda) basis for 2009-10. The discount is far too narrow, given Bharti’s better margins, scale and operating metrics and should be at least 20 per cent.