Idea: Weak signals

Operating profit margins are under pressure due to losses in three circles.

The June 2008 quarter was an eventful one for the Rs 6,719 crore Idea Cellular. First, it acquired Spice Communications and, at the same time, offered Telekom Malaysia an equity stake of around 20 per cent, the allotment of which has been completed. Idea has, however, deferred the open offer to minority shareholders of Spice pending a clearance from Sebi.

Meanwhile, falling tariffs resulted in the average revenue per user (arpu),for the June quarter, falling 3 per cent sequentially to Rs 278. However, the telco saw better minutes of usage (mou) for the second consecutive quarter though the sequential rise in mous, at 5 per cent, was lower than that for market leader Bharti Airtel.

Nonetheless, it offset the fall in the revenue per minute (rpm) of 7 per cent sequentially. Idea’s top line thus grew by 10 per cent to Rs 2,173 crore but what is worrying is that operating losses in three circles – UP east, Rajasthan and Himachal —-grew this quarter to Rs 15.4 crore. Idea had entered these circles nearly 21 months ago.

The operating profit margin declined by 60 basis points to 32.9 per cent partly because a waiver on licence fees was discontinued. Besides, higher network costs —-up 74 basis points q-o-q—-also hurt profitability. However, lower sales and marketing costs, which came off by 6 per cent q-o-q, arrested the fall in margins to some extent. Idea is on track to roll out operations in Mumbai and Bihar in the September quarter and plans to enter Tamil Nadu and Orissa by the end of 2008.

The expansion, say analysts, might increase mous but could result in lower rpms and, therefore, operating margins. Idea is expected to end FY09 with revenues close to Rs 10,000 and net profits of about Rs 1,200 crore. At Rs 86 the stock trades at 21.5 times its estimated FY09 earnings.