Idea: Valuations have priced in the growth

Despite good operational performance, it is vulnerable to regulatory changes

Of all the listed telecom service providers, Idea’s performance over the last few quarters has been most impressive. Monthly subscriber additions and the quality of its earnings have outpaced most of its peers, say analysts. Not surprising, then, that the stock has run up 20 per cent in the last three months. However, regulatory changes are likely to cap any further uptick.

Analysts believe the operational performance has been stellar and the quality of subscribers also seems good. According to Ankita Somani, telecom analyst at Angel Broking, “The company has the highest number of active subscribers. That apart, the share of value added services as a percentage of revenue has been steadily increasing for Idea, while it’s been stable for Bharti.”

 

Idea increased its revenue market share from 14 per cent in the second quarter to 14.4 per cent in the third quarter, thanks to its aggressive advertising and distribution strategy. The company’s revenue market share was 13 per cent in the first quarter of FY11. Idea’s monthly subscriber additions have been 1.5 to 1.7 million in the current quarter. This has helped the company improve its cash-flows in the current financial year, a big positive as the company this year has seen amortisation (along with interest costs) of the 3G expenses, too.

Despite the positives, the market has a neutral or sell call on the stock, as higher revenues and net subscriber additions won’t help the company improve its bottomline. This is not just the case for Idea but the sector as a whole, as the regulatory payouts are expected to eat into profitability. Given that Idea is a pure-play telecom services player, regulatory changes would impact the company a lot more than the others, which have a more diversified business model.

According to Ganesh Ram of Kim Eng Securities, with increasing network cost in Q4, recurring earnings growth would be muted. He says: “Despite improving prospects, we find the current valuation of a P/E ratio of 44x FY13 too expensive, considering possible penalties by the regulator, a one-time spectrum fee, and reduction in roaming fee.”