Idea Cellular beats street expectations, rises five percent

Idea Cellular rose to almost 5% to a 52-week high on a day when the BSE Sensex ended flat. The company posted better than expected results for the June 2011 quarter.

The company’s revenue grew 6.7 percent compared to the June 2010 quarter. Operating profits (profit before interest, tax, depreciation and amortisation) also rose 26.6 percent. Its net profit beat street expectations mainly due to stable call tariffs and increased mobile traffic. The company witnessed an increase of 6.5 percent in minutes of usage (MOU) over the March 2011 quarter. This is an encouraging sign. MOU is the metric used to track the performance of mobile companies. The street likes companies that engage their customers to use more of their network. The company has also curtailed the number of free minutes offered which has helped push up the minutes of usage.

In another development, Monet, an investment arm of Chrys Capital, on Thursday, sold about 2.5 percent of its stake in Idea for about $170 million, which gained them a price of Rs 90 per share. Though the exact transaction is not known, Reuters reports First State Asia Pacific Leader Fund bought about 41 million Idea shares on Thursday at 90 rupees each.

After the results, Himanshu Kapania, managing director of Idea Cellular, spoke of the key parameters that the company closely watches to evaluate the company’s performance and his view on recent tariff hikes. Here are the key takeaways of the concall:

• Idea’s minutes of usage went up by 31 percent compared to the corresponding quarter last year amounting to now 1.2 billion minutes per day.
• Due to the MNP, the company gained 941 thousand numbers where the management claims 58 out of every 100 portable subscribers came to them.
• Telecom Regulatory Authority of India (TRAI) has declared that it is no more enough to provide just number of subscribers. The real numbers are shown in active subscriber base where Idea has the highest ratio of 92.3 per cent. The industry average is around 70 percent. So though in terms of actual subscriber base, Idea has a market share of 11 percent, based on active subscriber, the share goes upto 14 percent which is closer to its revenue share of 13 percent.
• Idea has increased their tariff by 20 percent for new subscribers from 1paisa per second to 1.20 paisa for each second.On the increase in telecom tariffs , Kapania said they are still testing the waters and will keep watching how subscribers are reacting in terms of minutes of usage. Only once they are sure of stable revenue in spute of the hike, will they take it to all circles in the country.
• In terms of 3G, Idea is yet to catch up because of infrastructure issues and not all subscribers having 3G handsets. But once the price of these 3G handsets start coming down and the infrastructure improves, they feel 3G can bring good benefits to the company. Moreover, they feel 2G is underpriced compared to its cost. This aggressive pricing for 2G data services will not be sustainable. As price differential between 2G and 3G data services increase, it will mean better revenue in this segment as well.

In the longer term, the 3G story will keep the mobile growth story intact and give bigger players an edge in the business. Moreover, taking the usage of dual sim cards, usage of cell phones have yet not reached many parts of India. Penetration into rural areas to increase subscriber base and marketing expenditure to educate subscribers to improve revenue from each user would be the major drivers of growth for the company.

The key parameters to watch a telecom company would be gross revenue, cash profit and operating profits, active subscriber base, minutes of usage by each subscriber and the kind of benefits that the company is seeing after mobile number portability (MNP) was launched.