IDEA - short term upside is unlikely caution about these stocks

IDEA Cellular, the sixth largest telecom operator based on subscriber base, reported lower-than-expected profits and profitability during the June 2010 quarter. A higher-than-anticipated rise in network costs and licensing fees dragged down profits. Also, given the continued decline in its per minute revenue, investors may have to wait for a few more quarters to see some stability in its operations.

To its credit, Idea continued to expand its revenue share — this time by over 2.6% — from just over 8% of aggregate revenue for the sector. The improvement in revenue market share was fuelled by a strong 8% sequential jump in subscriber base. Despite tougher competition from new and existing entrants, the company managed to improve its share of net subscriber additions during the quarter.

The effect of robust subscriber additions on sales was, however, limited to 5.4% sequential growth in sales (after adjusting for consolidation of Spice Communications) since the average realised rate per user per minute (ARR) fell by 6% sequentially.

Though the company reported a sharp 13% jump in network minutes per user (MOU) during the June quarter, average revenue per user (ARPU) continued to slide. This is a concern since falling per user revenue tends to reduce ARR, thereby offsetting the positive effect of higher network minutes on the topline.

In the near term, the company is likely to witness pressure on its ARR though the rate of decline may taper off. This is because mobile tariffs seem to stabilise at the current levels. Another positive is that the contribution of its subsidiary tower company Indus Towers is gradually increasing. It has also turned profitable in the June quarter. This is likely to support the bottomline, going ahead. The company has also kept a close tab on cost efficiencies. Its revenue per employee has increased by 9% in the last one year. Such cost controls cushion margins in times when revenue growth is muted.

At the Thursday’s close of Rs 65.4, Idea’s stock is available at a pre-mium to its bigger peers Bharti Airtel and Reliance Communications. Its enterprise value is nearly 10 times its PBDIT. For its peers, the ratio is close to 7.5. Also, at the current price, Idea’s stock is available at a staggering P/E multiple of 25 compared with a P/E range of 8-12 for peers. Given this and the muted prospects, at least in the near term, Idea’s scrip may witness selling pressure on bourses.

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