Idea Cellular remains weighed down by debt, despite sale of towers to ATC
Idea Cellular Ltd has finally managed to arrest the fall in its data subscriber base in the September quarter (Q2), after three successive quarters of decline. It even managed to grow its data volume at a higher pace sequentially compared to Bharti Airtel Ltd, after lagging behind in the preceding quarters. Besides, like Airtel did for its India wireless business, it reported higher-than-expected operating profit thanks to tight cost control measures.
To that extent, Idea has pulled up its socks. Even so, it has lost considerable ground in the past year. Its Ebitda as a percentage of Airtel’s India wireless Ebitda has fallen from 45.4% a year ago to 35.7% currently, according to data collated by Kotak Institutional Equities. Ebitda stands for earnings before interest, tax, depreciation and amortization.
More worryingly, a year ago, Idea’s net debt stood at Rs36,400 crore, or 3.2 times annualized Ebitda for the September 2016 quarter. By the end of the September 2017 quarter, debt has ballooned to Rs54,000 crore or as much as nine times annualized Ebitda for the latest quarter. Even after deducting Rs4,000 crore after the sale of its stand-alone towers to American Tower Corp. (ATC), the net debt-Ebitda ratio would be at unwieldy levels of around 8.8-8.9 times, simply because of the additional tower lease rentals the company will now have to bear.
While the deal with ATC is a step in the right direction, its remaining tower assets in the form of an 11.5% stake in Indus Towers Ltd needs to be sold quickly to further reduce its leverage. Analysts at Kotak said in a results preview note to clients, “The company (Idea) may need to accelerate its efforts on tower monetization or have to live with constraints on capex in a phase where it would do well to step up capex spends.”
The fact that the company has lost ground vis-à-vis Airtel both in terms of subscriber/revenue market share as well as share of profits shows that the constraints on capex has hurt.
The silver lining is that Idea, like Airtel, has aggressively cut costs to offset the impact of lower tariffs and other headwinds. Apart from the pressure on pricing, telcos had to grapple with the impact of the implementation of the goods and services tax, which entails a higher rate (18%) compared to the earlier service tax rate of 15%. For a majority of subscribers, telcos were forced to absorb increase in taxation, given the cut-throat price competition in the industry. Idea offset some of this by extracting savings on its network operating costs as well as on selling, general and administration expenses. As a result, Idea’s Ebitda margin stood at 20.1%, considerably higher than Kotak Institutional Equities’ estimate of 17.9%.
But even though margins are better than estimates, they are still lower by around 300 basis points on a sequential basis. And with the impact of the 57% reduction in interconnect usage charges kicking in from 1 October, margins will remain under pressure in the December quarter as well. Read more
Thankfully for the company, Reliance Jio Infocomm Ltd has been raising tariffs gradually, leading investors to believe the pressure on margins will ease. Of course, it remains to be seen how long Jio’s forbearance lasts, considering the large difference between its current market share and its desired market share.
“(To expect) Jio to take up tariffs consistently (as the Street seems to expect) may conflict with its market share aspiration. Also, we think that Jio’s network is not markedly superior to Bharti’s that would allow it pricing power/ARPU premium; this makes pricing the chief basis of competition,” analysts at JPMorgan said in a note to clients last week. Arpu is short for average revenue per user.
As such, to assume a continued rise in tariffs and a considerable easing of pressure on margins may be foolhardy.