At first look, Idea Cellular Ltd’s March quarter results are more impressive compared to Bharti Airtel Ltd. The latter’s earnings before interest, tax, depreciation and amortization (Ebitda) was marginally ahead of the Street’s estimates; but in Idea’s case, the beat was substantial. Analysts at Kotak Institutional Equities, for instance, had estimated an Ebitda of Rs1,794 crore. Instead, Idea reported earnings of Rs2,197 crore at the Ebitda level.
Still, Idea shares fell more than 6% on Monday, giving up all of their gains post Bharti Airtel’s results announcement. What gives?
To start with, some investors are questioning whether the increase in profit margins is sustainable. Ebitda margin rose 200 basis points sequentially, despite a 6.2% fall in revenues, thanks largely to cost-cutting measures and some forex gains. With revenues expected to continue sliding, hardly anyone expects margins to be steady.
Besides, there are concerns whether the belt-tightening will hurt Idea’s capability in servicing the growing needs of its customers. Last quarter, the firm rationalized its 2G network footprint marginally by closing down 876 unprofitable cell sites. To be sure, it continued to spend heavily in expanding its 3G/ 4G coverage. Still, given its high leverage and losses for the second straight quarter, investors are worried Idea will be forced to continue with aggressive cost-cutting measures. This in turn could lead to loss in market share, in the backdrop of large investments by its rivals.
Thanks to an increasing interest cost bill, pre-tax losses expanded to nearly 10% of revenues, from 8.4% in the December quarter. As such, the expansion in operating profit margin amounted to nothing.
In addition, Idea lagged behind Bharti Airtel in some important areas. While Bharti Airtel reported a 13.3% sequential rise in its mobile broadband subscriber base, in Idea’s case, it fell 8.7%. And while Idea’s data volume grew 17% sequentially on the back of higher usage by its customers, it was below Bharti Airtel’s 31% growth. Likewise, its voice volume growth fell way short of Bharti Airtel’s.
As one analyst puts it, the quality of Bharti Airtel’s earnings is ahead of Idea Cellular’s. It’s little wonder the former’s shares are outperforming in recent months.