Idea Cellular Ltd’s shares had risen 13% in just six days ahead of its results announcement on 29 July. This was after news that Bharti Airtel Ltd had raised tariffs by 20% in six circles, that together account for around 40% of the firm’s revenue.
The sentiment for stocks of incumbent telecom companies such as Bharti and Idea has been positive for quite some time now owing to a decrease in competitive intensity. In the eight months till early July, shares of the two companies had outperformed the market by 35%.
In such a backdrop, there is always the fear of companies under-delivering on high expectations. But Idea has beaten expectations by a considerable margin.
It reported a sequential increase of 7% in revenue, on the back of a 7% and an 8.2% increase in the March and December quarters, respectively.
Volume growth, measured by the minutes of traffic carried on the company’s mobile network, continues to be impressive. More importantly, the average realized tariff rose marginally last quarter, after eight quarters of declining tariffs.
While there has been a decrease in competitive intensity, this appears to be the first piece of evidence that price-based competition has ceased and is no longer impacting incumbent firms such as Idea. What’s more, along with its results announcement, the company also said that it has raised tariffs in six circles by 20% to Rs1.2 per second.
Thanks to the increased volumes and steady tariffs, the company reported a 120 basis points (bps) improvement in margins. One basis point is one-hundredth of a percentage point. This is despite the fact that the March quarter results included one-off gains in the form of reversal of certain provisions made in the previous quarters.
Adjusted for this, margins have risen by over 200 bps and the sequential rise in operating profit is around 16-18%. This is considerably higher than analysts’ expectations. The jump in margins was aided largely by a 240 bps drop in subscriber acquisition and advertisement and promotion expenses, which, again, is reflective of the benefits of lower competition.
Reported net profit, however, fell 35% owing to a jump in interest cost. This is on account of the financing cost related to the third generation, or 3G, licences, which have started getting reflected fully in the profit and loss statement with the commissioning of the 3G network. Earlier, these costs were being amortized. But, again, a big jump in interest cost was being factored in in analysts’ estimates. The jump in Ebitda (earnings before interest, tax, depreciation and amortization) was not; which means that earnings estimates will be raised. It’s not surprising that Idea shares rose by another 5% after the results were announced, on the back of the 13% rise in the week prior to the results. While the environment for incumbent telecom operators has no doubt improved, one has to still wait and see the impact of the recent price increases—whether it increases subscriber churn, or whether it results in lower usage by customers.
Coming to a conclusion that incumbent operators can continue increasing prices and maintain volume growth will be premature.
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