Q1 results: Idea Cellular fails to strike the right balance
While slow revenue growth and a sharp rise in costs weighed, the pressure on Idea Cellular’s earnings may continue to keep investors on the edge
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Idea Cellular Ltd’s shares have underperformed the market this year, and its June quarter (Q1) results suggest it is for good reason. Rising capital expenditure has hurt earnings and data volumes continue to slow down.
Growth in data revenue fell to 27% on a year-on-year (y-o-y) basis, from 34% in the March quarter and 45% in the December 2015 quarter. In the mainstay voice business, average realization per minute improved for the second consecutive quarter, due to a reduction in promotional offers. But this strategy backfired as far as volume growth was concerned—voice volumes fell by 1% sequentially. On a y-o-y basis, voice volumes grew by just 1.8%. “We have found Idea’s dynamic management of the price-volume equation in the voice business impressive in the past; however, we do believe the company has not managed to strike the right balance of late,” analysts at Kotak Institutional Equities said in a note to clients.
In all, revenue grew by 8% y-o-y. At the same time, thanks to a vigorous expansion in its data network coverage, network operating costs rose by 16% y-o-y. Profit margins naturally fell. Adjusted for one-offs, Kotak’s analysts estimate Ebitda margins fell 90 basis points y-o-y. Ebitda stands for earnings before interest, taxes, depreciation and amortization. A basis point is 0.01%.
Profit after tax slumped 65%, which was more or less on expected lines, as interest costs almost tripled on network expansion, spectrum renewal and acquisition costs. Tracking the rise in capital expenditure and finance costs, analysts were forecasting a fall in profit. Still, the results have disappointed.
While slow revenue growth and a sharp rise in costs weighed on the June quarter performance, the pressure on Idea Cellular’s earnings may continue to keep investors on the edge.
Hopefully, the company will change tracks with its pricing strategy and voice volume growth may come back on track. Slowing data volume growth is a big worry, however, especially keeping in mind the large amount of investments the company has made in the segment. Besides, Reliance Jio Infocomm Ltd’s launch, expected later this year, can worsen competitive dynamics.
The silver lining in all this is that Idea Cellular’s shares have already underperformed the broader market by a wide margin and valuations are inexpensive. Still, investors may wait for a pickup in performance before committing their capital in the company.