Idea Cellular Ltd’s shares had been riding high in the past few weeks, buoyed by news that the firm is no longer being investigated for inappropriate second-generation (2G) spectrum allotment in 2008. While this news became public only in the second half of June, the markets seem to have anticipated that the firm will come out unscathed from the 2G scam. Since end-May, the stock had outperformed the market by around 15%.
This doesn’t mean that the company doesn’t face any regulatory or legal risks. This became evident on Monday, when the Delhi high court fined the company Rs1 crore and directed it to seek permission from the department of telecommunications (DoT) for the transfer of six overlapping circles the firm had acquired from Spice Communications Ltd.
Also see | Dialling In (PDF)
But investors don’t seem to be too perturbed by the development. Idea shares fell by only around 2% on Tuesday, on a day the broader market was listless, shedding around 0.37%. Interestingly, late on Tuesday, the Telecom Disputes Settlement and Appellate Tribunal gave an interim stay on the Rs250 crore fine proposed by DoT. This should further support the company’s shares.
Of course, there will always be a regulatory overhang on the sector, including on Idea shares. Even so, investors can now focus more on the company’s financial performance. Idea has led both in terms of volume growth and the increase in revenue market share. Operating profit has grown by 8% and 7% sequentially in the preceding two quarters. Relatively new players such as Tata DoCoMo and Uninor have become less aggressive of late and Reliance Communications Ltd, a large competitor, has been limited because of its high leverage. These factors have helped Idea, which seems to have seized the opportunity with both hands, as is evident from its recent gains in revenue market share.
The improvement in the company’s financial performance last year should sustain, thanks to a drop in the rate of tariff decline and continued volume growth. Besides, most analysts expect gains from the 3G roll-out, thanks to an increase in data usage. Of course, the 3G story is yet to play out and it remains to be seen if telecom firms recover the large costs incurred in procuring 3G licences. Still, thanks to the growth in voice traffic and relatively stable tariffs, incumbent operators such as Idea are expected to report decent earnings growth.
Graphic by Yogesh Kumar/Mint
We welcome your comments at firstname.lastname@example.org