Idea Cellular Ltd’s strategy of sacrificing volume for profit has played out well in the recently concluded September quarter. The company’s subscriber base declined by 1.5% last quarter and the total number of minutes carried on its network declined by a higher-than-expected 4% to 125.6 billion minutes.
Meanwhile, as expected, cost of revenue remained flat and threatened to drag down margins by as much as 200 basis points (bps). But the company did well to contain “subscriber acquisition and servicing expenses” as well as “advertisement and business promotion expenses”. These two costs were cut by over 20% quarter-on-quarter, leading to a 240 bps saving as a percentage of revenue. So, while most analysts were expecting a drop of 5-6% in earnings before interest, tax, depreciation and amortization (Ebitda), Idea reported a mere 1% drop in consolidated Ebitda. One basis point is one-hundredth of a percentage point.
The company’s shares inched up 0.25% to Rs.81.45 on Tuesday, even while the broader markets fell by 0.5%.
According to an analyst with a foreign brokerage firm, the shares would have jumped much higher, but for Videocon’s move to bid for the second-generation (2G) spectrum. According to him, the word on the Street is that Reliance Industries Ltd is likely to acquire Videocon’s licences at a later stage. Needless to say, this will result in intense price competition.
Of course, some analysts are also questioning the sustainability of margins. Analysts at Religare Institutional Research wrote in a post-earnings note, “We believe sector growth is clearly slowing and earnings recovery needs a big push from margins. This requires a significant improvement in market structure/price discipline, which is absent currently.”
But the savings on subscriber acquisition and promotional expenses last quarter were not trivial—they amounted to as high as Rs.153 crore, much higher than analysts’ estimates. According to the calculations of the analyst with the foreign brokerage firm, Idea has managed to cut subscriber acquisition costs by Rs.20 per subscriber. While telecom companies including Bharti Airtel Ltd had indicated to analysts that they had cut subscriber acquisition expenses since August, investors had underestimated the savings.
According to a earnings preview report by Kotak Institutional Equities, “Absolute costs, despite a likely decline in subscriber acquisition costs, are likely to be flat or go up marginally, leading to a decline in Ebitda for all telecom companies. Idea is likely to see the highest decline (6%) on account of its relatively higher operating leverage.”
On the other hand, analysts had estimated a 2-2.5% decline in voice minutes, mainly owing to the seasonal slowdown during the monsoon. But volume fell by 4%. And voice revenue per minute fell by over 1%. Thanks to an increase in non-voice revenue, average revenue per minute remained flat. But as the post-earnings movement in Idea’s share price demonstrates, investors have taken the decline in both volume and voice realizations in their stride. The key takeaway from the earnings is that Idea is cutting costs aggressively and, at least in the near term, this should sustain earnings at a time when volume growth is under pressure.