Tough times ahead for Idea Cellular

The stock of Idea Cellular, one of the key players in the telecom market, went down 7 per cent to close at ₹85.85 on Monday post March quarter results for FY2016-17.

While strong competition and the free services offered by new entrant Reliance Jio has negatively impacted the performance of the company, the synergies from the merger between Idea and Vodafone are being viewed as a positive for Idea Cellular. This benefit will, however, be reaped only over the long-term.

Idea Cellular reported consolidated net loss of ₹325.6 crore in Q4 compared to profit of ₹575.6 crore in corresponding quarter of the previous year. Idea Cellular’s revenue also fell 14 per cent year-on-year, due to sustained free services in voice and data offered by Reliance Jio which resulted in customer migration.

However, Idea Cellular has reduced its operating costs about 4 per cent to ₹5,930 crore (₹6,162 crore).

Overall customer base of the company has improved about 8 per cent in the March quarter y-o-y. However, data subscribers declined about 4 per cent to 4.2 crore in March quarter. The ARPU (average revenue per unit) for data subscribers declined drastically to ₹110 (₹147). Data volume usage, however, went up 54 per cent. Similarly, voice ARPU declined 17 per cent to ₹107 in the same period. In an effort to retain the company’s customer base, tariff rates were slashed about 13 per cent and 28 per cent in voice and data respectively.

Idea has expanded its network and broadband sites (70 per cent y-o-y) to provide coverage in 21 service areas on its own broadband spectrum. The overall spectrum holding of 891.2 MHz enables the company to roll out broadband services at 15-20 times of its current mobile data traffic.

Going ahead, the company is planning for expansion of broadband coverage, increase wireless data capacity and introduction of LTE (long-term evolution) services. Also, the merger between Idea and Vodafone can turn out to be fruitful, if cost savings/synergies flow as expected. However, cost synergies may not flow till FY19, as the deal is expected to conclude only by the end of 2018.

The debt of the combined entity is point of concern as it is pegged at ₹1.07 lakh crore. However, the management is expecting to reduce the debt through combined entity’s captive towers and Idea’s stake in Indus Towers.

From a current net debt/EBITDA ratio of 5.7 times, the management expects a fall to three times, post tower sales and opex synergies coming in from the fourth year of operations.