At 9:57 am, shares of Idea Cellular were trading 1.53 per cent up at Rs 73.05 on the Bombay Stock Exchange . It touched a high of Rs 73.95 and a low of Rs 72.95 in trade so far.
The company has started capitalising interest expenses owing to 3G-related debt. Also, it has not yet provided for various sub judice claims. These two factors may affect profitability of the business in the near term unless the company successfully leverages new growth areas such as 3G.
During the March quarter, net profit rose by a sharp 13% to Rs 274.5 crore from the quarterago level. Revenue rose by 7% to Rs 4,234.7 crore. Also, contrary to Street estimates, the company’s margin on operating profit before depreciation increased by 140 basis points to 25.4%.
Whether the company maintains its current tempo in the future largely depends upon the extent to which its new subscribers add to the profitability. Its subscriber parameters for the March quarter don’t provide much assurance, though. This is because despite a strong addition of 7.7 million users in the quarter, the company’s per user revenue and minutes of usage dropped.
Its average rate per minute also declined to 40.6 paise, the lowest compared to its bigger peers Bharti Airtel (43.1 paise) and RCOM (44 paise). Its subscriber churn has also increased sharply to 10.7% from 7.7% a year ago, the steepest change among its peers.
If the company fails to improve upon these parameters, it may impact profitability in the coming quarters since costs related to its debt and other non-operating accounts may increase. For instance, Idea has included Rs 124 crore interest on 3G-related loan in its balance sheet in the March quarter.
This will have to be amortised gradually in the coming quarters, which would lower operating profit (EBIT). It also has sub judice claims from various authorities worth over Rs 327.7 crore, which are not provided for since the company has challenged these demands. In case of an unfavourable court verdict, the company’s net profit would suffer.
But what could work for the company is the fact that its share of industry revenue has increased by more than 300 basis points to 13.6% within a year despite intense competition. This could be attributed to its highest proportion of active subscriber base. According Trai data, the company’s 93% reported user base was active as of March 2011.
This means Idea could emerge as a major beneficiary of the increasing share of value added services. Its future performance will hinge upon how farit succeeds in propagating such services based on the 3G platform to existing and new users.