While writing about Bharti Airtel's Q4 performance, I was highly critical about the way the growth in Data Volumes & Revenues has dropped sharply for the company. But after going through the Idea Cellular Q4 result, I think Bharti Airtel did a much much better job. Both these companies are part of the incumbent group and hence are being hit by smaller competition in several circles. All these incumbents charge premium rates for their services, which is certainly driving away a small portion of their high-usage customers to networks of regional 3G operators, who offer rates which are easily 30 to 40% lower.
If you look purely at the P&L numbers, Idea Cellular has done well with over 5% Q-o-Q increase in Revenues. Couple this with excellent control on Operating Costs and the company managed to grow it's EBITDA by over 15% Q-o-Q!! The company probably posted it's best EBITDA margins in several past quarters at over 38%. But a sharp jump in Interest Cost and Depreciation provisioning lead to a near 25% Q-o-Q fall in it's Net Profit. With Idea Cellular needing to do substantial CAPEX as well as prepare for July Spectrum Auctions, I think the pressure via Interest Cost & Depreciation is not going to ease away anytime soon. Idea Cellular does not have 4G compatible spectrum in more than half the circles & hence will have to bid aggressively during the auctions, atleast to win spectrum in a few crucial circles which contribute substantially to it's revenues.
Have a look at the charts alongside. Idea Cellular has done well in terms of adding/upgrading 2.4 million users to it's 3G/4G customer base during the quarter, which is an increase of almost 12% Q-o-Q. But then look at the Q-o-Q growth in Total Data consumption, which is PATHETICALLY Low at just about 1.5%!! This clearly means that many of it's Data consumers are using less Data on it's network and have started shifting their usage to other networks. I think there has been an increase in a proportion of first-time Data users on Idea's network, people who generally consume less than 500 MB in a month. These people opt for smaller Data packs, which I think has lead to the slight increase in Idea's Average Rate per MB. This is certainly not good news for Idea Cellular. I seriously think that as people start using more & more data, they start thinking of moving to another operator like BSNL or Tata DoCoMo or Aircel, who offer cheaper Data packs for large users.
Now look at the chart showing Q-o-Q % growth in Data Revenues. The Growth rate has been sliding rather sharply for Idea Cellular. With an increasing Base for comparison, the growth rates are normally expected to reduce with every passing quarter, but in case of Idea Cellular, the slide can be called a Collapse. All this even before the true impact of RelJio yet to be seen!! With RelJio now introducing an invite-system, where employees can invite upto 10 people onto Jio's network, I think the operator is moving couple of steps closer to full commercial launch in the next 3 to 4 months or so. Idea Cellular will have to act fast to keep the Volume growth momentum going. The high-usage customers also offer much better ARPU. Nobody can ignore them, just because someone is able to attract attention of first-time users. Data usage is addictive and almost every user starts consuming increased amount of Data with every passing month. Most of these first-time users will be consuming several times more Data in another 12-months time & if an operator does not have appropriate Data packs to entice these customers enough, then there will always be a competitor ready to welcome such consumers.
Coming to Valuations: At the current share price of around Rs.115/-, Idea Cellular's Market Cap stands at about Rs.41,400 crores. At this Market Cap, it trades at little over 3 times it's T-T-M EBITDA and little over 4 times it's T-T-M Cash Profit. These valuations are not expensive even if the company is able to hold on to this EBITDA and Cash Profit level. But that is not going to be the case. I am expecting substantial pressure on Idea Cellular's Revenues, EBITDA and Cash Profit in the coming quarters, especially in the second half of this fiscal. On a conservative basis, I am expecting atleast 5-10% downside to Idea's Revenues, while the downside on it's EBITDA & Cash Profit will be larger at about 20% or so. The true impact will depend on When RelJio opens it's gates for general public. Even apart from RelJio, we are already seeing BSNL getting aggressive in the market & is already posting decent growth rates. The other smaller operators like Tata DoCoMo & Aircel & Telenor are getting aggressive in an attempt to survive. They will have to look at consolidation sooner or later. One possibility for them is to focus their resources on few strong circles, where they can offer good 3G or 4G service. Competing with larger players across the country is certainly draining their resources very badly. Let's see how things pan out, but we will certainly get to see lots of action on M&A front in the coming few quarters. We have already seen Videocon Telecom winding up it's operations by selling it's 4G compatible spectrum to Bharti Airtel.
If you look purely at the P&L numbers, Idea Cellular has done well with over 5% Q-o-Q increase in Revenues. Couple this with excellent control on Operating Costs and the company managed to grow it's EBITDA by over 15% Q-o-Q!! The company probably posted it's best EBITDA margins in several past quarters at over 38%. But a sharp jump in Interest Cost and Depreciation provisioning lead to a near 25% Q-o-Q fall in it's Net Profit. With Idea Cellular needing to do substantial CAPEX as well as prepare for July Spectrum Auctions, I think the pressure via Interest Cost & Depreciation is not going to ease away anytime soon. Idea Cellular does not have 4G compatible spectrum in more than half the circles & hence will have to bid aggressively during the auctions, atleast to win spectrum in a few crucial circles which contribute substantially to it's revenues.
Now look at the chart showing Q-o-Q % growth in Data Revenues. The Growth rate has been sliding rather sharply for Idea Cellular. With an increasing Base for comparison, the growth rates are normally expected to reduce with every passing quarter, but in case of Idea Cellular, the slide can be called a Collapse. All this even before the true impact of RelJio yet to be seen!! With RelJio now introducing an invite-system, where employees can invite upto 10 people onto Jio's network, I think the operator is moving couple of steps closer to full commercial launch in the next 3 to 4 months or so. Idea Cellular will have to act fast to keep the Volume growth momentum going. The high-usage customers also offer much better ARPU. Nobody can ignore them, just because someone is able to attract attention of first-time users. Data usage is addictive and almost every user starts consuming increased amount of Data with every passing month. Most of these first-time users will be consuming several times more Data in another 12-months time & if an operator does not have appropriate Data packs to entice these customers enough, then there will always be a competitor ready to welcome such consumers.
Coming to Valuations: At the current share price of around Rs.115/-, Idea Cellular's Market Cap stands at about Rs.41,400 crores. At this Market Cap, it trades at little over 3 times it's T-T-M EBITDA and little over 4 times it's T-T-M Cash Profit. These valuations are not expensive even if the company is able to hold on to this EBITDA and Cash Profit level. But that is not going to be the case. I am expecting substantial pressure on Idea Cellular's Revenues, EBITDA and Cash Profit in the coming quarters, especially in the second half of this fiscal. On a conservative basis, I am expecting atleast 5-10% downside to Idea's Revenues, while the downside on it's EBITDA & Cash Profit will be larger at about 20% or so. The true impact will depend on When RelJio opens it's gates for general public. Even apart from RelJio, we are already seeing BSNL getting aggressive in the market & is already posting decent growth rates. The other smaller operators like Tata DoCoMo & Aircel & Telenor are getting aggressive in an attempt to survive. They will have to look at consolidation sooner or later. One possibility for them is to focus their resources on few strong circles, where they can offer good 3G or 4G service. Competing with larger players across the country is certainly draining their resources very badly. Let's see how things pan out, but we will certainly get to see lots of action on M&A front in the coming few quarters. We have already seen Videocon Telecom winding up it's operations by selling it's 4G compatible spectrum to Bharti Airtel.
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