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Tuesday, May 4, 2010

Idea Q4 rings in profit surprise

Pan-India mobile telephony company Idea Cellular Ltd’s March quarter resultssurpassed expectations on the Street on all counts. Compared to the Bloomberg consensus estimates of a net profit of Rs132 crore, Idea registered a 52% jump on a sequential quarter-on-quarter (q-o-q) basis to Rs266.6 crore. Idea’s stand-alone net profit was lower by around Rs9.7 crore due to the losses incurred by its subsidiaries Spice and Indus.

Profit expansion was a culmination of several positive factors. Amid stiff competition, revenue grew 6% on a q-o-q basis to Rs3,347 crore. The AV Birla company added five new circles in the quarter taking its presence to 22 circles. Idea’s management stated that the market share increased from 11.4% to 12.7%, in established circles it inched up from 17.5% to 18.8%.

Meanwhile, the company’s efforts in controlling staff and network operating expenses as a percentage of revenue translated into margin expansion. Both the number of subscribers added per employee and the revenue per employee have shown steady increase over the last three quarters.

Operating profit margin, which had dipped in the third quarter by 140 basis points to 25.8%, rose in the fourth quarter to 27.6%.

However, a key contributor to higher profit was the other income of Rs52 crore, which was absent in the previous quarter. Without this element, net profit would have been about Rs214 crore—still higher than estimates.

Of course, Idea has had to battle it out like its peers on tariffs. While the MoU (minutes of usage) improved by 2.3% on a q-o-q basis, the Arpu (average revenue per user) dipped from Rs200 to Rs185. Hence the average realized rate has been on the decline for the last few quarters. Tariff competition and the use of multiple SIM cards (this enables customers to switch loyalties) are factors that pull down Arpus. Most analysts’ projections state that migration of subscribers to lower tariff plans will put pressure on margins going forward.

Idea’s shares were actively traded even before the announcement of the results and closed 4% higher at Rs63.80. The earnings per share of Rs3.40 is discounted about 18 times.

Despite the good results, cash outflows for the much-touted 3G spectrum auction and tariff wars in existing circles could put pressure on profit margins in the coming quarters. Clarity on these counts would determine whether there could be a re-rating in the stock.

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