Recommendation Review: Idea Cellular

We had recommended Idea Cellular to investors in DSIJ Vol. 28, Issue No. 20 (dated September 22, 2013), when the scrip was trading at Rs 150. Our call was supported by the consistent growth in volumes, revenues and profitability that the company saw. Other factors that went in its favour were the growth in data and higher penetration, which resulted in an upward trajectory and higher profitability outlook due to economies of scale.

Apart from this, Idea seemed to be in a relatively better position as compared to its peers on the debt front, which is a major concern plaguing the industry. As of June 30, 2013, the company’s total debt stood at Rs 12263.24 crore. It incurred capital expenditure of Rs 329.8 crore in Q1FY13, but this was funded through internal accruals. With strong cash profits, robust cash flows, a debt-to-equity ratio of 0.85x and reserves of Rs 10989.04 crore, we had reckoned that there would not be much pressure on its balance sheet. After our recommendation, the scrip witnessed a sharp up-move and is currently trading at Rs 175, providing appreciation of more than 16 per cent.

On the financial front, Idea has posted a good financial performance in the September 2013 quarter. It posted a topline of Rs 6323.26 crore and a bottomline of Rs 447.61 crore as against Rs 5314 crore and Rs 240.04 crore respectively in September 2012.

However, though the company’s financial performance has been good, the telecom sector as a whole is under pressure. On another note, the Department of Telecom (DoT) has slapped a penalty of Rs 600 crore on the company over alleged violation of license conditions in its merger deal with Spice Communications. Though the company is challenging the same, we feel that booking profits at the current levels would be a prudent strategy.