Idea Cellular: Recommendation Review

While your mobile phones may be ringing away to glory, the companies that provide you with these services have not been having a good time. In fact, the telecom sector has been going through a very harrowing time for quite some time now. Everything that is happening around it seems to be adding to the negative pressures. The scams, license cancellations and higher amounts to be paid for bandwidths – these have all only escalated the stress on the managements of companies in this sector.

We had recommended Idea Cellular in DSIJ Vol. 27, Issue No. 21 (dated September 26, 2011), when the scrip was trading at Rs 99. Our recommendation was based on the company’s strong financial performance, expected improvement in the realisation per minute and a strong growth in the 3G segment.

However, after our recommendation, the whole scenario in the telecom sector changed, severely impacting the performance of all the telecom companies. Amid all these issues, the scrip remained largely stagnant and also saw some decline. Despite this, we reiterated our ‘hold’ call on the stock and that seems to be paying off now. As the air clears on the spectrum row and leading players seem to regain pricing power, the scrip has witnessed an up-move and has touched our target of Rs 115.

On the financial front, the company has performed well in the December 2012 quarter, reporting revenues of Rs 5579 crore, up five per cent on a YoY basis. The bottomline stood at Rs 228.57 crore as against Rs 201 crore. This can be attributed to a stronger 5.2 per cent growth in the network minutes and a higher 6.8 per cent growth in the Average Revenue Per User (ARPU), against a 1.3 per cent sequential drop in the subscriber base.

The traction in data-based revenue is another key factor that has helped the company. It is expected to maintain the tempo, helped by higher data usage and a higher active user base in an environment of rising tariffs. However, though the company is on a revival path, there is too much uncertainty surrounding the sector as a whole. We therefore recommend that investors book profits at the current levels as the target has been achieved.