Despite Q1FY19 profit, key performance metrics of Idea remain weak

Even though Idea Cellular has reported a surprise net profit of Rs 2.57 billion for the June quarter due to a one-time gain from the sale of its towers assets, the key performance metrics of the company remain weak.

The Aditya Birla Group company, which will soon be merged with Vodafone India, has seen deterioration in revenues, operating profit, margins and average revenue per user (ARPU). In fact, an ARPU of Rs 100 is lowest in the industry as compared to Rs 102 of Vodafone, Rs 105 of Bharti Airtel and Rs 135 of Reliance Jio. Analysts say that it will be very difficult for Vodafone Idea Ltd (name of the merged entity) to grow improve margins in the hyper-competitive market.

As per a report by Credit Suisse, in a worrisome trend, 3G/4G subscriber base of Idea Cellular has stagnated, with just 1.1 million net increase quarter-on-quarter (QoQ) against monthly run-rate of 3 million for Bharti Airtel and 9 million for Reliance Jio. Also, Idea incurred a capex of Rs 9.8 billion in 1Q19 which is negligible compared Rs 78.7 billion incurred by Airtel and Rs175 billion by Jio in the same period. 

“We believe that that the merged company will find itself constrained to invest in the business on account of high leverage – 20.4x 1Q19 annualized on pro-forma basis for the combined entity (assuming similar EBITDA contribution for Vodafone) coupled with inadequate free cash flow generation,” the report said.

During the quarter, there was a gain of Rs 33.65 billion from the sale of tower assets. On a sequential basis, revenue declined 2.9 per cent. The Ebitda for the quarter came in at Rs 6.6 billion, down 65 per cent YoY.

Analysts say the results prove that Idea’s under-investment of the last 12-18 months compared with Airtel and Jio is starting to impact its market share. Idea lost 6.6 million subscribers in Q1 and added 1.1 million broadband users (3G+4G) which is significantly below 12.4 million added by Jio and 9.1 million by Airtel. Also, data volume increased by 24 per cent QoQ vs 40 per cent QoQ growth reported by Airtel.

Airtel had recently indicated that the ARPU of a 2G sub potentially more than doubles in graduating to 4G. Therefore, analysts feel it is essential for Idea to get its fair share of subscribers to upgrade to 4G in order to improve headline ARPUs if overall industry pricing does not improve.

 “Investment programme trailing behind peers. Idea has added 43,212 mobile broadband sites since 1Q FY18 (last five quarters), well below the 116,698 added by Bharti Airtel. Likewise, its total optic fiber network spans 158k km, far short of Bharti’ Airtel’s 246k,” JP Morgan said.

As per Jefferies, capex post-merger will have to increase substantially compared to peers to match the capacity generation of peers.  “We expect ARPU to see further declines, led by downgrades and possible pricing competition, especially in postpaid and voice segments. Further, with Idea+Voda losing postpaid subs, we expect blended ARPU to see a sharper fall,” Jefferies added.

The net debt for the combined firm is likely to be Rs1.04 trillion (Rs 505 billion for Idea + Rs 530 billion for Vodafone) with a combined EBITDA of Rs15 billion. 

“Both Idea and Vodafone have demonstrated the archetypal conservative behaviour of two debt-stressed firms ahead of a significant merger. Unsurprisingly, customer churn at Idea also increased. Gains from the sale of Idea’s towers to ATC prevented significant losses at the PAT level, besides helping to reduce net debt by Rs 17 billion to Rs 506 billion,” JP Morgan said.

As per Deutsche Bank Research, Jio's commentary in its recent analyst meet suggests that it is likely to maintain an aggressive stance to transition feature phone subscribers to its network via attractive handset offers. “While we expect revenue trends to remain weak in the near term, the mergeco should gain from opex synergies to aid margins,” it added.   


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