Idea Cellular may not be a discount warrior, but it is a warrior

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Idea Cellular Ltd’s performance in the second half of fiscal year 2018 (FY18) stands in stark contrast to the first two quarters of the year. In the first half, it lost 2.8 million active subscribers, while in the second, it gained 12.2 million. Voice and data usage on its network was considerably higher as well, suggesting an effective use of bundled plans to retain and acquire customers.

Not too long ago, investors had the impression that the rug had been pulled from under Idea’s feet, with cut-throat pricing resulting in mounting cash losses and debt. When Himanshu Kapania, managing director of Idea, said in January, “We do not want to be a price warrior,” it had come across as a sign of resignation. The question on investors’ minds was, “How will Idea retain share without being aggressive on pricing?”

But three months since, Idea seems to have found the secret to being competitive without being a price warrior. “Initially, Idea’s response to Jio’s bundled offers came across as flat-footed; it has looked far more responsive lately,” said an analyst at a domestic institutional brokerage.

Apart from the increase in subscriber count and network usage, the company reported a sharp drop in subscriber churn. In the June 2017 quarter, churn stood at 6.7%; in the March 2018 quarter it fell to 4.3%. Note that Idea’s high leverage and the resulting constraints on network investments had supported the belief that it would not be able to retain subscribers. This thesis was supported by its results in the first half of FY18, but the second half has been a revelation. An equity infusion worth Rs6,750 crore has eased liquidity constraints, and things should look up further when the company’s deals to sell its tower assets close.

Another big surprise was that Idea’s profitability isn’t as bad as it had initially seemed. The company reversed some expense provisions it had made in preceding quarters. Adjusted for this, and based on the reported profit for the March quarter, FY18 Ebitda (earnings before interest, tax, depreciation and amortization) margins, at 21%, were about 100 basis points higher than Street estimates.

Idea has been aggressive with cost-cutting measures, understandable given its higher leverage. Before Reliance Jio Infocomm Ltd launched services, Idea’s operating expenses amounted to around 75% of Bharti Airtel Ltd’s India wireless opex. In the March quarter, it was less than 70%.

All this is not to say that everything is hunky-dory. Net debt-to-Ebitda after adjusting for the proceeds from the tower deals and after accounting for cash burn in the next two quarters will be high at eight times. It’s little wonder the firm is keen to complete the merger with Vodafone India Ltd quickly, and bring down leverage at the combined entity by eliminating duplicate cost centres. “But this will be easier said than done,” says the analyst mentioned above. The two firms offer services on three different bands (2G/3G/4G) with each having its own set of technology vendors; integration at such a large scale will take time.

Having said that, with Idea trading close to its 52-week low, investors appear to be pricing in a fair bit of scepticism.livemint