Idea Cellular’s volumes slow further in Q4

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Idea Cellular Ltd exceeded the Street’s estimates on the revenue and profit fronts in the March quarter (Q4). Consolidated revenue expanded 12.6% from a year ago while profit dropped at a slower-than-expected pace of 38.9%.

This was made possible by a reduction in promotional offers, helping the company reverse the drop in realizations on a sequential basis. Both data and voice realizations improved in the range of 2.9-4.4% over the December quarter.

But this strategy slowed volume growth. Compared with 17-18% growth in the previous four quarters, voice traffic on Idea Cellular’s network increased just 9% over the year-ago quarter. Growth in data volume slowed further to 51%, from 76% in Q3, 83% in Q2 and 93% in Q1. In comparison, voice and data traffic on rival Bharti Airtel Ltd’s network increased by 11% and 69%, respectively, in the last quarter.

The volume performance lagged Street estimates too. Kotak Institutional Equities, for instance, was forecasting Idea Cellular’s voice volumes to grow by 11.5%. Data growth also trailed several broker estimates. Worryingly, the contribution of data to services revenue expanded at the slowest pace in recent quarters. In fact, they softened a bit from the December quarter, a first in recent quarters. The slowing data traffic can accentuate investors’ concerns about the company’s growth trajectory, especially with impending competition from Reliance Jio Infocomm Ltd.

To be sure, Idea Cellular did well to cut freebies and improve realizations. Even the churn rate (on a blended basis) has fallen on a sequential basis. But analysts doubt if Idea Cellular can hold on to these gains or improve further when competition opens shop.

“We expect competition, especially in data space, to further intensify with launch of Reliance Jio,” Edelweiss Securities Ltd said in a note. “Heightened competitive intensity will lead to higher subscriber acquisition and retention cost, in turn impacting margins.”

Also clouding the earnings outlook is high capital expenditure. As the company invested Rs.7,770 crore in capex, finance charges jumped 80% last fiscal year. In the current fiscal year, it plans to incur a capex of Rs.6,500-7,000 crore, which may add further to interest costs. As in FY16, the capex may be revised over the guided amounts, due to spectrum purchases and related investments.

These concerns are weighing on the Idea Cellular stock price, which has lost a third of its value in the past one year. Though it recovered a bit in the past month, clarity on competition and stabilization in volumes growth rates will determine its future trajectory.