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Idea’s Q2 results show it’s not calm before the Reliance Jio storm

There are upside risks to capital expenditure and downside risks to revenue and profit projections. Photo: Pradeep Gaur/Mint

There are upside risks to capital expenditure and downside risks to revenue and profit projections. Photo: Pradeep Gaur/Mint

Idea Cellular Ltd’s September quarter results will disappoint investors. Consolidated revenue fell 1.2% and earnings before interest, taxes, depreciation and amortization (Ebitda) fell by 5.3% sequentially. Contrast this with estimates by analysts at Barclays Securities (India) Pvt. Ltd, for instance: They had expected revenues and profit to grow by 1.5% and 0.5%, respectively.

The difference may not look like much, especially keeping in mind the fact that the second quarter is a seasonally weak quarter. But taken along with other operating metrics such as falling price realizations, it is clear that incumbents such as Idea Cellular are involved in fairly intense competition. Investors will worry that this is happening even before the commercial launch of services by Reliance Jio Infocomm Ltd.

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Idea Cellular’s note to investors has cited “pressure on mobile data realized rate as the competition intensifies” as one of the reasons industry growth has fallen to mid-single digits in the first half of this year, from double-digit levels a year ago.

Idea Cellular reported a 4.9% sequential drop in average price realization in the data business; on a year-on-year (y-o-y) basis, average realizations are down 11.7%. Voice revenue per minute fell by 0.6% sequentially and as much as 9.7% y-o-y. The continued drop in realizations is worrying. When Reliance Jio launches its services, it is expected to lead to further price cuts by incumbents.

Of course, it’s another matter that Idea Cellular has managed to maintain profit growth at fairly robust rates on a y-o-y basis. Ebitda rose by a healthy 22.7% y-o-y, albeit lower than the 28.9% growth in the June quarter. The drop in margins in the September quarter appears to be slightly higher than expectations, although given the company’s increasing spend on 4G rollouts, it is not entirely surprising.

Idea Cellular’s shares have underperformed the Nifty index by around 17% in the past six months. As analysts at Religare Institutional Equities put it in a recent note to clients, investors have been worried about under-investment by incumbents, cannibalization of voice services by over-the-top applications and the Reliance Jio launch. In other words, there are upside risks to capital expenditure and downside risks to revenue and profit projections. Idea Cellular’s September quarter results, instead of bringing succour, add to some of these worries. Its underperformance may well continue.

[“source -livemint”]

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