Idea Cellular – Weak Quarter + 3G Weigh on Balancesheet for Next 3 Quarters

Idea Cellular – Pure Play 2G Wireless Operator reported a weak and a worse quarter, ending Sept-30. I don’t BUY the seasonality argument as pitched by management and other analysts as Telecom is the most affordable essential service [once upon a time luxury] the rural folks have. Telcos must devise a strategy to arrest such bumps.  Here is an excerpt from the Results as well as Con Call

  • ARPU for the quarter came in at Rs167, down 8.2%qoq and 21.6%yoy and unexpected ~5.1%qoq drop in usage/subscriber/month to 394mins (our and street est. 413mins).  On the contrary, Uninor managed to increase its ARPU to Rs 91 from Rs 84 suggesting we maybe at the end of the Tariff war but not done yet.
  • Pre-paid churn continues to remain high at 8.2%
  • Management said that decline in revenue per minute was largely driven by acquisition products and retention initiatives and not headline rate cuts.
  • As a result of a higher number of towers, higher average tenancy and some operational performance Towers Division saw a healthy  EBITDA
  • Network opex that had been steadily rising over the last few quarters will continue its upward trend even after the 3G launch.
  • 3G – Management hinted that Idea would roll out the 3G network aggressively over the next 3-4 quarters, which could put margins under pressure.  Rollout of 3G network in a phased manner from Jan – Mar 2011.
  • Mgmt expect the capex to be lumpy over the next three quarters given the 3G rollout.
  • Mobile Number Portability – Given its 3G capabilities which allow it to cover 75% of the present subscriber base and 80% of the revenue base, there is low risk on the basis of QoS for Idea’s Subscribers to migrate.
  • Regulatory – Roaming, interconnect and tariff related regulatory activity will add to the uncertainty related to license renewal payouts.
  • Other Regulatory Hurdles for Telcos – Government decision on 2G spectrum payouts at licence renewals, roaming charge cuts and interconnect revisions
  • M&A will be an integral part of Idea’s strategy. Media Reports suggest that Etisalat would consider Idea for a possible merger or acquisition.

Across the industry, the next couple of quarters will see some pressure on sector profitability (as 3G fee amortisation and CAPEX costs will increase), one thing to keenly watch is how the data story unfolds. What say ?