Tough tariff pressures post number portability could depress revenues, analysts believe that fortunes will swing back in favour post 3G operations launch.


While the stock has bounced up on suggestions of UAE telco, Etisalat’s, acquisitive interest in Idea Cellular to expand its India presence, higher network traffic for GSM incumbents and lower competitive pressures on the tariff front are other tailwinds.

The last quarter saw GSM incumbents Bharti, Idea and Vodafone seeing a rebound in traffic on network and a moderate gain in market share in terms of adjusted gross revenues (AGR), net of interconnect charges. Idea (including Spice) saw its AGR receipts increase to Rs 2,790 crore in Q1FY11, up 9% y-o-y and 6% q-o-q. The revenue market-share expanded by about 20-25 bps q-o-q to nearly 13% of the pie even as its share of subscribers is about 10% of the total. Traffic volumes in terms of minutes of use (MoUs) were up about 13% normalized for the Spice merger.

The downward pressures on tariffs appear to have bottomed for the present although analysts expect that new GSM operators will put up a last stand when mobile number portability becomes a reality, attacking post-paid tariffs this time around. However, the business case for new operators is becoming increasingly unviable in the face of the strong presence of incumbents, according to a Motilal Oswal report. The recent newsflow of falling through of the RCOM-GTL deal also is a positive for other incumbent operators as given its stretched balance-sheet and with no immediate relief in sight, RCOM is unlikely to push down tariffs further, easing competitive intensity for the time being.

Idea’s net debt is Rs 9,660 crore as of 30 June 2010, thanks to 3G spectrum payment of Rs 5,800 crore with about Rs 1,900 crore as short-term debt. Net debt to equity ratio of about 0.83 and net debt to Ebitda ratio is about 3x, which means that there are no immediate pressure to raise equity.

The stock was up 3.2% in trade on 07 September, closing at Rs 74 at a P/E valuation of about 38x one year forward EPS estimates given its nascent operations in seven new circles. While tariff pressures post number portability could depress revenues, most analyst believe that post 3G operations launch, fortunes will swing back in favour of the incumbent operators including Idea. The company also can monetize its tower assets which include about 8,000 towers and its stake in Indus. Consolidation in the industry will help matters and Etisalat’s interest in Idea is the icing to the cake.