Muted performance

Updated: Oct 31 2011, 06:24am hrs
Ideas September quarter revenue of R46 bn was in line with our and consensus estimates, but Ebitda (earnings before interest, taxes, depreciation and amortisation) of R11.9 bn was 4% below and adjusted NPAT (net profit after tax) of R1.4 bn was 10% below consensus. Reported NPAT fell 40% q-o-q, impacted by higher D&A (depreciation & amortisation) and forex.

A weak result overall with below-consensus numbers, weak wireless trends and lower-than-expected Ebitda in new and old circles. Consolidated margins fell 90 bps (basis points) to 25.7%. Operating leverage via margin improvement has been a key focus, especially as competition has been stable and core wireless prices are rising; however, this is not evident in the current resultSeptember quarter is seasonally slow and management teams have been highlighting that impact of price hikes could become more visible from the December quarter onwards.

Revenue growth moderated to 2% q-o-q in the seasonally weak quarter (after recording 7% in the previous two quarters). ARPU (average revenue per user) fell 3% toR155, and total minutes fell 2% q-o-q to 106 bn, which is moderately weaker than expected. Ebitda margin fell 90 bps to 25.7%. Operating costs rose 4% sequentially, primarily on the back of an 8% increase in roaming & access charges.

Margins in established circles fell 20 bps to 29.4%, while new circle losses increased by R380 m to R1.8 bnthe highest ever, but management expects this to be the peak. Revenues rose by 3% q-o-q in these new circles to R4.9 bn, but the costs increase was 9% and this should keep a lid on consolidated margins, in our view.

RPM (revenue per minute) rose 4% q-o-q to R42.6pthe highest ever increase, which was driven by revision in promotions, roaming and VAS (value added services) revenues. It was the second consecutive quarter of rise after nine straight quarters of decline. However, we do note the rise in pricing has come with negative minutes growthtotal minutes fell for the first time since FY08; 2.4 bn minutes were lost. September quarter is seasonally slow.

The customer base has crossed the 100m-mark. Also, 91% of reported subscribers are on VLR (Visitor Location Register ), too, which is one of the best in the industry, as per Trai D&A continues to expandup 5% q-o-q. It amounted to 16% of sales. Gross debt of R127 bn was up 6% q-o-q; net debt-to-Ebitda rose to 2.65.

A strong increase in ARR (average realised rate per minute, +4% q-o-q) to 42.6 paisa was attributed to revisions in promotional tariff, higher roaming revenues and VAS contribution, including 3G (up from 12.1% to 13.2%). Particularly for VAS, gains were registered across the board including VAS based on voice, SMS and data.

3G rollout remains on trackcurrently 3G services are available in 1,600 towns, in 20 service areas (including 3G roaming arrangements). Last quarter, Idea rolled out 5,000 BTS (base transceiver stations), of which 3,000 were on 3G. However, take up rates havent been exciting; Idea had offered 3G broadband services to 2.5 m customers, of which only 750k used these seriously. In order to address this, Idea remains focused on contributing to the potential tsunami of data growth that it expects to take place in Indiaplanning to launch low-priced Android-based smartphones and feature phones. However, no subsidies are envisaged at this stage.

The management expects the tariff hikes to start showing impact from subsequent quarters-seasonally weak Q2FY12 is not the right quarter to gauge the impact, as per management. Contribution from roaming agreements resulted in an increase on both the top line as well as operating costs.

For new circles, the management considers the losses in Q2 to be the peak; also the lower sequential gain in revenues versus the rise in losses was attributed to seasonality to some extent.

Forex losses of R313 m were attributed to payables, and these included both realised and unrealised losses. The mark-to-market adjustments worth R2.8 bn pertaining to long-term loans are being capitalised. Idea remains the highest net gainer from MNP (mobile number portability)has acquired 1.3m customers from MNP so far.

Idea continues to consider VLR subscriber share (14.9%) as a more relevant metric than total subscriber share, since its more in line with revenue share (13.9%), according to management. The management remains confident that the tie-ups on 3G that Idea has participated in are completely compliant and adheres to all of licence clauses. The 5% sequential rise in D&A was primarily driven by rise in capex in the quarter, as per management. The management looks forward to participating with the government on discussions on NTP (national telecom policy), which it expects to be a long process; particularly on adoption of single licence and roaming charge removal, since as of now, there are differential tariff structures in place across circles.

Nomura