Idea Cellular plunges over 6% despite posting profit after 18 months; Is this the reason?

A ray of hope had finally arrived for Idea Cellular during Q1FY19 when it turned its losses into profit of Rs Rs 256.5 crore. It is noteworthy that Idea saw its first profit after witnessing losses in past six quarters. Idea had recorded net loss of Rs 962.2 crore in Q4FY18 and loss of Rs 815.9 crore in Q1FY18. Also, for entire fiscal of FY18,  the company’s loss stood at Rs 4,168.2 crore. However, looks like investors are not quite happy with Idea when it comes to trading in the company’s stock price as it has plunged by more than 6% and has also touched an intraday low of Rs 54.85 per piece on BSE. 

At around 1138 hours, share price of Idea was trading at Rs 55.40 per piece down by Rs 3.05 or 5.22% on BSE. With this, Idea shares have reversed their previous day gains. Idea announced June 2018 quarter ended result after market hours yesterday, which led to an increase of over 4% during the previous trading session. 

Some of the reasons, that can be for investors not finding faith in Idea Cellular share price are revenue which came in at Rs 5,889.2 crore which was down by 27.89% from Rs 8,166.5 crore in Q1FY18 and below 4.04% as against Rs 6,137.3 crore in Q4FY18. 

The decline in revenue was mainly on account of downtrending ARPU representing a normalised decline. Idea’s ARPU for the quarter was at RS 100 as against Rs 105 in Q4FY18. 

Idea blamed Reliance Jio for deceleration in their ARPU. It added, “during the quarter, the Indian mobile industry continued to decline under pressure from heavily discounted unlimited voice and bundled data plans & subsidised 4G feature phone from one of the operator, forcing commensurate response from other existing mobile operators to retain subscribers.”

Idea adds, “The sector presently offers voice and data unlimited bundles at unsustainable below cost price levels impacting the financials of all incumbent operators. As existing customers continue to prefer lower value deep discounted unlimited voice and bundled data plans, the Average Revenue Per User (ARPU) remained under pressure. 

Following the result, CLSA has downgraded Idea Cellular’s share price to sell from buy with a cut in target price to Rs 51 from previous Rs 70. 

According to CLSA, the company’s Q1 revenue was in-line, but EBITDA below estimates. Also operating metrics were weak. 

Further, CLSA also showed a red flag in Vodafone and Idea merger by mentioning that the merged company funded but gearing still out of hand. 

In its audit report, Idea stated that its merger with another telco Vodafone has been approved by Department of Telecommunication (DoT). Idea has also stated that they are in their final stage for completing merger process with Vodafone. 

The combined entity Vodafone Idea Limited will become India’s largest mobile operator and also the second largest in the world with nearly 408 million subscribers. 

However, lastly CLSA believes that Idea’s net debt will be 6.6x EBITDA by FY21 and will still remain uncomfortable.