The Hindu Business Line : Idea Cellular dips on fears of short-term margins pressure

Mumbai, June 26 Idea Cellular stock price ended weak on Thursday , a day after the company acquired controlling stake in Spice Communications and also received a net inflow of Rs 4,500 crore by selling 14.99 per cent stake in the merged entity to Telecom Malaysia.

The stock came under some pressure because of concerns on its margins in the short term, due to the lower profitability of Spice. The company had not been doing well in the past few quarters.

Spice Communications posted a net loss of Rs 36.50 crore for the quarter ended March 31, 2008, according to a release put up by the company on the BSE. First quarter loss this financial year was higher compared with net loss of Rs 14.66 crore posted during the corresponding quarter of the previous year.

Equity Dilution

The Idea share prices touched a low of Rs 98 during the intra-day trade on the BSE before closing down 1.76 per cent at Rs 100.25. On Wednesday, after the deal was announced, the scrip had moved up by 2.92 per cent to Rs 102.05. “We view the deal as a long-term positive, even though a short-term negative impact cannot be ruled out. We maintain a buy on the stock and our target price is under review,” said Mr Harit Shah, Telecom Analyst for Angel Broking.

“In the short-term, Idea’s equity will see a 23 per cent dilution, leading to lower EPS and its margins will also witness some pressure due to lower profitability of Spice,” said Mr Shah.

On account of the deal, Idea’s equity capital will witness about 23 per cent dilution as Idea will first make a preferential allotment of 46.47-crore equity shares to Telecom Malaysia for 14.99 per cent stake and in the next stage will involve swapping Telecom Malaysia’s 39.2 per cent stake in Spice for further shares in Idea. (Promoter’s stake in Idea will fall to 47 per dent from 57.7 per cent.)

Aggressive bidding

“The deal, in addition to two established circles, would provide a war chest to Idea for expansion in the remaining circles, once the spectrum is allotted and aid aggressive bidding in likely 3G auctions,” said a research note from India Infoline. Though the price paid for Spice was a bit steep, the benefits that the deal will bring to Idea, in the long-term, was also to be considered.

“If the company was to start operations on a green field basis in these circles, it would take several months to roll out operations, post the receipt of spectrum and most likely in excess of 2-3 years for the circles to break even,” said analysts.

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