Among the operators to have come out on top after the churn in the telecom sector in 2010-13, Idea Cellular clearly stands out.

The company expanded its revenue as well as subscriber market share over the past few years and is a strong number three in the Indian mobile market.

Investors with a two-year perspective can buy shares of Idea Cellular given its strengthening business prospects.

At ₹139, the share trades at 18 times its likely per-share earnings for FY15, which is much lower than peer Bharti Airtel (35 times), despite the latter’s slower growth in financials.

This multiple is also lower than the 20-plus levels that the Idea Cellular stock generally trades at.

A steady improvement across key parameters (such as ARPM, ARPU), continuous enhancement, addition of lucrative data subscribers and a focus on maintaining a quality user base are key positives for the company.

Also, its pact with Bharti Airtel and Vodafone to provide 3G services in areas where it does not have spectrum, which was opposed by the Telecom Department, has now been allowed by the telecom tribunal.

This agreement will help Idea Cellular cater to a pan-India audience. It has also bid selectively in the recent spectrum auction, in the less expensive 1800 MHz, which would serve it well, especially when some eight service areas of operation come up for renewal in the next two years. So, capex outlay will not be high.

In FY14, the company’s revenues grew by 18.1 per cent over the previous fiscal year to ₹26,519 crore, while net profits rose 94.7 per cent to ₹1,968 crore. The spectacular increase in net profits was due to a tight leash on operating expenses, a reduction in network operational costs and a significant decline in interest costs during the year. The company’s EBITDA margin is at a healthy 31.4 per cent and its interest cover is over 10 times.

Improving parameters

Idea Cellular has been able to reduce discounts and freebies in its mobile tariffs significantly over the past year. So, its average revenue per minute (ARPM) has improved from 41.2 paisa last year to 44.2. The average revenue per user (ARPU) has increased by ₹13 in FY14 and stands at ₹170.

The increase in key parameters was also made possible by the company cleaning up its user base. So, the company now has a very active user base, where subscribers recharge regularly. Idea Cellular’s active user base is the highest in the industry.

With the explosion in data usage, the company has been able to tap users in this segment well. The number of 3G subscribers who opt for both voice and data services has doubled in the last one year to 10.2 million and account for 7.6 per cent of the total subscriber base.

In fact, data as a percentage of revenues has increased from 5.6 per cent in FY13 to 8.9 per cent in 2013-14.

This upward trend is likely to ensure further improvement in ARPUs and enhance realisation.

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