Stock Pick From The Telecommunications Sector

HERE IS WHY:

• The company has been seeing consistent growth in volume, revenues and profitability.
• Growth in data and higher penetration ensure an upward trajectory.
• It has a higher profitability outlook due to economies of scale.

The telecom industry was battling tremendous pressures in the recent past, but things seem to be settling down now. Consolidation in the industry and easing out of regulatory hang-ups has resulted in a turnaround in outlook. This factor coupled with its huge potential makes us positive on Idea Cellular, a strong player that is expected to see further improvement.

As of March 31, 2013, India’s wireless teledensity stood at 70.85 per cent. Of this, urban teledensity stood at 140.67 per cent while that in the rural areas was at 40.23 per cent. Moreover, all of 16.50 per cent of the total subscriber base accessed the internet through wireless phones. This hints at the tremendous untapped potential that the country still holds and which companies like Idea seek to capitalise on.

Idea Cellular has been concentrating on rural expansion to build a strong base and fuel growth. At the end of June 30, 2013, its 2G coverage extended to 303984 villages. Its subscriber base stood at 125 million, having grown by 2.80 per cent QoQ.

The company also witnessed 4.19 per cent growth in its ARPUs (average revenues per user) to touch Rs 174. Higher penetration and improved price realisation led to revenue growth of 7.88 per cent in the quarter to Rs 6538.77 crore.

The real nitro booster was data growth. In Q1FY14, the company’s data subscribers increased by 17.88 per cent and the total data volume by 20.75 per cent, of which 3G data volume grew by 21.09 per cent. Data as a percentage of revenues has gone up to 7.2 per cent from 6.6 per cent in Q4FY13 and 4.5 per cent in Q1FY13.

But is this fast-paced growth coming at the cost of quality? Not so, because with the highest reported VLR (visitor location register) subscribers in the industry (98.1 per cent), it is evident that Idea has maintained the quality of its subscribers.

The company has also seen tremendous profitability growth, with a blended churn of 5.1 per cent in Q1FY14 from 9.9 per cent in Q1FY13. This resulted in 3.8 per cent lower ‘subscriber acquisition and marketing cost’. Moreover, economies of scale further aided margin growth. In Q1FY14, its EBITDA grew by 24.10 per cent to `2076.34 crore, expanding the EBITDA margin by 415 basis points to 31.75 per cent.

While Idea is present in all of the 22 circles in India, seven of these are classified as ‘emerging geographies’ where Idea was a late entrant. These contribute to 27 per cent of Idea’s revenues but 39 per cent of the national market, and present scope for further growth.

Debt has been plaguing the industry and Idea seems to be in a relatively better position as compared to its peers. As of June 30, 2013, its total debt stood at Rs 12263.24 crore. The company incurred capital expenditure of Rs 329.8 crore in Q1FY13, but this was funded through internal accruals. With strong cash profits, robust cash flows, a debt-to-equity ratio of 0.85x and reserves of Rs 10989.04 crore, we reckon there won’t be much pressure on its balance sheet.

There is considerable potential for regulatory easing in the industry. Recent comments by the TRAI Chief on intra-circle roaming and lower spectrum pricing, introduction of unified licenses and clarity on the mergers and acquisitions guidelines are likely to cover the grey areas and eventually work in favour of telecom operators. 

With a high probability of an improved operating environment and robust performance at the company level, we are optimistic on the scrip's prospects.