Idea Cellular: Muted Q2, lower tower valuations disappoint
The tower sale will help bring down debt
The Idea stock fell 3.6 per cent in trade on disappointing September quarter (Q2) results and the sale of standalone towers at lower-than-estimated valuations. The company announced on Monday it had sold its portfolio of about 10,000 towers housed in fully owned subsidiary Idea Cellular Infrastructure Services to ATC Telecom Infrastructure for an enterprise value of ~4,000 crore or $611 million. While this is in line with the company’s strategy of monetising its tower assets and will help bring down its net debt as of September at ~54,000 crore, the valuations of the deal are lower than the $900 million that analysts had earlier estimated.
Analysts had pegged a higher value (over ~60 lakh a tower) for the tower portfolio given that a higher proportion (63 per cent) was ground-based and thus could fetch higher tenancies. The 30 per cent reduction over estimates given lower tenancies, which will reduce further on merger with Vodafone, means that ATC will be getting the towers at an enterprise value of about ~40 lakh a tower. This is lower than the tower deals such as ATC’s purchase of 51 per cent stake in Viom, which had a valuation of ~50 lakh a tower. Nevertheless, given the high level of debt, the deal should help bring down standalone debt going ahead. Vodafone, too, is selling its standalone towers to ATC for ~3,850 crore, taking the combined deal size to ~7,850 crore.
On the operational front, while the trend of increasing pricing pressure witnessed in the prior three quarters continued, what compounded matters in a seasonally weak quarter was higher indirect tax rates. The goods and services tax (GST) of 18 per cent increased the tax burden given the earlier 15 per cent service tax rate. In the quarter, Idea in particular faced revenue pressures given a larger proportion of rural subscribers as compared to other incumbents.
On the back of a 10 per cent fall in voice realisations per minute to 22 paise on a sequential basis and a halving of data realisations for the second quarter in a row to 2.7 p per megabyte (MB), revenues declined by nearly nine per cent to ~7,465 crore. While voice volumes grew by 1.7 per cent to 255 billion minutes, what stood out was the strong 73.5 per cent growth in data volumes to 438.6 billion MBs over the June quarter. This is better than Bharti Airtel’s 65 per cent growth in data volumes for Q2. But, unlike the leader which added 1.4 million subscribers during the quarter, Idea lost subscribers. While Bharti’s average revenue per user (ARPU) stood at ~145, down six per cent quarter-on-quarter, Idea’s sequential ARPU fall was similar at 6.4 per cent to ~132.
Falling revenues and higher operational costs (largely roaming and access fee) and employee costs (increments) led to a 20 per cent fall in operating profit to ~1,501 crore. Margins thereby shrunk nearly 300 basis points over the June quarter to 20.1 per cent and almost 10 percentage points over the year-ago period.
The operational stress, depreciation and amortisation costs on account of network roll-out, coupled with higher interest costs of ~1,182 crore, led to the company to report its fourth consecutive quarter of loss which crossed the ~1,000-crore mark. Net debt has increased from ~50,000 crore at the end of FY17 (including deferred spectrum liabilities) to the current ~54,050 crore. The company had reported a profit of ~91 crore in the September quarter last year and a loss of ~815 crore in the June quarter.
While the tower sale is a positive, the next important trigger for the company would be closure of its merger deal with Vodafone, which is currently on track and going according to plan.