Idea cellular is in bad shape financially and it does not make sense to invest in the company for those who are looking for multibagger return in 2018.
Idea Cellular has posted another lackluster quarterly result, which was very much expected considering the disruption in the telecom sector caused by the much hyped launch of JIO.
Though, the share price has fallen 10% post Q3 result. Now many people see a value in the stock and they expect it to bounce back after the merger of Idea and Vodafone in FY 2018. However, that is an illusion. Smart investors are dumping the stock, so there is no reason for novice investors for buying or holding this stock.
Losing Market Share
Thing is that Idea Telecom has not been able to save its turf after the advent of JIO. Airtel’s market share is 24%, which is intact even after JIO disruptive effect. Therefore, the growth in the market share has been largely at the expense of Idea. And they’ll keep losing the market share as they don’t have financial muscle to offer freebies as given by JIO and Airtel. They are not in a position to do a CAPEX for technology upgradation either.
Balance Sheet in Bad Shape
If balance sheet is the barometer of the health of a company, Idea Telecom does not raise hope at all. Compared to Idea, Airtel’s balance sheet is in much better shape. It has recently sold out its Bharti TV at a good valuation.
“Clearly, IUC cut has hit the company. The numbers are weak and this is expected to continue for the next few quarters. Jio’s price war is still on, and Idea will continue to see downtrading in its ARPU (average revenue per user),” writes Live Mint based on some telecom analyst observation.
Also Read: Is Dilip Buildcon Next Larsen & Toubro
There is not much scope for deleveraging the balance sheet as they have already sold their tower business. Idea’s net debt as on 31 December was Rs 55,781.8 crore that includes a large component of debt from Department of Telecommunications under ‘deferred payment obligation’ for spectrum acquired in auctions.
Debt/EBITDA is 10X and there is very high probability that it will further worsen in the next 2-3 quarters.
Note: Debt/EBITDA ratio is used to assess a company’s probability of defaulting on issued debt. A high ratio means that company may not be able to service debt in the near future.
As per the Kotak Institutional Equities, the company (Idea) may need to accelerate its efforts on tower monetization or have to live with constraints on capex. This will seriously affect the growth of the company. In the next few quarters, the performance may not increase considering the dip in the revenue from IUC charges, which has come down significantly after TRAI reduced it significantly.
Merger Synergy is an illusion
Past experience suggest that merger of two telecom companies has hardly been successful and expectations are hardly realized. So the much talked about merger synergy is a pipe dream.
Merger will only be complete in the next 3-4 years and as expected, it won’t be the largest telecom company, but maximum third largest company as expected by analysts. This is because of the difference in the cultures of two companies.
The predicament of Idea telecom is not going to ease in the near future as believed by Stallion Assets Amit Jeswani. He is of the view that telecom market will witness a lot of consolidation in the next 2-3 years. After that a lot of money will be made by more established player such as Bharti Airtel and JIO. Idea-Vodafone will be in the market, but their market share will be taken by Bharti Airtel and JIO. So, investors have much better chance to make money with Bharti Airtel than Idea.
The company is not able to attract subscribes, rather its losing out existing ones. Their current EBITDA is around 25%, whereas for Bharti, it’s 35%.
Note: EBITDA margins provide investors a snapshot of short-term operational efficiency. So, higher EBITDA margin means better short-term financial operational efficiency.
Price War is Expected to Continue
If you think that price war among telecom companies is over, you are mistaken. JIO has already announced another price-cut. So this will continue in the future as well. Also, JIO is focusing more on pre-paid that gives it cash flow, whereas Idea is still focused towards post-paid subscribers.
JIO’s current market share is around 15% and they had intended to gain around 20% market share. But, the recent price cut shows that the company has ambition to get larger pie of the subscriber base.
Therefore, the pressure on the industry will be there for the next 2-3 quarters, which is certainly not good for the company.
The view on Idea is bearish in the market, so investors should stay away from buying the share as of now.