Idea Cellular: Signals strengths
26th July, 2016
The Economic Times
26 July 2016
As the industry enters a turbulent phase, Idea offers an opportunity for long-term investors.
Reliancejio is expected to launch its operations in October. Since the company's investment and spectrum holding is significantly higher, investors fear that this may cause disruption among existing operators. As per initial estimates, Reliancejio may launch data pack at 50% discount to the existing players. The next few years could be a painful period for the entire industry. While increased competition - loss of customers, price reduction, etc. -will result in high operational expenses, forced high capex spending would further strain balance sheets.
Even as telcos are taking steps to counter Jio's entry-offering more data at the same price-analysts feel that Idea Cellular, in particular, is a strong player and would be able to navigate this painful period successfully. For the past few years, Idea has been reporting industry beating growth rates.
While Idea's subscriber base grew at 28% compound annual growth rate between 2007-08 and 2015-16, the company's revenue grew 23% during the same period. The company also has formulated a different strategy to deal with heightened competition. Though Idea will match industry peers in terms of pricing, its focus will be more on better 'profitable minutes' and not on subscriber additions. To mitigate the pressure from increased capex, the company is also undertaking steps to rationalise other costs.
The upcoming spectrum auction is a worry, and the Idea management is expected to exercise circle-wise discretion focus only on critical pockets like Gujarat and West UP-and won't aggressively bid for all circles. While the top three telcos - Airtel, Vodafone and Idea-may be able to withstand the Reliancejio onslaught to some extent, several smaller players may exit the business altogether. As much as 28% of the industry revenue is contributed by the smaller players. This offers the possibility of the bigger players making up their market share loss to Reliancejio by picking the smaller players' marketshare.
The next two years' pain will be visible in financials also. And, as per consensus estimate, Idea's net profit and earnings per share is expected to shrink. However, analysts are getting bullish this counter because most of the bad news is already priced in. Its valuation is also close to the bottom. But investors who may want to go for bottom fishing should invest with a long-term investment horizon in mind. Since the industry's pain is expected for the next two years, the holding period should be close to at least five years.
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