Ever since Reliance Jio’s entry into telecom sector, Idea cellular has suffered. The stock has seen 35% fall in the current year alone. Investors are worried about the fall and wonder if the fall in stock price is a temporary phenomenon or it’s a prolonged correction. The stock closed flat in today’s trading session. Let’s look at what are the various reasons due to which the stock is languishing on bourses.
Concerns over Merger Delay
In comparison, the S&P BSE Sensex has edged up one percent in the current year and 0.28 percent for the day. There were concerns about the delay in a merger between Idea Cellular and Vodafone India. The stock has reached its lowest level after January 20, 2017, and the company announced its merger on March 20 last year. The merger is pending before the department of telecommunications since it is waiting for Department of Industrial Policy and Promotion (DIPP) to provide its approval for increasing the limit of foreign direct investment to 100 percent.
This is required in respect of Idea Cellular before giving approval for the merger with Vodafone India. In any case, the telecom firm could continue to face the pressure following the price cut announced by Jio; Business Standard reported quoting ICICI Securities analysts. Any price cut would reduce the margin of the telecom company as the sector is bearing the brunt of Jio’s entry.
In a preview of fourth-quarter results, the brokerage stated that “We expect around 6.5% decline in ARPU (average revenue per user) to Rs 107 during the March 2018 quarter, which also witnessed continued down trading by high ARPU customers. Consequently, we expect around 4.6% decline in revenue at Rs 62.12 billion. On the EBITDA front, the IUC impact coupled with negative operating leverage would result in around 330 bps decline in margins at 15.5% during the quarter.”
Similarly, Edelweiss Securities think that revenue could drop further by 5.8 percent on a quarter-over-quarter basis. This is based on the expectation of 9.2 percent fall in average revenue per user (ARPU). The brokerage also sees voice and data realizations to fall 15.2 percent and 9.5 percent respectively though volumes could grow 8.0 percent and 13.9 percent respectively.
Aside from that, the analysts estimate EBITDA margin to drop 2.6 percentage points to 16.2 percent on a quarter-over-quarter basis. This would allow the net loss to balloon to Rs.14.4 billion from Rs.12.8 billion in the December quarter. The brokerage wanted investors to keep a tab on the updates of merger and the tactics to curb subscribers migrating to Jio.
Investors’ concerns about the merger were quite natural since Reliance Communications merger with Aircel faced rough weathers from the regulators. The two companies’ coming together would have helped to bring down the debt burden. But that did not happen, and both have to scrap their merger deals. That incident is still hurting investors’ sentiments towards Idea Cellular stocks.
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