Investors worry about the idea of a debt-heavy Idea Cellular

MUMBAI: Shares of Idea Cellular fell 2.6% on Wednesday after the company denied the rumours of a merger plan with Vodafone.
The fact that the stock rallied on Tuesday afternoon buoyed by the rumours shows the uncertainty about the future of the second-largest listed telco, saddled with debt that is expected to rise further after the fresh round of spectrum auctions in the next few weeks.

Idea's stock had a bumpy ride over the past year losing 35% during the period compared with its bigger peer Bharti Airtel, which held on to its year ago price level.

Intense competition, which is making it difficult to improve realisations without sacrificing volume growth, and recurring need of funding expansion on new service platforms thereby increasing the debt burden are major concerns for Idea.

For instance, in a bold step, Idea decided to do away with promotional freebies two quarters ago. Though this improved average realisation per minute (ARPM) to 47.7 paise in the June quarter from 44.8 paise in the December 2015 quarter, average minutes of use (MoU) dropped to 379 minutes from 393 minutes QoQ. To check further fall in usage, Idea plans to realign tariffs with respect to that of the competition. While this may restrict a fall in MoU, ARPM may cease to show improvement in the coming quarters.

The scene on the data front is not encouraging either. Unlike in case of voice tariff, Idea has been following the strategy of expanding volumes by dishing out discounted tariffs. In the June quarter, its total data volume increased by 13.4% from the quarter ago but average realisation fell by 8%.

The tariff and volume trend in voice and data segments shows the high intensity of competition, which is expected to increase once Reliance Jio commences its services. This may prompt Idea to use the upcoming spectrum auction for expanding 4G presence, thereby, increasing its non-current debt from `37,869 crore at the end of June 2016.

After the June quarter results, ICICI Securities lowered Idea's rating to `reduce' with a 12-month target price of Rs 100.

The Idea stock fell 2.6% to close the day at Rs 98.2 on Wednesday.