Idea Cellular’s second-quarter results justify the current spate of downward revision in the valuations of Indian telecom stocks. Idea’s scrip has lost over 25% in one month. And, the latest quarterly performance does not offer any solace for investors to stop this slide.

Erosion in realisations on per-user and per-minute basis, rising percentage of subscriber outflow or churn, and widening loss of its subsidiary, Spice Communications, are the major concerns that may continue to cast a shadow on Idea’s performance for the remaining two quarters of FY10.

Idea, the third-largest listed mobile operator in the country, disappointed investors after it reported a near flat revenue of Rs 2,973.9 crore compared with the previous quarter. Net profit skidded 25.9% to Rs 220.2 crore.

Analysts had expected a jump of 5% in sales for the September quarter given additional revenue from Spice Communications — Idea’s key acquisition effective from October 2008 — and launch of operations in new circles. However, the company failed to show much growth on these counts.

A major worry for Idea is that the percentage of customers leaving its network is rising as its operation is widening across circles. Idea’s churn of 7.2% in the second quarter, including pre-paid and post-paid users, has started climbing up again from the lows of 3.9% a year ago.

Idea’s management has cited inability of user churn to be a meaningful parameter, given the advent of technology that supports multiple SIM cards. However, this change in technology is also applicable even for its peers, which have a lower churn. At the current levels, Idea’s churn is alarmingly high compared with an average 1-3.5% churn for Bharti Airtel and Reliance Communications. The September 2009 churn data is awaited for the latter two operators.

Idea has been on an expansion spree. It has added five more circles to its repertoire over the past one year. While this has increased its network costs, revenue has not increased at the same pace. Its network expenses as a percentage of sales rose 610 basis points from the year-ago period to 25.6%. Had it not been for lower roaming access charges, its operating profit would have shrunk substantially.

The company plans to expand its operations from current 18 circles to 22 by the end of FY10. This will jack up its network costs further. If its revenue fails to keep pace with this rise, the company may see a further drop in its operating margin from the current level of 27.2%.

At the current price of Rs 56.2, Idea’s enterprise value is 7.2 times its operating profit in the past four quarters. This is cheaper than EV/EBITDA of 15.5 for Bharti, reflecting the lower extent of profitability of Idea. Results of Bharti and RCom, which are due to be announced in the next few days, would provide more clarity on sector trends.