Visit http://indiaer.blogspot.com/ for complete details INDIAN TELECOM: 2QFY11 Preview; Seasonal weakness; Growth to rebound in 2HFY11/FY12
Subscriber additions steady but most incumbents face slowdown: Industry subscriber additions in Jul & Aug 2010 averaged 17.6m/month against 17.1m in 1QFY11. The increase was driven by Uninor, BSNL, Idea and Videocon while subscriber additions declined for Bharti, RCom and Vodafone. New entrant Uninor posted a significant ramp-up in subscriber additions driven largely by high discounting vs tariffs of competitors.
Seasonal weakness: We expect 2QFY11 to be a flattish quarter due to the negative impact on MOU during the monsoon season. While major operators have shown pricing discipline, new entrants like Uninor, MTS and Videocon continue to offer significant discounts, causing some disruption in the market. We would watch out for (1) the RPM trend, (2) wireless margins, and (3) subscriber churn as key indicators of competition in the wireless market. In 2HFY11, 3G launch and MNP implementation would be the major events.
No significant tariff cuts, traffic growth to moderate: We expect a blended RPM decline for GSM incumbents of 2-2.5% QoQ vs ~5% QoQ decline in 1QFY11 and an average decline of 8-9% QoQ in the preceding two quarters. We expect Bharti (ex- African operations) to post revenue growth of 2% QoQ, driven by 4.5% mobile traffic growth. On a consolidated basis (including full quarter performance of Africa operations v/s 23 days in 1QFY11), we expect 25% QoQ revenue growth. For Idea and RCom we expect QoQ revenue growth of 1%.
Margin pressure from flat topline performance, higher diesel prices: We expect EBITDA margin pressure led by (1) flat revenue, and (2) higher diesel prices. Bharti and Idea are likely to post EBITDA margin decline of 70-100bp QoQ. For RCom, we expect flat margins due to likely better margins in the non-wireless business.
Stable QoQ PAT for Bharti/RCom; decline for Idea: We expect QoQ PAT to be flat for Bharti (lower forex loss offset by higher loss from full quarter consolidation for Africa) and RCom (lower forex loss offset by a lack of tax write-backs). We expect Idea's PAT to decline 16% QoQ due to pronounced seasonality of MOU. We expect Bharti and Idea's PAT to decline 28-29% YoY and RCom's PAT to decline 64% YoY.
MNP, adverse 2G spectrum policy, higher leverage remain overhangs: Mobile Number Portability (MNP) implementation is expected in 3QFY11 and is likely to put pressure on post-paid RPM and subscriber retention costs. In the GSM market, post-paid subscribers constitute ~4% of total subscribers and account for ~17% of revenue. Final policy decision on 2G spectrum pricing/allocation and spectrum re-farming also remains an overhang. We believe TRAI recommendations (May 2010) are unlikely to be implemented in their current form.We estimate FY11 net debt/EBITDA of 2.8x for Bharti (including Zain), 3.3x for Idea and 4.5x for RCom. However net debt/equity will remain reasonable at 1.2x for Bharti (including Zain), 1x for Idea, and 0.8x for RCom. High leverage levels could also drive better pricing discipline.
Growth outlook improving; regulatory/competitive environment challenging; valuations attractive: While strong voice traffic growth, incremental 3G revenue opportunities and potential stabilization in tariffs will drive sector revenue growth, the potential increase in competitive intensity (given aggression from new entrants and MNP implementation) and adverse regulatory developments are key risks.While Bharti and Idea trade at 7.2-7.3x FY12E EV/EBITDA, RCom trades at ~10% premium likely on expectations of corporate action (tower business value-unlocking; stake sale to strategic/ financial investors).
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