Telecom: Muted quarter for incumbents - more than seasonality:: Kotak Sec

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Telecom
India
Muted quarter for incumbents - more than seasonality. TRAI-published revenue
data for the Sep quarter confirms what we have been highlighting – the weak quarter
for incumbents Bharti, Vodafone, and Idea was more than seasonality. Don’t mistake us
– we maintain that it is risky to extrapolate single quarter metrics; nevertheless blaming
the poor quarter for incumbents on seasonality alone ignores the competitive dynamics
of the industry completely, which is even riskier. We remain Cautious on the sector.




TRAI-published financial performance data for Sep 2010 quarter – key highlights
Exhibits 2 and 3 depict the player-wise GR and AGR trends for the past few quarters. Key
highlights from the Sep 2010 quarter revenue performance
􀁠 Gross revenues growth for the industry was a muted at 1.1% qoq (after 4.6% and 3.4% in
Mar and Jun 2010 quarter, respectively), while adjusted gross revenues declined 0.6%
sequentially, reflecting a seasonally weak monsoon quarter.
􀁠 Revenue growth was particularly muted for the top-3 GSM incumbents Bharti, Vodafone and
Idea, all of which lost revenue market share (both GR and AGR) to other players.
􀁠 Bharti lost 110 bps AGR market share sequentially; its AGR share of 32.2% is the lowest since
the June 2008 quarter.
􀁠 Key revenue market share gainers included Aircel, which maintained its steady market share
gains trajectory (an AGR share gain of 125 bps in the past 3 quarters) and Uninor, which is
doing well in the marketplace, per our channel checks.

We note that (1) the data published for TRAI pertains to UAS licenses for players (excluding BSNL
and MTNL for which we include only cellular revenues) and included wireline revenues as well for
Bharti, RCOM, TTSL, Shyam Sistema and HFCL, (2) the revenue data reported to the regulator
could be different from that reported to the investors; however, the difference is marginal in case
of Bharti and Idea, while being substantial for RCOM. Nevertheless, the Sep quarter revenue data
clearly suggests that the muted quarter for the incumbents was more than just seasonality impact.

Ignoring the competitive dynamics risky; we remain Cautious
We do not share the view that competition has not had a meaningful impact on the market. To
illustrate our point of view on this aspect, we draw attention to Exhibit 1 on the next page. We
make a few observations –
􀁠 The size of the industry has barely grown in the past seven quarters (Dec 2008 – Sep 2010) – a
100%+ growth in subs base in the industry (10.5% CQGR) has translated into a 11% growth
in gross revenues for the industry (1.4% CQGR) and 6% growth in AGR (0.8% CQGR).
􀁠 Similar analysis for Bharti looks even worse on revenue performance – the company’s AGR for
the Sep 2010 quarter has barely grown from the Dec 2008 levels (and GR is up just 5%), even
as the company’s subs base has swelled 67% during the timeframe.
We find the Street’s optimism on the competitive implications of the recent regulatory
developments (CAG report etc) a tad pre-mature and near-term focused (please see our note
dated Nov 19, 2010 for our detailed thoughts on the issue). Remain Cautious.