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Telecom (Tepid growth, regulatory uncertainty) Negative
The telecom sector is reeling under overcapacity leading to stagnant
revenue, high operating cost and huge debt resulting in dwindling earnings
and regulatory uncertainty led contracting multiples. While subscribers
have grown at 10.1% CQGR, revenue has grown by a mere 0.4% CQGR
over Q1FY10-Q2FY11. Impending 3G launch and MNP introduction may be
an immediate impetus. With an abating rate of decline in key metrics,
telecom companies are expected to fare better in FY12E than in FY11E.
Companies with exposure in foreign markets, like Bharti Airtel and
OnMobile Global may see higher growth than the industry. Telecom stocks
may remain subdued during most of FY12 while towards the end of FY12E
we may see a narrowing of discounts to the broader markets once
regulatory concerns are put to rest.
⇒ Rate of decline in key metrics will taper down with ARPU declining
by average 3-4% in FY12E as against 12-14% in FY11E and ARPM
declining 1-2% to | 0.42 – 0.43 in FY12E as against 13-15% in FY11E
⇒ Growth in total minutes on network will shrink with drying of free
minutes and rationality returning to the sector. We expect total
minutes to grow 12.4% YoY in FY12 to reach 1763 billion (universe
coverage) against 26.9% in FY11
⇒ The PAT of telecom service providers is expected to decline by 41%
YoY in FY11E. However, with rationality returning to pricing and
partial turnaround of Zain, we expect PAT to grow 25% YoY in FY12
⇒ Corrective measures related to 2G scam may be harsh on new
licensees. Airtel, Idea may have to pay for additional spectrum held
while RCom faces government probe. The overall exercise may yield
a positive operating environment for the industry
⇒ Value-added player OnMobile Global may stand out in the telecom
pack with continual deployment of VAS solutions with global
Vodafone entities and Telefonica across LATAM
⇒ Telecom stocks historically trading at a 10-15% premium to the
Sensex now trade at about 20% discount. Though earnings may
recover in comparison to FY11, regulatory uncertainty and
competitive pressures would remain an overhang on stocks. We may
see narrowing of discounts to broader markets towards the end of
FY12E once regulatory concerns are put to rest
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