TELECOM Seasonally strong quarter: Q3FY11 Result Preview: Edelweiss

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

TELECOM
Seasonally strong quarter: Q3FY11 Result Preview: Edelweiss


􀂄 Key highlights of the sector during the quarter
Since Q3 is a seasonally strong quarter subscriber additions have accelerated and
we expect usage also to be higher. While the industry added about 52 mn
subscribers in the quarter ending September 2010, we expect 63 mn additions in
the quarter ending December 2010, a 21% growth Q-o-Q. The monthly subscriber
additions for Bharti Airtel (BHARTI) have remained stable at about 3 mn, but
Vodafone and Idea seemed to have experienced some acceleration in November
2010.

􀂄 Result expectations for the sector and stocks under coverage
With strong subscriber growth and it being a festive season, we expect traffic
growth to accelerate in Q3FY11. We expect 5-10% surge in network traffic for
listed telecos. We believe MOU are likely to bounce back to near Q1FY11 levels
after declining about 5.0-6.5% Q-o-Q in Q2FY11. In our view, RPMs will continue
to decline around 1-2% Q-o-Q, as promotions too would have spurred traffic
growth.
We expect EBITDA margins to expand ~70bps for BHARTI given the strong
growth in traffic. We expect Africa business margins to remain stable for the
company. For Reliance Communications (RCOM) and Idea Cellular (Idea), despite
strong minutes growth, we expect EBITDA margins to remain flat Q-o-Q as we
expect the increased pace of cell site expansion will lead to higher costs.
Additionally, the amortisation of licence fee and interest cost on debt related to
3G licence (which was being capitalised so far across telecos) for half the month
of December will impact RCOM’s Q3FY11 net profit. For Tulip Telecom, in a
seasonally strong quarter, we expect healthy sequential revenue growth of ~7.5%
and EBITDA margin expansion of 50bps Q-o-Q led by operating leverage in the
fiber and IP VPN business.
􀂄 Outlook over the next 12 months
We expect some clarity on the policy front, especially on 2G spectrum pricing, in
the next 12 months. The new telecom minister Mr. Kapil Sibal seems to be
favouring consolidation in the sector and also believes more spectrum should be
allotted to operators fulfilling the subscriber criteria, contrary to TRAI’s
recommendation of a cap of 10MHz spectrum in a circle. We believe MNP will be
implemented pan-India on January 20, 2010, and will lead to increase in
competitive intensity and lower margins for the industry. 3G services will, in our
view, lead to dilution in margins in the medium term as operators will not achieve
scale as they are unlikely to price it cheaply. Stocks in the sector have continued
to underperform broad markets during the quarter. We maintain our cautious
stance on the sector as we believe valuations at 7-8x FY12E EV/EBITDA leave
little margin of safety given the uncertainties in the sector.
􀂄 Recommendations
Top picks: Tulip Telecom.