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Volume to drive revenue growth
We expect volumes to drive revenue growth during
Q4FY11 as incumbents continue to maintain their
subscriber net adds run rate. In Q4FY11 players
implemented MNP across India in Jan 2011 and
launched 3G services. We believe incumbents would
witness revenue growth with improvement in
operating margins as pricing pressure eases and
because 3G services would not put additional burden
on SG&A expenses. Bharti Airtel remains our top pick
in the sector.
�� Revenue growth to come back on a QoQ basis: We
expect the revenue for telecom companies to grow by
1-5% on a QoQ basis, on the back of minutes growth
and lower fall in revenue per minute. Subscribers net
adds during Q4FY11 remained strong for incumbents.
�� EBITDA margin expected to expand during
Q4FY11: We expect the EBITDA margin to improve for
telecom companies on a QoQ basis, as we see the
stable pricing scenario and 3G services related
marketing spend will not put additional burden. Bharti
Airtel is likely to show maximum improvement in
margins on account of scale benefit in domestic
market and potential margin expansion in its Africa
business.
�� Financial expenses may go up in Q4FY11: We
expect the telcos to register an increase in interest and
depreciation expenses. This would largely be driven
by launch of 3G services. We have not factored in forex
gain/loss in our estimates.
�� Bharti Airtel remains our top pick in the space:
Bharti Airtel continues to be our best pick in the sector
on account of improvement in the competitive
pressure in the domestic market, potential of volume
growth with stable pricing scenario, growth prospects
in the Africa regions and highest return ratios among
peers. Also, Bharti Airtel is not going to get impacted
from regulatory stand-point and current 2G
license/spectrum related issues.
Bharti Airtel (Rating – Buy; Target Price – Rs424)
�� We expect Bharti (Ex-Africa) to register 14.7% YoY (1.8% QoQ) revenue growth in Q4FY11 on the
back of an increase in minutes growth (seasonally a better quarter). We expect average revenue
per user (ARPU) to amount to Rs190 as compared to Rs198 in Q3FY11 for the domestic market.
�� We expect the company to report an operating margin of 33.6% at a consolidated level, as the
Africa business would show improvement in operating profit margin apart from improvement
in margin from domestic operations. Also, the launch of its ‘Airtel’ brand in Africa is already over
for the company.
�� We expect net profit to grow 21.1% QoQ on the back of higher operating margin.
Idea Cellular (Rating – Buy; Target Price – Rs97)
�� Net sales are expected to grow 25 YoY (5% QoQ), driven by growth in minutes of usage. During
the quarter, the company witnessed strong growth in subscriber additions.
�� We expect the operating profit margin to be higher at 25.3% on a q-o-q basis, on stable pricing
scenario and scale benefit. The company is getting the benefit from MNP implementation.
�� We expect net profit to grow by 0.7% YoY (10.5% QoQ), on higher sales growth and operating
profit margin in Q4FY11.
Reliance Communication (Rating – Buy; Target Price – Rs167)
�� We expect RCom to register 0.6% YoY (2.4% QoQ) revenue growth during Q4FY11 on back of
lower minutes growth as there are some free minutes in the system. Post clean-up of free
minutes from the system in the last few quarters and slower fall in revenue per minute, we
believe that revenue growth would be more aligned to minute growth.
�� We expect operating profit margin to remain low at 31.1% QoQ for Q4 as we expect increase in
SG&A expenses for RCom. Unlike expectation, the company has lost customers post MNP
implementation which is likely to impact ARPU.
�� We expect net profit to decline by 77.3% YoY (42.3% QoQ) on the back of lower operating
margin, higher depreciation and interest expenses.
Tulip Telecom (Rating – Buy; Target Price – Rs206)
�� We expect net sales to register 18% YoY growth in revenue, backed by growth in fibre-based
revenue.
�� Change in sales mix in favor of fibre would help maintain operating profit margin at 29% level in
Q4FY11.
�� We expect net profit to register lower growth of 2.2% YoY on the back of higher depreciation
expenses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume to drive revenue growth
We expect volumes to drive revenue growth during
Q4FY11 as incumbents continue to maintain their
subscriber net adds run rate. In Q4FY11 players
implemented MNP across India in Jan 2011 and
launched 3G services. We believe incumbents would
witness revenue growth with improvement in
operating margins as pricing pressure eases and
because 3G services would not put additional burden
on SG&A expenses. Bharti Airtel remains our top pick
in the sector.
�� Revenue growth to come back on a QoQ basis: We
expect the revenue for telecom companies to grow by
1-5% on a QoQ basis, on the back of minutes growth
and lower fall in revenue per minute. Subscribers net
adds during Q4FY11 remained strong for incumbents.
�� EBITDA margin expected to expand during
Q4FY11: We expect the EBITDA margin to improve for
telecom companies on a QoQ basis, as we see the
stable pricing scenario and 3G services related
marketing spend will not put additional burden. Bharti
Airtel is likely to show maximum improvement in
margins on account of scale benefit in domestic
market and potential margin expansion in its Africa
business.
�� Financial expenses may go up in Q4FY11: We
expect the telcos to register an increase in interest and
depreciation expenses. This would largely be driven
by launch of 3G services. We have not factored in forex
gain/loss in our estimates.
�� Bharti Airtel remains our top pick in the space:
Bharti Airtel continues to be our best pick in the sector
on account of improvement in the competitive
pressure in the domestic market, potential of volume
growth with stable pricing scenario, growth prospects
in the Africa regions and highest return ratios among
peers. Also, Bharti Airtel is not going to get impacted
from regulatory stand-point and current 2G
license/spectrum related issues.
Bharti Airtel (Rating – Buy; Target Price – Rs424)
�� We expect Bharti (Ex-Africa) to register 14.7% YoY (1.8% QoQ) revenue growth in Q4FY11 on the
back of an increase in minutes growth (seasonally a better quarter). We expect average revenue
per user (ARPU) to amount to Rs190 as compared to Rs198 in Q3FY11 for the domestic market.
�� We expect the company to report an operating margin of 33.6% at a consolidated level, as the
Africa business would show improvement in operating profit margin apart from improvement
in margin from domestic operations. Also, the launch of its ‘Airtel’ brand in Africa is already over
for the company.
�� We expect net profit to grow 21.1% QoQ on the back of higher operating margin.
Idea Cellular (Rating – Buy; Target Price – Rs97)
�� Net sales are expected to grow 25 YoY (5% QoQ), driven by growth in minutes of usage. During
the quarter, the company witnessed strong growth in subscriber additions.
�� We expect the operating profit margin to be higher at 25.3% on a q-o-q basis, on stable pricing
scenario and scale benefit. The company is getting the benefit from MNP implementation.
�� We expect net profit to grow by 0.7% YoY (10.5% QoQ), on higher sales growth and operating
profit margin in Q4FY11.
Reliance Communication (Rating – Buy; Target Price – Rs167)
�� We expect RCom to register 0.6% YoY (2.4% QoQ) revenue growth during Q4FY11 on back of
lower minutes growth as there are some free minutes in the system. Post clean-up of free
minutes from the system in the last few quarters and slower fall in revenue per minute, we
believe that revenue growth would be more aligned to minute growth.
�� We expect operating profit margin to remain low at 31.1% QoQ for Q4 as we expect increase in
SG&A expenses for RCom. Unlike expectation, the company has lost customers post MNP
implementation which is likely to impact ARPU.
�� We expect net profit to decline by 77.3% YoY (42.3% QoQ) on the back of lower operating
margin, higher depreciation and interest expenses.
Tulip Telecom (Rating – Buy; Target Price – Rs206)
�� We expect net sales to register 18% YoY growth in revenue, backed by growth in fibre-based
revenue.
�� Change in sales mix in favor of fibre would help maintain operating profit margin at 29% level in
Q4FY11.
�� We expect net profit to register lower growth of 2.2% YoY on the back of higher depreciation
expenses.
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