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Expect modest volume growth in Q1: After strong volume growth in Q4
we’re expecting slower Q/Q wireless minutes growth across
Bharti/Idea/RCOM. This is driven by the 15%-25% decline in quarterly net
add rates for these telcos with flat to slight declines in MOUs. While
slightly negative for Q1, we believe telcos are increasingly focusing on
revenue generating subs/minutes – positive for H2 FY12.
Some ARPM pressure to continue: We expect ARPMs to decline again in
Q1 after Q4 broke away from the improving trend. However we expect the
rate of decline to be more modest in Q1. We forecast about 1% declines in
blended ARPM for the three telcos vs. 0-3% seen in Q4.
Wireless margin – a mixed picture: We expect slight margin
improvement (~70bp each) at Bharti and RCOM which saw 130-160bps
decline in wireless margin in Q4 while for Idea, which saw a flattish
development in Q4 we expect margins to decline 30bp in Q1.
Key issues to watch in Q1 [1] Pricing development as we expect H1 to be a
transition with most telcos indicating a better environment [2] Weaker
subscriber trajectory as telcos increasingly focus on revenue generating subs
and minutes [3] increased network opex [4] for Bharti Africa, evidence of
continued margin improvement.
Forecast changes: For Bharti, we reduce our FY12E EPS by 4% driven by
the wireless business, while for Idea our FY12E EPS declines to INR2.5
(from INR2.7) due to below-the-line costs. We slightly tweak our Tulip
Telecom estimates too. Our new Mar-12 PTs for Bharti and Idea are
INR444/62 vs. INR440/60 earlier.
While Q1, besides being a seasonally weak quarter, will also see higher 3G
related costs for the telcos, we continue to see two positives for the sector in
FY12 – improved pricing and regulatory clarity. We prefer Bharti as it is
best positioned to absorb any negative regulatory impact in addition to
benefiting from the expected pricing stability in H2 FY12 and strong
earnings growth. We also like Tulip Telecom and expect continued strength
in core business as increased fibre contribution drives both top-line growth
and margin expansion. We remain cautious on Idea Cellular primarily due to
higher exposure to regulatory risks
Bharti Airtel – Q4 trends spill-over
expected; watching for margin
improvement in Africa
Bharti India's Q1 net adds like the market have declined Q/Q. The run rate for Bharti
is –25% until May while for the GSM market it is –27%. While we expect this to
have impacted minutes growth somewhat, our conversations reveal that with a
greater focus on revenue generating and active subs, the decline in net adds was
driven by lower-end subs implying only a limited negative volume impact.
For Bharti’s India wireless business, we’re looking for 4.6% minutes growth Q/Q
after the 6.4% seen in Q4. On ARPMs, we looking for continued pressure on the
voice segment and forecast 3% decline in voice-ARPMs, somewhat off-set by
continued growth in non-wireless revenue resulting in our estimate of a 1.5% Q/Q
decline in blended ARPM to 42.6 paisa after the 2.3% decline seen in Q4. This drives
our estimate for wireless revenue growth of 3.0%, slightly below the 3.8-3.9% seen
over the past two quarters. We expect some momentum in the Telemedia business
driven by data and forecast 3.5% Q/Q growth while we expect the Enterprise
business to remain largely flat with 1% growth. After a weaker Q4 than expected in
the passive infrastructure business (only 0.2% growth seen in Q4), we expect a small
rebound with 4.5% growth.
On the costs front, we expect network opex and SG&A expenses to remain high and
forecast only a 40bp Q/Q improvement in margin to 37.0% for India and South Asia.
For Bharti Africa, we expect elasticity to have remained robust and forecast a slight
recovery in net add trend. We’re looking for 1.8% revenue growth and a 30bp margin
improvement to 26.6%.
On a consolidated basis, we forecast 2.6% revenue growth to INR 167.3bn, a 45bp
margin improvement to 33.9% and an EPS of INR 3.7.
Bharti Airtel
Our March 2012 price target is now INR444 (vs. INR440 earlier). We note that we
take an INR 28/share adjustment (quantified based on detailed analysis) for the
regulatory risk Bharti faces. Without this, our fair value estimate for Bharti is close to
INR 472.
Reliance Communications – concerned
about volumes and margins
We expect volumes to remain sluggish at RCOM given that [1] its net adds in Q1 are
tracking 23% lower Q/Q and [2] it continues to protect ARPM over volume. We
forecast 3% volume growth in Q1 (vs. 5% for Bharti,7% for Idea) and 2% wireless
revenue growth. On a consolidated basis, we’re looking for 2% Q/Q revenue growth
to INR 54.3bn.
We expect a slight margin recovery after the 1.6pp drop in wireless margin, 3.5pp in
consolidated margin Q4 and forecast a 70bp/90bp increase respectively. We’ll be
watching the capex development and leverage levels.
Reliance Communications
Our Mar-12 price target is INR 95. This is based on our SOTP-based fair market
value of INR 134/share for RCOM's core businesses and an INR 38 reduction for
estimated risk of the current regulatory environment
Idea Cellular – sharp net income decline
expected
Like the rest of the industry, Idea’s net add rate has declined Q/Q too - we estimate a
15% decline, but better than the GSM market’s 27% (as of data to May-11). With
slight MOU pressure expected to continue (JPMe -1%), we expect 7.3% Q/Q growth
in minutes, slower than the 9-10% seen in the last 2 quarters. We expect ARPM to
decline by 0.5 paisa/1.2% to 40.1 paisa which drives wireless revenue growth of
5.5% to INR 44.7bn.
Our consolidated revenue estimate is INR42,954m, +4.6% Q/Q and we expect slight
margin pressure of 30bp to 23.6%. Our concerns are around Q1 expenses and costs
[1] We expect an increase in network opex as result of towers being added late in
FY11 and 3G related network opex [2] We expect SG&A to remain high [3] Q1 will
see the incremental INR 1.2bn of 3G related interest expense impact the P&L [4] We
estimate INR 700-750m of incremental amortization too. As a result, we estimate a
sharp 64% Q/Q decline in net income to INR 987m and EPS of INR 0.30/share.
Idea Cellular
Our Mar-12 price target is now Rs62 and is based on our SOTP valuation. This is
driven by INR62 from the core business and INR13 for its 16% stake in Indus, and
we knocked off Rs.13 for regulatory uncertainty. We use a WACC of 12% and a
terminal growth rate of 3%.
Tulip Telecom – expect a seasonally
modest Q1, looking for Y/Y growth
With Q3 and Q4 being stronger quarters for Tulip Telecom, we’re looking for a
modest 1% Q/Q revenue growth in Q1 (-1% in Q1FY10, -4% in Q1FY09). On a Y/Y
basis this implies 23% growth. We forecast 28.4% EBITDA margin, a ~90bp decline
Q/Q, but +1.4pp Y/Y.
We will also be watching for a continued increase in contribution from fibre, which
was 50%+ of new orders in Q4 and an update on the data centre business.
Tulip Telecom
Our Mar-12 price target is INR 230. We value Tulip’s core business at INR 221
based on a full DCF analysis. We add INR 10/share for TTSL’s 13% stake in the
BWA JV with Qualcomm valued at INR 1,400.
Tata Communications – Watch Neotel
We forecast a modest 1% Q/Q revenue growth for Tata Communications to
INR31,036m, as a result of continued pricing pressure in the global voice and
domestic data segments. We forecast a 30bp sequential margin decline to 11.3% and
expect improvements to show from H2 FY12. We expect Neotel to continue
weighing on consolidated profitability. Our net loss estimate is INR1,596m and an
EPS of –INR5.6.
Our Q1 capex estimate is INR4.7bn (~US$110m) and we expect the company to
spend US$450m of capex this fiscal year
Tata Communications
Our Mar-12 price target of INR 180 is based on our sum-of-the-parts valuation. We
use a WACC of 13% and a terminal growth rate of 3%. The core business (ILD,
NLD voice, data and others) contributes INR12 value, its 9.5% stake in Tata
Teleservices adds INR54, while the surplus land is valued at INR114.
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