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Telecom
With the industry having matured, subscriber growth has slowed down to
2%-3% QoQ for the leading players. In such circumstances, the ongoing
drop in minutes of usage and in ARPUs is hitting the telecom companies
with a double whammy. Furthermore, muted 3G uptake, negative price
elasticity for 2G voice traffic and reluctance of the newer entrants to raise
prices is likely to throttle EBITDA growth. PAT for the leading telecom
companies is likely to remain under pressure from high interest costs and
hedging and translational losses. Although the substantial currency
depreciation is unlikely to be felt substantially on the P&L, this is likely to
further weaken the sector’s balance sheet, where the impact is taken, and
burden cash flows. Regulatory headwinds from license fees on passive
infrastructure and MTC removal are likely headwinds for revenue growth
into CY12.
Negative price elasticity: As tariff hikes flow through the subscriber base over
the next three quarters, we expect price elasticity to negatively impact MoUs. We
build in a price elasticity of -1 for 3QFY12 and expect voice ARPMs to rise by 2%,
leading to a 2% drop in voice MoUs. As a larger number of subscribers face tariff
hikes in the quarters to come, the impact of negative price elasticity would be
sharper (>-1)
Profitability: We do not expect sequential margin expansion for the telecom
operators. We expect an EBITDA margin of 33.2% for Bharti and 25.1% for Idea.
Profits for the telecom operators would be impacted by rupee depreciation on their
dollar denominated loans in the form of higher interest cost and forex losses.
Preparing for the upcoming results
We maintain our estimates as published in our telecom initiation report dated
December 22, 2011.
Key factors to watch: (a) Extent of decline in MoU on account of negative price
elasticity from tariff hikes; (b) Pick up in 3G demand during the quarter; (c) Forex
losses of foreign currency loans; (d) Management commentary on various
regulatory uncertainties such as 3G ICR, excess spectrum charges, M&A, uniform
license fees, removal of mobile termination charges, implementation of one
nation-one license and removal of roaming charges etc.
Ambit v/s consensus
Our estimates for the quarter are below consensus for both Bharti and Idea. Our
estimates factor in negative price elasticity in voice revenues and slower–thananticipated
3G uptake. Our EBITDA margin estimates are below consensus also on
account of sequential margin expansion being factored in by consensus.
Recommendation
We prefer Bharti (BUY) over Idea (SELL) on account of Bharti’s market
leadership, stronger balance sheet and robust FCF generation enabling it to
absorb regulatory changes. Bharti’s recent stock price correction also makes it
more attractive. Although Idea’s recent gain in subscriber market share has led to
significant share price out performance compared to Bharti, Idea’s rich valuations
coupled with substantial operating and financial leverage makes it extremely
sensitive to regulatory changes and competitive pressures and could lead to future
disappointments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
With the industry having matured, subscriber growth has slowed down to
2%-3% QoQ for the leading players. In such circumstances, the ongoing
drop in minutes of usage and in ARPUs is hitting the telecom companies
with a double whammy. Furthermore, muted 3G uptake, negative price
elasticity for 2G voice traffic and reluctance of the newer entrants to raise
prices is likely to throttle EBITDA growth. PAT for the leading telecom
companies is likely to remain under pressure from high interest costs and
hedging and translational losses. Although the substantial currency
depreciation is unlikely to be felt substantially on the P&L, this is likely to
further weaken the sector’s balance sheet, where the impact is taken, and
burden cash flows. Regulatory headwinds from license fees on passive
infrastructure and MTC removal are likely headwinds for revenue growth
into CY12.
Negative price elasticity: As tariff hikes flow through the subscriber base over
the next three quarters, we expect price elasticity to negatively impact MoUs. We
build in a price elasticity of -1 for 3QFY12 and expect voice ARPMs to rise by 2%,
leading to a 2% drop in voice MoUs. As a larger number of subscribers face tariff
hikes in the quarters to come, the impact of negative price elasticity would be
sharper (>-1)
Profitability: We do not expect sequential margin expansion for the telecom
operators. We expect an EBITDA margin of 33.2% for Bharti and 25.1% for Idea.
Profits for the telecom operators would be impacted by rupee depreciation on their
dollar denominated loans in the form of higher interest cost and forex losses.
Preparing for the upcoming results
We maintain our estimates as published in our telecom initiation report dated
December 22, 2011.
Key factors to watch: (a) Extent of decline in MoU on account of negative price
elasticity from tariff hikes; (b) Pick up in 3G demand during the quarter; (c) Forex
losses of foreign currency loans; (d) Management commentary on various
regulatory uncertainties such as 3G ICR, excess spectrum charges, M&A, uniform
license fees, removal of mobile termination charges, implementation of one
nation-one license and removal of roaming charges etc.
Ambit v/s consensus
Our estimates for the quarter are below consensus for both Bharti and Idea. Our
estimates factor in negative price elasticity in voice revenues and slower–thananticipated
3G uptake. Our EBITDA margin estimates are below consensus also on
account of sequential margin expansion being factored in by consensus.
Recommendation
We prefer Bharti (BUY) over Idea (SELL) on account of Bharti’s market
leadership, stronger balance sheet and robust FCF generation enabling it to
absorb regulatory changes. Bharti’s recent stock price correction also makes it
more attractive. Although Idea’s recent gain in subscriber market share has led to
significant share price out performance compared to Bharti, Idea’s rich valuations
coupled with substantial operating and financial leverage makes it extremely
sensitive to regulatory changes and competitive pressures and could lead to future
disappointments.
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