Telecom - Q4FY12 Result Preview - Focus on yields and margin : Edelweiss PDF link

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In Q4FY12 we expect reasonable volume growth as the wireless segment saw high intensity promotions, which led to strong subscriber additions, especially for Bharti and Idea. Though headline tariffs have not been cut, we believe intense competition will preclude rise in voice RPM. With continued high sales and marketing margins may remain stable, although absence of forex losses will boost QoQ earnings growth. Overall, commentary on impact of competition on RPMs will be keenly watched. 

Good volume growth, but voice RPMs unlikely to rise

In Q4FY12, as indicated by Bharti Airtel (Bharti), volume growth is likely to be better due to higher subscriber additions. We expect the company to report 3.2% QoQ growth in total minutes compared to 0.8% in the previous quarter. Idea Cellular (Idea) too continued to remain aggressive and we expect it to report similar volume growth as in Q3FY12 of about 7.2% QoQ. But, we believe voice RPM is unlikely to rise due to intense competition to gain market share, belying expectations. Thus, we expect voice RPM to remain stable for both Bharti and Idea in Q4FY12. 

Idea to report good numbers, Bharti’s report card to be moderate

EBITDA margins across the board are expected to remain either stable or inch up marginally. Bharti had several one offs in Q3FY12 towards sponsorship of a few events, hence, margins were expected to rise in Q4FY12. But, in Q4FY12 its sales and marketing expenses will remain high due to promotion of Airtel Money and rise in commission to distributors on higher subscriber additions. Thus, we expect its margin to expand 50bps QoQ. In Africa, volume growth is likely to be muted as indicated earlier due to protests and strike in Nigeria against petrol price hike. Idea is likely to post high subscriber acquisition cost and hence its margin is likely to remain stable. The INR appreciated against the USD during Q4FY12, thus earnings would be aided by forex gains. Idea is likely to derive a bigger benefit of INR movement as it may report forex gain of ~INR150mn in Q4FY12 compared to a loss of INR 331mn in Q3FY12. Thus, we expect Idea to report revenue growth of 7.9% QoQ and 28% YoY and earnings growth of 43% QoQ and 4.8% YoY. We expect Bharti to report revenue growth of 3.6% QoQ and 17.5% YoY with stable margin. Reliance Communications (RCOM) is expected to report yet another muted quarter.

Outlook and valuations: Mixed bag; prefer Bharti

In the medium term, we expect Idea to continue to report strong earnings growth, but over the long term its cash flows would be under strain. Bharti’s earnings growth is likely to be moderate in the near-term, but over the long term we expect it to generate strong cash flows. Thus, based on DCF, we prefer Bharti (BUY) as it has the potential to provide higher upside. It remains our top pick with a target price of INR470. We maintain ‘BUY’ on Idea with a target price of INR103. We maintain ‘HOLD’ on RCOM with a target price of INR100. We maintain ‘BUY’ on Tulip with a target price of INR 165, but assign high risk due to solvency issues. Tulip needs to unlock capital from a few avenues and focus on conserving cash flows.  

    

Telecom - Q4FY12 Result Preview - Focus on yields and margin

Regards,