Telecom Sector | Q3FY15E Results Preview (Bharti Airtel & Idea Cellular) :: IndiaNivesh

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Seasonally better quarter: Strong growth in wireless volume…
Uptick in Wireless Volume…
In Q3FY15, Bharti and Idea had shown subscriber additions of 3.5 mn and 4.0 mn,
respectively. On back of seasonal uptick, we expect 1.4%/4.1% Q/Q increase in
Bharti-India/Idea’s wireless mobile traffics. On a Y/Y basis, traffic growth is expected
to accelerate to 5.9%/16.1% for Bharti & Idea, aided by a low base. On back of
curtailment of freebies and continued strong data growth, ARPM is likely to grow
by 8.7%/3.3% Y/Y for Bharti and Idea, respectively. As a result, ARPU could also
improve for both Bharti (4.6% Y/Y) and Idea (6.8% Y/Y) during the quarter. We
expect 13.6%/21.6% Y/Y revenue growth in wireless mobile revenue for telcos (BhartiIndia/Idea)
in Q3FY15.
Muted Margin Expansion on Sequential Basis…
Despite higher volume, we expect only 4.8 bps EBITDA margin expansion for Bharti
due to depreciation in Africa revenue currency basket. EBITDA margin is likely to
improve by 42 bps Q/Q for Idea, led by 4.1% Q/Q growth in mobile traffic and
continued strong momentum in data business. Our estimates imply 3.5%/7.6%
Q/Q growth in EBITDA for Bharti/Idea, respectively.
Bharti Africa Performance to be impacted by currency depreciation…
In Africa, we estimate 1.1% Q/Q $-revenue growth due to significant depreciation
in its Africa revenue currency basket. Africa’s rupee revenue is expected to increase
by 1.3% Q/Q on account of 2.4% Q/Q depreciation in INR (v/s USD). Given the cross
currency impact, we expect Africa’s $-EBITDA margins to contract 70 bps Q/Q to
22.9%. In INR term EBITDA could de-grew by 1.7% Q/Q to Rs.16.0 bn during the
quarter.
Reliance JIO & 4G rollout, upcoming spectrum auction, key monitorables…
After aggressive competition in past spectrum auction, key event to watch out
would be next round of spectrum auction (scheduled in Feb-2015). Additionally,
4G launch plan of Reliance JIO, would be critical to watch given potential impact
on data tariffs. Reliance JIO would have to launch 4G services before May-2015 in
order to meet the roll-out obligations associated with its 2,300 band spectrum.
Maintain HOLD rating on Bharti/Idea…
On back of expected increase in competitive intensity (Post Reliance-JIO launches)
and upcoming spectrum auction (Feb-2015) telecom stocks corrected significantly.
Despite strong quarterly performance, in last three months, Bharti/Idea corrected
~14.1% each. Post this correction; Bharti/Idea is trading at 5.7x/5.3x FY16E EV/
EBITDA estimates, which at the lower end of valuation band. In our view, at current
valuation the stock price factors major negatives. However, Reliance JIO launch
remains the key near-term hangover. We maintain HOLD on Bharti/Idea with TP
price of Rs.399/Rs.167, respectively

LINK
http://www.indianivesh.in/Admin/Upload/635568216680937500_Nivesh_Q3FY15%20Results%20Preview_Telecom.pdf