Saturday, July 14, 2012

>TELECOM: Q1FY13 Results Preview

Volume growth to drive sales in Q1

We expect growth in volumes to drive revenue during Q1. This will be from better subscriber growth for incumbents (Bharti and Idea). We expect Bharti to register higher growth in revenue on QoQ basis compared to Idea Cellular driven by better subscriber growth and data business uptick. Operating margins of leading operators will witness flat to marginal expansion. Companies have reduced 3G services tariff to drive data usage. We believe that regulatory uncertainty continues to put pressure on stock performance. We continue to maintain our view that Bharti Airtel should be preferred in the sector considering the regulatory risk and because Idea Cellular is likely to face more damage despite strong operational performance on issues relating to higher spectrum pricing.

Revenue growth driven by volume – Idea to post highest QoQ growth: We expect revenue for telecom companies to grow by 1-3% on a QoQ basis on the back of minutes of usage growth. We expect revenue per minute to remain under pressure during Q1 due to the hike in service tax and reduction in 3G services tariffs.

EBITDA margin likely to be flat to marginally positive: We expect the EBITDA margin to remain flat or a bit better for telecom companies on a QoQ basis. Higher minutes of usage will drive EBITDA growth rate. We expect Bharti’s margin to improve marginally despite the fall in revenue per minute due to scale benefit.

Bharti remains our preferred pick: Bharti continues to be our preferred pick in the sector considering risk reward. Bharti will be relatively less impacted from a regulatory stand-point on one-time payout/re-farming of spectrum and removal of roaming fees. We have not factored in forex gain/loss in our estimates. We recommend profit booking on Idea in case the stock price further moves up by ~5% on better result expectation. Risk to our call: Any relief given by the regulator on spectrum pricing will lead to outperformance of Idea Cellular ober Bharti because its operations are local whereas Bharti is present in many countries.

Bharti Airtel (Rating – Accumulate; Target Price – Rs361)

  • We expect Bharti (ex-Africa) to register 3% QoQ revenue growth in Q1FY13 on the back of 3.5% growth in minutes of usage. We expect average revenue per user (ARPU) to remain flat at Rs188 QoQ for the domestic market. At a consolidated level, revenue would grow by 3% QoQ.
  • We expect the company to report an operating margin of 33.8% at the consolidated level, as the African and Indian businesses show relatively better performance in operating profit margin. We believe that pressure on operating margin would ease going forward once the Africa business margin profile improves.
  • We expect net profit (pre-forex loss) to grow marginally by 19.8% QoQ as depreciation and amortization expenses have normalized.

Idea Cellular (Rating – Neutral; Target Price – Rs73)

  • Net sales are expected to grow 2% QoQ, driven by 5.5% QoQ growth in minutes of usage. The company is expected to add 5mn subscribers during April-Jun 2012 to reach 118mn.
  • We expect the operating profit margin to remain flat at 27% QoQ as the scale benefit to an extent would get negated with tariff decline.
  • We expect net profit (ex-forex losses) to grow by 5.2% YoY (23.9% QoQ), on higher growth at EBITDA level and normalization of depreciation and amortisation.

Reliance Communication (Rating – Neutral; Target Price – 69)

  • We expect RCom to register 1.1% QoQ revenue growth during Q1FY13 on the back of minutes of usage growth of 2.6% and improvement in non-wireless business. However, we have built in 1.5% QoQ decline in revenue per minute to 43p in Q1FY13 as the company deducted data pack rates.
  • We expect operating profit margin to remain lower at 30.1% QoQ for Q4 over increase in network expenses.
  • We expect net profit to decline by 72.0% YoY (42.1% QoQ) on the back of a drop in EBITDA and higher depreciation expenses.

Tulip Telecom (Rating – Neutral; Target Price – Rs120)

  • We expect net sales to register 5% YoY decline in revenue, backed by slowdown in demand for fibre-based revenue.
  • Investment in data centre subsidiary would lead to a decline in operating profit margin by ~490bp YoY to 23.3% level in Q1FY13.
  • We expect net profit to decline 74.8% YoY on the back of a drop in operating margin and increase in depreciation.