Upbeat on telecom, buy Bharti Airtel, Idea: Motilal Oswal

Motilal Oswal has come out with its report on telecom space. The research firm remains positive on the telecom sector.

Business momentum strong; 3G spectrum amortization and interest costs to impact earnings: We expect revenue momentum to remain strong, driven by continued growth in aggregate minutes of usage, relatively stable tariff environment and increased data usage. Amortization and interest costs related to 3G license fee paid last year would hit the P&L of companies from 1QFY12, depressing headline earnings.

Usage growth robust; slight pressure on tariffs: We expect RPM decline of 0.5/ 1.7% QoQ for BHARTI/IDEA in 1QFY12 v/s 1-3% decline for GSM incumbents in the last three quarters and an average decline of 7-8% QoQ in the preceding three quarters. We expect BHARTI to report revenue growth of ~3% QoQ, driven by ~4% mobile traffic growth. We expect QoQ revenue growth of ~3% for RCOM and ~5% for IDEA.

Expect slight margin expansion for BHARTI, RCOM; moderation for IDEA: We expect EBITDA margin to increase ~40bp QoQ for BHARTI (ex-Africa) and 70bp QoQ (consolidated), driven by operating leverage in domestic as well as Africa business. However, for IDEA, we expect adjusted EBITDA margin to decline ~50bp QoQ primarily due to 3G launch expenses off-set partially by operating leverage. For RCOM, we expect ~90bp QoQ EBITDA margin expansion, driven by higher margin in broadband and 'others' segments.

QoQ PAT trends to remain divergent: We expect BHARTI's PAT to remain flat QoQ, despite increased finance cost and amortization expenses for 3G license fee, driven by 5% QoQ EBITDA growth. IDEA's PAT is likely to decline QoQ, due to (1) one-off revenue accretion and cost reversals in 4QFY11, and (2) impact of 3G license fee-related costs below EBITDA. For RCOM, proforma PAT should grow ~23% QoQ primarily driven by ~6% QoQ EBITDA growth. We have not modeled capitalization of 3G spectrum fee for RCOM.

Industry subscriber additions decline significantly: Industry subscriber net adds have declined meaningfully in 1QFY12 to 13m-15m per month v/s 19m-20m in preceding quarters. We model an average net adds run-rate of 14m/month for FY12 and 10m/month for FY13. We are not surprised by declining trend in net adds and believe this is driven by (1) market saturation, especially in urban markets (real penetration is now >50% on pan- India basis), and (2) lower aggression and high churn rate for challengers, which implies a better competitive environment for incumbents. We believe traffic growth and data revenue contribution would be key revenue drivers rather than subscriber net adds, going forward.

MNP update: Recent TRAI data on MNP (launched 20 January 2011) suggests an increase in porting requests to 8.5m (1% of subscriber base) as of 30 April v/s 3.8m (0.5% of subscriber base) as of 28 February. Initial trends imply that MNP related subscriber churn remains insignificant; our industry interactions suggest that even 'revenue' churn is insignificant. However, full impact of potential renegotiations in enterprise tariffs is likely to be completely visible only by 2QFY12. We continue to believe that MNP is unlikely to be a game changer, given the largely pre-paid nature of the Indian market (>96% of subscriber base) and high churn levels (50-120% per year).

Valuation and view: Ongoing policy revamp (regulatory reforms) could drive consolidation, which is a positive for GSM incumbents. We believe that market mechanism could lead to price discovery of 2G spectrum lower than 3G/TRAI valuations, as potential 2G spectrum supply has increased. Revenue and EBITDA growth is likely to rebound in FY12, driven by robust traffic growth, lower RPM decline and launch of 3G services. Reiterate Buy on BHARTI and IDEA.

Tata DOCOMO tariff hike an incremental positive; RPM outlook unchanged near-term: Tata DOCOMO, the GSM brand of Tata Teleservices issued a notice that new subscribers joining the network from June 16th 2011 will have to pay higher rates for STD calls after one year of activation and also increased SMS tariffs. Tata Teleservices has a ~9% revenue market share on a pan-India basis (including CDMA) and has >5% market share in most circles. While this development reinforces our view that tariff environment is improving and indicates more rational pricing from Tata DOCOMO going forward, we highlight that: (1) There would be no impact on tariffs in the near-term; (2) The tariffs for existing subscribers remain unchanged (Tata DOCOMO had offered 1p/s tariff for life); and (3) Churn rate in the industry remains high at 8-10% per month implying that an average subscriber actually leaves the network within the first year. During 1HFY12 we continue to expect moderate declines in RPM due to (1) full impact of decline suffered in 4QFY11 (2.5-3% for GSM incumbents), and (2) seasonal weakness in 2Q.  Structurally, efforts by price leader like Tata DOCOMO to rebalance RPM indicates improved competitive environment. Every 1% change in RPM impacts EBITDA for Bharti/ Idea/RCom by 1.3-3.2%. We maintain Buy on Bharti Airtel and Idea Cellular .

Source : moneycontrol.com