Posts tagged bharti airtel

OVERALL OUTLOOK:

• The three major Telecom Sector Operators Bharti Airtel , Reliance Communications & Idea Cellular came out with their Q2FY10 results in October 2009.

• While Bharti Airtel & Idea cellular came out with results around analysts expectations Reliance Communications posted figures which were way below street expectations

• The companies witnessed muted growth on top line front with sales not growing as analysts expected. This was due to less than expected growth in subscribers and with a decline in ARPU’s and MOU’s over the last five quarters

• Among the key revenue segments Wireless services registered a less than expected increase with Passive Infrastructure(towers) business registering a healthy increase The companies witnessed muted growth in EBITDA margins but PAT margins registered a healthy increase mainly on account of cost cutting and decreasing interest costs

• The current outlook of the telecom operators looks bleak considering growth which was a major factor for the valuations which the companies used to command is bottoming out because we are witnessing teledensity of more than 100% in the major metros which are major revenue drivers, intensifying competition because of entry of new players like MTS, Tata DOCOMO and with companies like Uninor, Swan, Loop due to start operations existing operators do have to slug it out to fight competition of falling call rates and subscriber churn

• Increasing competition and muted growth has made telecommunication a matured play and with the rural market being a low margin segment the rural growth story will not command higher valuations and with new services like 3G and Wimax being delayed due to regulatory hurdles the present outlook for the industry doesn’t looks favorable and with Mobile Number Portability (MNP) due to come there would be a churn in subscriber base making it all the more difficult for the existing players

• Our analysis concludes that declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S, saturation of urban customer base, increasing competition and regulatory hurdles makes telecom an unfavorable play to be in at the moment and until there is a clear picture on revenue front which would come out after 3G auctions and with the regulatory hurdles sorted out any valuations made for these companies would be unjustified so we would suggest staying away from this sector even though all major players have seen their stock price tumbling by 30-50% and with most of the damage already being discounted

• We strongly believe that Bharti Airtel is the only stock in the sector which is to some extent suited to investment and one can add the stock to their portfolio since it would benefit with entry into the 3G spectrum (largest 2G subscriber base) and value unlocking from Bharti Infratel and Indus Towers

• ARPUs have declined continuously with increasing competition leading to price wars
• MOUs have along being declining with saturation of high usage metro circle and entry into the low usage rural circles
• Bharti and Idea’s market share has declined and Reliance Communication’s has increased. However this is mainly on account of entry into the GSM spectrum
• All of this has lead to a slowdown in revenue growth, however the operating margins are maintained on account of reduction in advertising expenses and interest cost

Author: Rahul Sonthalia, Analyst, Kredent Group