Tuesday, October 26, 2010

Telecom Sector - Avoid

Driven by the seasonality factor, the telecom sector is expected to experience weak show in September quarter. On a sequential basis, while revenue growth will be muted for the sector, a marginal improvement on profit after tax (PAT) due to forex gain is expected, say industry experts.

"The 3.2% appreciation of the rupee over the last quarter should boost the reported profits on account of forex and derivative gains," said IDFC SSKI in a report. Also, with the phasing out of free minutes from the network, minutes of usage will be flat which will further decline average revenue per user (ARPU). Margins of the telcos will be range bound due to lower MoUs, they say. Thus, declining revenue per minute and lower wireless margins will impact profitability in this quarter.

"We expect MoU per subscriber per month to remain flat due to stricter subscriber verification norms and cutting down of free minutes on the network. Industry subscriber additions in the quarter averaged 17.6 million per month. The increase was driven by Uninor, BSNL, Idea and Videocon (VIDEOIND.NS : 265 -0.6) while subscriber additions declined for Bharti, RCom (RCOM.NS : 179.55 +0.4) and Vodafone.

However, subscriber growth of 6-8% quarter on quarter (QoQ) will be largely offset by 3-4% QoQ average revenue per user decline, leading to low-single digit sequential growth in wireless revenue. "We expect the downward trend in average revenue per minute (ARPM) to continue with a 1.8-2.2% QoQ decline for the top three operators-RComm, Idea and Bharti Airtel (BHARTIARTL.BO : 337.2 0) (Airtel)," said Srishti Anand an analyst with Angel Broking.

Market leader Bharti Airtel's consolidated revenue is likely to increase 25% on a quarter on quarter basis, mainly driven by consolidation of the Africa business.

"However, consolidated net profit is expected to decline 1.6% QoQ (lower forex loss offset by higher loss from full quarter consolidation for Africa)," said Shobhit Khare and Nirav Poddar from Motilal Oswal in a note.

Idea Cellular is expected to post a 0.7% consolidated QoQ revenue growth. Its margins in established circles is likely to come down QoQ by 100bps. Idea's is expected to post a 16% decline in PAT on QoQ basis.

For Reliance Communications (RComm), we expect revenue to grow sequentially by 1%. Its EBITDA margin is expected to remain stable at 32% led by margin recovery in global and broadband segments. RComm PAT is expected to stay flat QoQ.

While strong voice traffic growth, existing rural and incremental 3G revenue opportunities and potential stabilisation in tariffs will drive sector revenue growth, the potential increase in competitive intensity (given aggression from new entrants and MNP implementation) and adverse regulatory developments remain key concerns for the sector.

Source : FE

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