Though volume growth continues to be robust, severe pricing pressure is impinging on profitability of telecom companies.
Despite the volume boost in terms of number of subscribers as well as minutes on network growing quarter-on-quarter, wireless telephony service providers are struggling to sustain growth in revenues and profitability. The price war which was unleashed three months ago continues to take its toll as new players launch their services at attractive price points and existing players try to match them. Among the three largest listed players in this space, Idea Cellular surprised in terms of subscriber and sales revenue growth for the December 2009 quarter.
Trend in sales
Backed by a 12 per cent increase in its subscriber base with an addition of 6.2 million subscribers, Idea recorded a sales growth of 6 per cent for the quarter ended December 2009.
Though the numbers are coming off a lower base in September 2009 quarter, the company has held its own when compared with Bharti Airtel and Reliance Communications (Rcom) which saw revenues for the quarter fall 1-7 per cent. Total minutes of usage (MOUs) on the network was also up by a hefty 15 per cent for Idea compared to 6.6 per cent for Bharti. MOUs might increase for Bharti going ahead as customers migrate to lower tariff plans.
Non-wireless and enterprise services revenues for both Bharti and Rcom were disappointing. For Bharti, while telemedia (broadband) business revenues were flat on a sequential basis, enterprise service revenues were down 4 per cent. Rcom’s global business revenues saw a sharp fall of 18.5 per cent sequentially, while its broadband business revenues fell 9.2 per cent. Competition and higher costs dented ebidta (earnings before interest, depreciation, tax and amortisation) margins for all players.
| SALES, MARGINS DROP | |||
| in Rs crore | December 2009 quarter | ||
| Bharti | Rcom | Idea | |
| Net Sales | 9,772 | 5,309 | 3,149 |
| % change q-o-q | -0.7 | -6.8 | 5.9 |
| Ebidta margin (%) | 40.0 | 34.1 | 25.8 |
| q-o-q change (bps) | -200 | -130 | -140 |
| Net profit | 2,061 | 457* | 170 |
| % change q-o-q | -5.1 | -40.1 | -22.75 |
| P/E (x) FY10E | 12.8 | 9.0 | 22.5 |
| P/E (x) FY11E | 13.4 | 10.3 | 29.3 |
| * excludes forex gains | |||
Falling profitability
Bharti’s ebidta margins fell the most tanking 200 basis points to 40 per cent on the back of a 9 per cent fall in average revenue per user (ARPU) and 8 per cent fall in average revenues per minute (ARPM).
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While revenue growth was flat sequentially, operating expenses were up 3 per cent. While Rcom’s revenues fell sharply by about 7 per cent, it managed to prevent a steeper margin fall by controlling costs which came down by 5 per cent. The launch of services in five areas and a drop in margins for its subsidiary, Spice, saw Idea’s margins get depressed by 180 basis points to 26 per cent. Given that the peak capex is already over for Rcom and Idea, and Bharti is expected to have a lower capex, expect costs to come down in the quarters ahead which will partly offset the margin decline due to the price war.
At the net profit level, while Bharti saw a fall of 5 per cent to Rs 2,209 crore on a sequential basis, the same was offset to an extent by a forex gain of Rs 149 crore. On the other hand, forex gains helped Rcom report a 49.5 per cent jump in net profit to Rs 1,107 crore. Higher depreciation, taxes and lower margins hit Idea’s bottomline that fell 22 per cent to Rs 170 crore.
| MORE TALK, LESS VALUE | |||
| Q3, FY2010 | Bharti | Rcom | Idea |
| Subscribers (in crore) | 11.8 | 9.3 | 5.7 |
| % change q-o-q | 7.5 | 8.9 | 12.0 |
| ARPM (Rs) | 0.5 | 0.5 | 0.5 |
| % change q-o-q | -7.9 | -4.2 | -8.9 |
| MoU | 446.0 | 340.0 | 389.0 |
| % change q-o-q | -0.9 | -2.9 | 3.7 |
| ARPM=Average revenue per minute; MoU=Minutes of usage | |||
Triggers and risks
Launch by new players and attractive pricing offers by existing players have aided in a robust new subscriber growth month-on-month for December 2009 to 1.9 crore. Analysts say that Bharti’s market share as well as its network volume growth has fallen more than the rest as the new players especially Tata Docomo have launched services in areas where Bharti gets a substantial chunk of its subscribers and revenues. Pre-paid churn for the market leader has also increased to 6.5 per cent from 4.6 per cent due to one-offs such as ban on prepaids in J&K and non-IMEI handsets.
Going ahead MNP and 3G are the two triggers with the former impacting GSM players more while the latter will be a test of balance sheet strength in which case Bharti is better prepared.
Valuations
The sum-of-the-parts (SOTP) calculation for Idea, Bharti and Rcom which includes their tower businesses adds up to Rs 55, Rs 367 and Rs 170, respectively.
While Idea and Rcom are already trading at their respectively SOTP values, an investment in Bharti could fetch you 20 per cent returns from the current levels.