Telcos fired up for strong Q2

Driven by robust net subscriber additions, telecom companies are poised to deliver yet another quarter of strong earnings growth.

In August, telecom companies added 8.2 million subscribers as compared with 8 million in the previous month, according to the Telecom Regulatory Authority of India (Trai). It should be a similar story when the Trai releases the figures for September.

Analysts expect that Bharti Airtel, Reliance Communications (RCom) and Idea Cellular will post over 50 per cent annual growth in revenues (year-on-year) and more than 10 per cent sequential growth (over the previous quarter). 
 

KEEP TALKING Q2 expectations by brokerages
(Rs Crore)	Sales	% chg*	Net Profit	% chg*
Religare
Bharti Airtel	6451.2	48.06	1551.3	66.04
Reliance Comm	4718.4	33.82	1184.1	68.6
Motilal Oswal
Bharti Airtel	6499.4	49.16	1517.3	62.4
Reliance Comm	4845.8	37.43	1131.3	61.09
* year-on-year estimated growth rate

Bharti continues to lead in the subscriber addition race (2.1 million in August). Last week, the company announced that it had crossed the 50 million subscriber mark.

The performance of telecom operators today resembles that of information technology (IT) companies a year ago, when they registered 40 per cent revenue growth and more than 70 per cent growth in net profit (year-on-year).

According to Morgan Stanley, increased capital expenditure (capex) spend by operators, innovative products, increase in tower sharing and the renewed impetus for rural telephony from regulators should result in higher subscriber growth.

Analysts at research and investment company Religare say that in the first two months of the second quarter, Bharti, RCom and Idea Cellular contributed 54 per cent of net subscriber additions. Add Vodafone's numbers and that could go over 70 per cent.

They expect Bharti's net revenue to grow at 50.3 per cent year-on-year and 10.9 per cent quarter-on-quarter, RCom's net revenues to grow at 34.6 per cent (y-o-y) and 10.3 per cent (q-o-q) and Idea Cellular's net revenues to grow at 63.4 per cent (y-o-y) and 11.6 per cent (q-o-q).

Analysts at stockbroking house Motilal Oswal expect Bharti's overall revenue to grow 10 per cent (q-o-q) and overall EBITDA margins (operating margins) to increase 36 basis points (0.36 per cent) to 41.80 per cent.

They say overall RCom revenues would grow 12.6 per cent (q-o-q), but overall EBITDA margins would decrease by 20 basis points (0.20 per cent) to 42 per cent. The analysts expect Bharti's net profit to be flat sequentially, while RCom's net profit may decline up to 7 per cent as the first quarter had one-time forex gains on the rupee's appreciation.

Usage concerns

While the growth story is intact, falling average revenue per users (ARPUs) remains a concern.

Motilal Oswal analysts expect Bharti's ARPU to decline 2.6 per cent to Rs 380 and RCom's ARPU to fall by 3 per cent to Rs 364.

The Trai's latest figures also reveal that the all-India blended ARPUs (both pre- and post-paid) for GSM players fell to Rs 297 a month, while those for CDMA players went up to Rs 206 in the quarter ended June 2007.

ARPUs in the post-paid GSM sector went up 7 per cent to Rs 655 in the quarter ended June 2007, while ARPUs in pre-paid fell 0.8 per cent to Rs 248, which is a concern, as about 95 per cent of net additions are pre-paid customers.

Analysts believe that ARPUs should increase when 3G services are introduced. However, this could take some time as spectrum is being mooted for 2G players now. Net subscriber additions would make up for the decline in ARPUs, the analysts say.

Moreover, tower sharing among telcos will help them reduce their capex and increase profits. Tower sharing, Morgan Stanley analysts reason, has a payback of 6-8 years, which will depend on tenancy rates. They estimate that the consolidated earnings for Bharti and RCom will increase 2-3 per cent in 2008-09 (E) and 13-15 per cent in 2009-10 (E) from the tower business.