Telecom scrips to ring louder

STREET CUES

India is ringing louder than ever before. Analysts believe the last week's mega buy of Hutchison Essar by Vodafone is all set to boost the domestic telecom industry.

Last year, driven by stable regulation, innovative products, upped capex and falling equipment prices, the country's wireless penetration surged 81 per cent. But it is still only 13 per cent versus China's 34 per cent. So there is huge potential.

A recent Morgan Stanley report said: "We raise our pan-India wireless subscriber estimates, of March 2009, by 7 per cent to 314 million. Overall telecom revenues should rise 25 per cent from $15.5 billion in FY06 to $30 billion in FY09E, driven by 35 per cent CAGR growth in wireless revenues and 42 per cent CAGR rise in data revenues."

DSP Merrill Lynch recommends a "buy" on Reliance Communications (Rcom). Its profit for Q3 FY07 zoomed 199 per cent y-o-y to Rs 9.3 billion. The 3Q EBITDA stood at Rs 15.27 billion, up 13 per cent q-o-q. Consolidated EBITDA margin rose 230 basis points (bps) q-o-q to 40.7 per cent. Overall network and staff costs fell 3-4 per cent q-o-q, while its top line grew 7 per cent q-o-q and the wireless subscriber base rose 15 per cent q-o-q.

In 3Q FY07, RCom saw q-o-q margin improvement in its wireless and non-wireless segments. In the former, revenues rose 7 per cent q-o-q. The global business revenues stayed flat, but EBITDA margin expanded 230 bps q-o-q to 26.6 per cent. The broadband revenues rose 17 per cent q-o-q.

"EBITDA was on the expected line s, but headline profit was higher largely because of forex and treasury gains that resulted in net interest income for the quarter against expected interest outgo. For FY08-09E, we raise earnings for RCom by 10-15 per cent, driven by 8 per cent rise in the market forecasts," Merrill Lynch said.

"We have also raised our price target to Rs 580. In the near term, robust earnings growth will continue to overshadow LT execution risks with regard to RCom's GSM expansion," it added.

Motilal Oswal Securities maintains a "neutral" view on Mahanagar Telephone Nigam (MTNL), as it sees no upside from the current stock price.

MTNL's 3Q FY07 revenues rose 3.3 per cent q-o-q to Rs 12.6 billion. PAT surged 103.8 per cent q-o-q to Rs 2.2 billion, aided by extraordinary items comprising interest on tax refund of Rs 1.2 billion and tax write-back of Rs 579 million.

Revenues from fixed-line fell slightly to about Rs 8.9 billion, from Rs 9 billion in Q2. While the core fixed-line revenues remained stable at Rs 6.8 billion on a q-o-q basis, PCO revenues fell 7.3 per cent q-o-q and 35 per cent y-o-y. EBITDA rose 23 per cent q-o-q to Rs 2.3 billion, as interconnection costs fell.

"The rise in broadband revenues has been partly offset by lower wireless revenues. If wireless revenues also start lagging the industry growth, we may further cut our estimates. EBITDA margins improved 250 bps q-o-q, driven by lower interconnection and selling, general and administrative costs," said a recent Motilal Oswal report.

"Although revenues will grow at 9.9 per cent CAGR, earnings are likely to fall at 4.5 per cent CAGR over FY06-09E. Valuations at 27.3x FY08E earnings and 21.2x FY09E earnings are unattractive considering the bleak outlook on the core fixed-line business. We maintain 'neutral' with a target price of Rs 160," it added.