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With worries on regulatory and operational performance receding, it is advantage large incumbents in the telecom sector, such as Bharti Airtel and Idea Cellular. With adequate spectrum available for auction in January 2014 (a notice in this regard was issued at the end of last week) and rational bidding expected due to the stretched balance sheets of some operators, the last key overhang on the regulatory front seems to be behind the sector.
Naveen Kulkarni and Vivekanand Subbaraman at PhillipCapital say positives are emerging on the regulatory front, with auctions not presenting major challenges for incumbents. According to them, demand (at the auctions) is likely to be muted, as new entrants have already curtailed their footprint and are grappling with high debts due to operating losses.
Another key trigger for the sector could be activity on the mergers and acquisitions (M&A) front, with analysts saying 2014 is likely to be a year of consolidation. Such expectations have prompted Fitch Ratings to revise its outlook on the Indian telecom sector from ‘negative’ to ‘stable’ in a recent report.
Nitin Soni and Steve Durose of Fitch say while this will reduce competition and bring back pricing power to major companies, regulatory risk is also easing with cheaper spectrum, more supply of spectrum and relaxed M&A rules.
Also, the operating performance of leading players has been improving through the last three quarters, in terms of revenue per minute, margins and high data growth. Bharti Airtel, for instance, saw its voice revenue per minute rise five per cent since the March quarter, while its wireless earnings before interest, tax, depreciation and amortisation (Ebitda) margins for the domestic business rose 299 basis points during that period.
Analysts at Sharekhan say the domestic business environment continues to improve, with data likely to be the next driver of growth in both revenues and margins. While profit margins from data are weaker than those from voice due to higher investments and subscriber acquisition costs, Fitch expects the average revenue per user for data to increase on strong growth in data traffic, which will double in 2014, on the availability of cheaper smartphones and local content.
Given the strong outlook on the India business, about 70 per cent of analysts have a buy rating on the two largest listed telecom companies, Bharti Airtel and Idea, with the former being a preferred pick on account of its valuations. Analysts say Bharti is trading at more attractive levels, with most concerns factored in.
Bharti AirtelNaveen Kulkarni and Vivekanand Subbaraman at PhillipCapital say positives are emerging on the regulatory front, with auctions not presenting major challenges for incumbents. According to them, demand (at the auctions) is likely to be muted, as new entrants have already curtailed their footprint and are grappling with high debts due to operating losses.
Another key trigger for the sector could be activity on the mergers and acquisitions (M&A) front, with analysts saying 2014 is likely to be a year of consolidation. Such expectations have prompted Fitch Ratings to revise its outlook on the Indian telecom sector from ‘negative’ to ‘stable’ in a recent report.
Nitin Soni and Steve Durose of Fitch say while this will reduce competition and bring back pricing power to major companies, regulatory risk is also easing with cheaper spectrum, more supply of spectrum and relaxed M&A rules.
Also, the operating performance of leading players has been improving through the last three quarters, in terms of revenue per minute, margins and high data growth. Bharti Airtel, for instance, saw its voice revenue per minute rise five per cent since the March quarter, while its wireless earnings before interest, tax, depreciation and amortisation (Ebitda) margins for the domestic business rose 299 basis points during that period.
Analysts at Sharekhan say the domestic business environment continues to improve, with data likely to be the next driver of growth in both revenues and margins. While profit margins from data are weaker than those from voice due to higher investments and subscriber acquisition costs, Fitch expects the average revenue per user for data to increase on strong growth in data traffic, which will double in 2014, on the availability of cheaper smartphones and local content.
Given the strong outlook on the India business, about 70 per cent of analysts have a buy rating on the two largest listed telecom companies, Bharti Airtel and Idea, with the former being a preferred pick on account of its valuations. Analysts say Bharti is trading at more attractive levels, with most concerns factored in.
The stock, which lost 13 per cent since the beginning of November, due to regulatory concerns on India and prospects in Africa, rose about four per cent on Tuesday, on strong subscriber additions in India in November, and unconfirmed reports the company planned to sell its Sri Lanka unit to UAE-based telecom services provider Etisalat. Analysts say the stock price correction after the September 2013 quarter results is an opportunity to buy the stock, as the company’s performance during the quarter was good, despite the fact that it was a seasonally weak quarter.
Himanshu Shah of HDFC Securities says the three-quarter trend of rising revenue per minute would continue in the seasonally strong December quarter, without impacting demand elasticity. The Africa business, too, delivered after three quarters of regulatory changes and pricing pressures, posting record Ebidta of $301 million. Shah says further re-rating is likely, with improving dynamics in the domestic business and a revival of growth in Africa. At current levels, the stock is trading at 5.5 times its FY15 enterprise value to Ebidta (for Idea, it is 6.4 times). Given the target price of Rs 400, it is likely to see an upside of 26 per cent from these levels.
Among telecom stocks, the Idea stock has fared the best through the past year, with returns of 70 per cent on the back of flawless execution (100-basis-point revenue market share gain; Ebidta margin up 400 basis points through the last four quarters). The stock saw some weakness after mid-October, owing to market-share losses, larger minutes-of-usage drop (eight per cent sequentially, against Bharti’s and Vodafone’s four per cent) and a Rs 600-crore penalty notice from the Department of Telecommunications.
However, most analysts say voice volumes are expected to pick up, adding the downtrend was more pronounced due to seasonality in the case of Idea Cellular. The stock remains a top pick for research houses such as Macquarie, as the company is expected to be a key beneficiary of the receding regulatory overhang and the likely rate rises.
According to Morgan Stanley research, Idea’s revenue (12-14 per cent) and Ebidta growth (16-18 per cent) are expected to grow faster than peers. Analysts are, however, divided on the valuations front.
While most analysts, including Macquarie, believe valuations are reasonable, given the likely turn in the industry dynamics, Deutsche Bank analysts believe at a 17 per cent premium to Bharti and Asian peers, the valuations aren’t justified. Given the target price of about Rs 200, expect upsides of 18 per cent from current levels.
