Should investors switch from Bharti to Idea?

Analysts believe so because Idea's revenue & profit in the Sept quarter has been superior to Bharti's

The telecom sector is seeing an interesting shift, after the second quarter report card and subscriber additions seen in the month of October. After showing a steady improvement in its profitability, Bharti reported a weak set of numbers in the September quarter compared to rival Idea. Even though both companies have managed to add a similar number of subscribers in October, many telecom analysts are recommending a shift from Bharti to Idea, as the latter's numbers are better.

In October, Bharti reported net subscriber additions of 1.86 million, which is a big jump from its one million additions in September. Idea added 1.85 million in October against 1.73 million it added in September. Despite adding a similar number of subscribers in the first half, analysts are advising a switch from Bharti to Idea as the financial performance of Idea has been superior. In the second quarter, Bharti's India wireless revenues grew 11.3 per cent year-on-year and operating income rose 21 per cent. In contrast, Idea's wireless revenues grew 19.8 per cent YoY. The gap in the operating profit growth is much wider. While Idea's Ebitda grew 29.5 per cent during the quarter, Bharti's India wireless Ebitda grew 21 per cent and consolidated Ebitda grew by 12 per cent on a sharp decline in Africa margins.

In a note, JM Financial says that Bharti has been its top pick since end-2013 and the stock is up 18 per cent year-to-date compared to Idea, which has declined two per cent. The brokerage is now recommending switching back Idea because of a higher upside potential and superior revenue/Ebitda growth outlook over medium-term, which is not reflecting in valuation premium relative to Bharti.

  Also, Idea is purely an India focused company with no difficult overseas business. Africa continued to be a drag for Bharti's overall numbers in the September quarter, even as the India business continued to show healthy growth in sales and profit.

During the September quarter, Africa's revenues declined two per cent sequentially in dollar terms to $1.14 billion. Bharti's dollar revenues from Africa were impacted by 300 basis points due to adverse currency movement. According to Kotak Institutional Equities, Africa's Ebitda for the quarter was $270 million, down five per cent q-o-q and 10 per cent y-o-y, which was disappointing. Africa margins dipped to 23.7 per cent, down 60 basis points q-o-q and 320 basis points y-o-y. Kotak believes that the margins are the lowest quarterly margins in Africa since acquisition (barring the December 2010 quarter that had one-off restructuring costs).