Idea Cellular top pick in telecom space: AnandRathi

AnandRathi has come out with its report on telecom sector. The research firm neutral on the telecom sector due to the subdued growth outlook and regulatory overhangs, while Idea Cellular  is top pick. It has struck an appropriate balance between network and margin expansion, and this should drive high earnings growth over FY12-14.

• Lower trade push to affect volume growth: In 3QFY12 we believe telecoms operators recorded lower gross subscriber additions (adjusting for de-activation of inactive ones) to control wasteful SIM card sales and save on acquisitions costs. This would further drag on volume growth, which has been slowing due to voice-market saturation. We expect combined voice-minutes growth for Bharti, Idea and RCom to decline to 10.5% yoy (from 11.2% in 1QFY13 and 12.2% in 4QFY12). We expect margins to be steady yoy.
• Stable realisations, lower channel costs to counter seasonal margin pressure: We expect ARPM to be largely flat qoq (vs the decline in the last two quarters) due to lower tariff moves and ongoing traction in nonvoice revenues. This, along with attempts by the industry to control channel expenses, should counter the margin pressures typically seen in the second quarter. Note that EBITDA and PAT margins would be down yoy due to the high base because of tariff hikes last year.
• Our take: We are neutral on the telecoms sector due to the subdued growth outlook (slowing volume growth, competitive headwinds) and regulatory overhang. Our top pick is Idea. It has struck an appropriate balance between network and margin expansion, and this should drive high earnings growth over FY12-14.

2QFY13-Results preview:

Bharti Airtel  -

We expect 13.3% growth in Bharti's consolidated revenues, driven by 29% growth in its African revenues in rupee terms (8.3% in US dollars). We expect 7.4% growth in its South Asian revenues; the wireless business is expected to grow 7.1% while passive infra revenues (up a mere 2.9% yoy) would drag on growth. (Passive infra business has been affected by the operational scaling down of telcos facing cancellation of licenses.) We expect consolidated revenues to be up a mere 1% qoq due to seasonality in the wireless business in India. We expect Bharti's consolidated EBITDA margin to be largely stable qoq, resulting in flat EBITDA qoq. In 2QFY13, we expect qoq decline in its profit, assuming 'zero' forex and derivatives gains/losses (vs a 1QFY13 `1.6bn gain). 

Idea Cellular -

We expect 16.5% growth in Idea's consolidated revenues, driven by 19% growth in its wireless minutes. We estimate a significant slowdown in yoy revenue growth from 22-27% in the preceding three quarters. This would be because of 1) the high base effect as tariffs were raised in 2QFY12 only to be reversed in the following quarters, 2) slowing industry volume growth and 3) keener competition from Bharti Airtel which has tactically decided to focus on market share in the short to medium term. Our assumptions imply 2.2% decline in consolidated revenues in 2QFY13.

Reliance Communications  -

We expect 6.4% yoy (and 1% qoq) growth in RCom's consolidated revenues, driven by 7% growth in wireless voice minutes. RCom's results are not as seasonally sensitive as Bharti and Idea, as the former's network footprint is largely urban. We expect EBITDA margin to be stable qoq. We note that cost items below the EBITDA line (especially depreciation/amortization, minority share and tax) have been very volatile and difficult to forecast.

Tata Teleservices (Maharashtra)-

We expect Tata Tele (Mah) to record a 10% yoy growth in revenues, sustaining the buoyancy witnessed in preceding three quarters. We expect EBITDA margins to be flat qoq, implying a 250-bp yoy decline. We expect net loss to be broadly similar to that in 1QFY13.