Slower growth to impact mobile operators' revenues, say analysts
January 18, 2010
Worsening metrics in the Indian wireless (mobile) industry are likely to converge into significant pressure on earnings of incumbents, say analysts.
"For the third quarter of FY10, we expect the aggressive price cuts to lead to 9%-14% quarter-on-quarter (q-o-q) drop in wireless ARPU (average revenues per user) and a 2%-4% q-o-q decline in wireless revenues for our coverage stocks. Idea Cellular is the most vulnerable to competition and we expect losses in its new circles to widen to Rs1.10 billion in the quarter," said IDFC-SSKI Securities Ltd, in a research report.
Entry of new operators in the market has led to higher subscriber additions every month. Tata DoCoMo has been the market leader for incremental additions for the last four months. Despite being the 7th-8th largest operator in its eight circles, Uninor has added an impressive 1.2 million subscribers in the first month, garnering an estimated 12% share of the incremental market in these circles.
IDFC-SSKI said that in the near term, it expects the pace of subscriber additions to remain strong and pricing to be a key factor in the fight for market share.
The net telecommunications (telecom) subscriber additions in December 2009 stood at 12.52 million, excluding the numbers of Reliance Communications (RCom) and Tata Teleservices (Tata Tele), implying a 12.9% growth month-on-month (m-o-m) in the net additions. At the end of December 2009, India's total mobile subscriber base, excluding RCom and Tata Teleservices increased to 364.7 million, an m-o-m growth of 3.6%.
"Despite a 7.5%-12.6% q-o-q growth in wireless subscribers, we expect the third quarter of FY10 revenues of mobile operators to be stagnant sequentially," said Anand Rathi Financial Services Ltd, in a report.
The report said that unlike the second quarter, the brokerage expects the third quarter ARPU to drop more from average revenues per minute (ARPM) or tariff cuts, and less from minutes of usage (MOU) drop, due to seasonal recovery. As such, the third quarter margin contraction would be more than in the second quarter, leading to a 0.7%-6.6% q-o-q drop in estimated wireless earnings before interest, taxes, depreciation, and amortisation (EBITDA) of the leading operators like Bharti Airtel, RCom and Idea, the research report added.
On the back of aggressive price cuts and intense competition, wireless metrics of all the listed operators are likely to deteriorate significantly. "We estimate 7%-9% q-o-q drop in yields for Idea and Bharti, up from about 4% q-o-q in the second quarter of FY10. Notably, RCom had reported a 17.5% q-o-q drop in yields in the second quarter of FY10, mainly due to elimination of handset revenues in the wireless segment. We estimate about 5% decline in revenue per minute for RCom in the third quarter of FY10. ARPU for our coverage universe is likely to decline by 9%-14% q-o-q, leading to a 2%-4% decline in wireless revenues. A sharp decline in tariffs and new market launches, we believe, would lead to margin erosion of 70-420 basis points," said IDFC-SSKI.
Current valuations appear inexpensive compared to the cost of a nationwide rollout for mobile operators, but the worsening wireless metrics and persistent ambiguity around regulatory developments would remain key overhangs on stock prices.
The IDFC-SSKI report said that Idea remains the most sensitive to pressure on wireless business as the operator is still in an expansionary mode. "We have lowered our 12-month price target for Bharti, RCom and Idea by 4%-11% to Rs330, Rs188 and Rs54, respectively and believe these companies would continue to underperform the broader indices,” the brokerage added.
The telecom sector is witnessing one of its worst times over the recent past, primarily due to heightened competitive activity in the market place. There are 12 players in the market at present and a couple more are likely to roll out services shortly. Rapidly falling tariffs are impacting the profitability of all players in the market.
Echoing the same view, ING Investment Management (India) Pvt Ltd, in a report said, "We believe (the) telecom sector will continue to get negatively impacted by the hyper-competition in the market. (The) number of players in the market needs to come down for improved profitability of the industry. While consolidation in the long term is inevitable, in the next two years, we may not see any activity on that front. We are underweight on the sector.”
New launches by Uninor and Etisalat, introduction of mobile number portability (MNP), final policy on 2G licence fee and allocation, and auction of 3G spectrum would be the key events closely watched over the next few months. While MNP implementation and new launches could lead to some further market disruption and lead to an increase in competitive activity, successful 3G auctions and final policy on 2G spectrum allocations would increase visibility in these key regulatory issues.
Motilal Oswal Securities Ltd (MOSL) said in a research note that it foresees a low risk of significant revenue decline at the industry level, given high mix of low-end subscribers in the pre-paid segment who are likely to step up usage. However, realignment of revenue market share could continue to be driven by aggressive tariffs and promotions by new entrants, it added.
In the current challenging environment, MOSL said it believes that Bharti remains the best placed bet based on its strong balance sheet, least earning sensitivity to ARPM declines and strong brand, network, and distribution coverage, enabling it to maintain a premium versus other competitors.