Telecom - Volume growth to remain low in Q2 - Q2FY13 Results Preview - Centrum

We expect growth in volumes (minutes of usage) to remain low during Q2. Incumbents will witness lower subscriber addition during Q2 as compared to Q1FY13 as players rationalize inactive customers from the system. Operating margins of leading players will be flat due to higher operating expenses. Companies have reduced 3G services tariff to drive data usage and we expect the benefit to come over a long term. We believe that regulatory uncertainty continues to put pressure on stock performance. We have a cautious stance on the sector as competitive intensity continues which limits the immediate possibility of increasing tariff.

- Revenue growth to remain low: We expect revenue for telecom companies to grow by 1-2.5% on a QoQ basis on the back of lower minutes of usage growth. Further reduction in 3G services rates would have its impact in Q2 and the benefit will be seen over a longer period. Moreover, during Q2, incumbents would be witnessing lower subscriber net adds as they are rationalizing inactive customers.

- EBITDA margin likely to be flat: We expect the EBITDA margin to remain flat on a QoQ basis on account of higher operating expenses as competitive intensity is still high. We expect Bharti and Idea to post flat margins at 30% and 26.1% respectively.

- Cautious stance on sector: We have a cautious stance on the telecom sector as the regulatory challenges continue (one-time payout/re-farming of spectrum, upcoming spectrum auction and removal of roaming fees) and due to increase in competitive intensity. We have not factored in forex gain/loss in our estimates. We suggest profit booking in Bharti Airtel on further move of 5% as it would reach our target price of Rs.288.

- Risk to our call: Any relief given by the regulator on one time spectrum charges will lead to outperformance of Idea Cellular over Bharti because its operations are local whereas Bharti is present in many countries.

Source : Equity Bulls

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