Telecom - December 2012 quarter earnings preview - BRICS Research

Bharti and Idea to record revenue growth of ~4% yoy: We expect Bharti & Idea to report revenue growth of 3.7% yoy (adjusted for one off) & 4% yoy, led by modest volume growth and marginal improvement in realization in a seasonally strong quarter. Bharti had reported one-off revenue of Rs5.86bn in Q2, as a result of which, its revenue growth is expected to come in at merely 0.7% yoy in Q3. Bharti & Idea are likely to record subscriber net addition of merely 0.7mn (vs. decline of 1.4mn and 1.7mn in Q2). We expect Bharti's Africa business to grow 2.6% yoy.

Margins to remain stable: We expect margins for both Bharti & Idea to remain largely stable, as savings arising from discipline in management of subscriber acquisition cost are offset by higher network operating cost as a result of diesel price hike. Bharti's EBITDA margin is expected to improve by 57bps sequentially to 31% (adjusted for one off), while that of Idea will remain stable at 26.8%.

Key issues to monitor: Since Bharti Infratel will be announcing its quarterly results for the first time since its listing, management's commentary on the outlook for the tower business is being keenly awaited. Traction in data revenue and any uptick in ARR (average realized rate) will also be the other key factors to watch out for.

Investment thesis: We believe that with the spectrum auction now over and NTP 12 in place, most of the regulatory concerns are behind us. An increase in data revenue will drive the growth in revenue and profit for the telecom sector. With new operators reducing their operations, an improvement in ARR will result in higher margins and consequently, reduce stress on the balance sheet. Bharti trades at 6.8x our FY13 EV/EBITDA estimates and 27.6x P/E. Idea trades at 5.6x FY13 EV/EBITDA and 27.8x P/E.

Source : Equity Bulls

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