The telecom sector has seen improving operational performance over the past few quarters, evident in improved operating metrics and healthy gross revenue growth. However, we believe that stocks are likely to remain in a narrow trading range in the near term till the new telecom policies come through which is expected by April.
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Based on the current recommendations from the Telecom Regulatory Authority of India, we estimate the total impact to be Rs 57 and Rs 44 for Bharti Airtel Ltd and Idea Cellular Ltd, respectively, which we believe is getting discounted in the share price to an extent.
In our view, the steep spectrum renewal prices will face resistance from operators as they could impact the sector return ratios given that the second-generation (2G) voice market is likely to mature over the next three-four years. Overall the operational dynamics continue to improve and regulatory clarity remains the key trigger for the stocks. We adjust our estimates marginally to factor in varied third-generation launch schedules and maintain our buy ratings on Bharti and Idea with December target prices of Rs 400 and Rs 95, respectively.
While the sector’s operational performance has improved, the regulatory imbroglio remains the key issue. We believe the stocks of Bharti and Idea are to an extent already discounting these impacts. In our view, licence renewal and refarming will be a protracted affair (little impact likely before FY14) and 2G spectrum pricing would also be impacted by possible consolidation in the space and maturing of voice market over the next three-four years. We note that the return on equities in the sector have already come down to developed market levels. So, the incremental investments in matured 2G voice (2G spectrum renewal/refarming) will dent the return profile.
Operational performance improving
The average revenue per minute (ARPM) for bigger operators in the sector have remained flat over the past three quarters and while minutes of usage, or MoU, (blended) did fall by 2% this quarter, strong subscriber additions helped offset the weakness. As such, traffic growth remains strong and stable ARPMs should enable the industry to sustain growth. This is also evident in the average gross revenue growth of 12–14% year-on-year on a blended basis across A, B and C circles in the last quarter. Further, weak incumbents continue to lose revenue market share to stronger challengers. We also note that Bharti saw a healthy 4% sequential revenue growth in Africa, driven mainly by subscriber growth as tariff reduction of 5% was offset by higher MoUs.
Limited impact of portability
According to the department of telecom, only around two million subscribers have ported their operators in the past one month, implying a monthly churn of around 0.3%. Incumbents have been clear beneficiaries, largely at the expense of CDMA operators and Bharat Sanchar Nigam Ltd. Among the bigger gainers are Vodafone Essar Ltd, Idea and Bharti in that order, with net port-ins of 190,000, 150,000 and 148,000, respectively. We continue to maintain that portability is unlikely to be a game changer for the sector and incumbents are likely to gain at the margin.
Edited excerpts from a report by Religare Capital Markets. Your comments are welcome at email@example.com