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Telecom: cash generated provides floor for share prices

Telecom: cash generated provides floor for share prices
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First Published: Sun, Nov 20 2011. 09 57 PM IST

Photo: Bloomberg
Photo: Bloomberg
Updated: Sun, Nov 20 2011. 09 57 PM IST
Reliance Communications Ltd defied the trend of flat to negative growth in volumes for Indian mobile firms. Bharti Airtel Ltd and Idea Cellular Ltd had reported a 2% decline in volumes, attributing it to the impact of seasonality. Vodafone Essar Ltd saw flat volumes, based on disclosures by Vodafone Plc. Last week, Reliance Communications reported a 1.6% sequential growth in volumes.
Photo: Bloomberg
Of course, at an industrywide level, it still appears that volumes fell last quarter, which is a first for the industry since inception. While the firms are blaming seasonality, it does appear the tariff hikes this year may have also contributed to the drop in volumes. In a post-results review note, analysts at Citigroup said they suspect some of the hit on minutes growth could be from tariff hike and removal of discount minutes. Similarly, analysts at Motilal Oswal said the subdued minutes growth could be partly because of price elasticity.
Reliance’s average revenue per minute increased by 0.5%. Average tariffs realized by Bharti last quarter increased by 1%, and by 4% in the case of Idea, reflecting the price hikes taken earlier in the year. And not all customers on the companies’ networks have moved on to the new tariff structure, which means that some of this impact still remains to be played out.
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Of course, it is still not clear if the industry will experience price elasticity and demand will be impacted. The results of the December quarter will bring more clarity. But early signs indicate the industry will have to live with lower growth rates, and operators will have to be careful about further price hikes.
Another setback for telecom investors is that growth expectations from the high-speed third-generation (3G) connections may have to be toned down. As analysts at Citigroup put it, “Management commentary on 3G seems to have toned down. The active 3G subs (subscription) base is 25-30%. Operators have taken steps to encourage ramp-up, such as providing low-cost 3G handsets (Idea), tablets (Bharti, Reliance communications), and cut data prices by 50%. All these steps should help, though any returns will still remain back-ended.”
Established telecom companies, however, are now generating a fair amount of cash and this seems to have provided a floor for their share prices. Shares of Reliance Communications continue to suffer owing to its high debt and a further deterioration in its profit margins.
Graphics by Yogesh Kumar/Mint
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First Published: Sun, Nov 20 2011. 09 57 PM IST