Indian telcos had a weak September quarter, thanks to the pronounced impact of the monsoon season on volume growth. But growth is likely to bounce back in the three months ending December, thanks largely to the low base of the September quarter. Volume growth measured in minutes of traffic had stagnated last quarter after reaching record levels in preceding quarters. Growth should now revert to high single digits. What’s more, pricing seems be stabilizing with competition from new entrants weakening. As a result, revenue growth should also be strong.
But clearly, investors would be looking far beyond the December quarter results before taking a call on telecom stocks. This is because, from the March quarter, profit margins are likely to be affected because of the launch of 3G services and the onset of mobile number portability (MNP). The full impact of these two changes will be reflected only in the June quarter, since the roll-out of 3G services will be gradual and spread across the March quarter.
Needless to say, one can expect volatility in the margins of telecom firms in the next calendar year. The good news is that the stability in the 2G business should offset at least some of the impact. In this backdrop, it would be important to watch the trend in average revenue per minute in the December quarter. While this metric has been declining at a sharp rate in the past many quarters, the drop in the competitive intensity in the industry is likely to lead to a relatively lower fall in revenue per minute.
Because of the uncertainty of how margins would behave next year, profit estimates for companies such as Idea Cellular Ltd are spread across a wide range. For Bharti Airtel Ltd, there is the added uncertainty of how the Zain operations in Africa it has acquired would perform. But analysts seem to have little doubt that revenue growth will be strong in the next year, as far as the domestic business is concerned. This should act as a support for valuations of telecom firms.
Telecom shares have been range-bound this year—at current levels, Bharti has underperformed the Nifty by 6% so far this year, while Idea’s shares have outperformed by 4%. The performance may not be very different next year, unless, of course, the impact of 3G and MNP is far higher than analysts are currently estimating.
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