The telecom sector has been the market’s ugly duckling for some time now. While competitive intensity has eaten into margins, increased regulatory uncertainty has eroded its premium valuations. In July, however, shares of Bharti, the dominant player in the sector with a 30 per cent revenue market share and 20 per cent subscriber market share, started moving up and climbed six per cent in July alone.
Numbers show competition has not wreaked much havoc with margins. Bharti’s Ebitda margin for India in Q1FY10 stood at 40.5 per cent, before the rate wars broke. In Q4FY12, it fell to 33.2 per cent. Similarly, average revenue per minute fell 26 per cent from 54 paise in Q1FY10 to 43 paise. So, though profitability has been affected, margins have not crashed to below 30 per cent levels. Ambit Capital believes better operational performance in the last quarter, strong balance sheet and cash flows, gave Bharti greater ability to play the market share game.
If one discounts the current regulatory overhang and potential payouts, then a section of the market believes Bharti will generate free cash flows of Rs 10,000 crore each year, starting FY13, as it has the highest number of active subscribers and high quality 3G customers. If free cash flows sustain at these levels, it would be able to easily pay interest and bring down debt. Given the company is past its peak capex cycle, costs will largely remain constant. Karan Mittal, analyst at ICICIDirect, expects revenue to grow at a CAGR of 12.3 per cent over FY12 and FY14, on the back of an increase in traffic in domestic as well as the African businesses. Mittal also expects earnings per share to double from Rs 11.2 in FY12 to Rs 21.4 in FY14.
Even if one factors in a higher payout for spectrum, the market’s perception is that many players may not bid if the base price is not cut. This would reduce competition and allow the remaining players to raise rates. Even if there is a payout on account of spectrum, analysts believe the impact on Bharti’s EPS would be largely mitigated by rising rates in the backdrop of reduced competition. The sector’s valuation multiples would also go up sharply, if clarity emerges on the regulatory environment. Even if the base price for the spectrum is not cut, analysts believe Bharti is best placed in the sector.