Telecom sector's revenues may decline by 1.6% in Q2

Operating margins likely to decline by 20 basis points on weak voice traffic during quarter

Telecom stocks may have run up 31% since April this year, but no fireworks are expected in the second quarter because it is a seasonally weak quarter. There are several factors have contributed to this weakness.

For starters, voice traffic drops sharply during this quarter. Kotak Institutional Equities has built in a 2.5% quarter-on-quarter decline in voice traffic for Bharti and 3.5% for Idea.

Secondly, after the substantial improvement in revenue per minute (RPM), which is a key measure of profitability, operators have not hiked tariffs in the second quarter. In the first quarter, operators reported a sequential jump of 4% in RPM.

Consequently, analysts do not expect more than a 1.8-2% sequential pick up in RPM for Idea and Bharti in the second quarter.

Morgan Stanley’s Vinay Jaising and Vanessa A D’Souza expect overall wireless revenues of key listed players to decline by 1.6%. Despite the expected weakness in the second quarter, analysts are bullish on the sector as most of the headwinds are seen to be abating.

With competitive intensity abating, Bharti and Idea are adding new subscribers at higher tariffs, which implies higher margins. As a result, the second quarter’s decline in voice traffic would have an impact on the operating margins of telecom operators but that would largely be a temporary phenomenon.

The increase in data usage is having an impact on revenues from SMS, explain analysts, but with data picking up, the margin recovery would also happen. In the second quarter, Idea and Bharti could see a 20 basis point decline in operating margins. Also, the reduction in SMS termination from 10 paisa to 2 paisa will be visible in the second quarter.

So what’s in store for the top listed telecom companies? Morgan Stanley expects Bharti’s African revenues to grow by 14% and operating profit in rupees to grow by 16% sequentially due to the positive impact of the depreciation of the domestic currency against the dollar, whilst the African currencies have remained largely stable against the dollar.

This should lead to 2.7% sequential growth in consolidated revenues for Bharti, says the brokerage. Kotak Institutional Equities estimates Idea’s consolidated revenues to decline by 2% and operating profit to decline by 2.5% sequentially. This would largely based on assumption that traffic would decline by 3.5% sequentially and 1.5% RPM would increase by 1.5%.