Telcos ring in multi-year highs

Bharti Airtel’s rate increase sets stage for sector-wide rating upgrades.

Bharti Airtel and Idea scrips touched their multi-year highs on Monday, on expectation that pricing power was back with telecom players. Shares of Reliance Communications (RCom) gained the most in five months.

Since Thursday, while the Bharti Airtel scrip has gained nearly 10 per cent, Idea and RCom have gained 15 per cent and 19 per cent, respectively.

Bharti Airtel’s announcement of a 20 per cent rise in pre-paid rates on Friday is seen as a trigger for rating upgrades across the sector in anticipation that other players will follow suit. While Bharti’s stock touched a 22-month high, Idea shares closed at a three-year high. Emkay analyst Naval Seth has revised Bharti’s earnings estimates for FY12 by four per cent and that for FY13 by nearly eight per cent. Given the improvement in margins and easing competitive pressures, analysts have set one year target price range of Rs 460- 500 for Bharti Airtel. 

SURGE ON RE-RATING
BSE closing prices in Rs	22-Jul	25-Jul	%chg
Reliance Communications	93.55	107.50	14.91
MTNL	44.05	48.15	9.31
Idea Cellular	85.30	92.10	7.97
Tata Communications	220.30	232.75	5.65
Bharti Airtel	410.95	433.00	5.37
Tata Tele (Mah)	21.75	22.80	4.83
Sensex	18,722	18,871	0.80
Data compiled by BS Research Bureau

While regulatory risks remain, the expectation of an improvement in revenues per minute could see the earnings estimates of other telecom players revised going ahead. The focus of telecom players is likely to move towards improving profitability rather than protecting subscriber share.

Ganesh Duvvuri of Edelweiss Securities says the slowdown in subscriber additions over the last couple of months suggests a shift in focus from adding subscribers to enhancing margins and return on investment. Therefore, companies are pursuing greater wallet share primarily from data and 3G-related services. However, meaningful 3G revenues are at least a year away, while investments required for effective 3G operations in terms of network infrastructure and customer awareness are considerable. This has pushed service operators to improve returns on voice services, believes a HSBC Research report. Analysts says that the rate rises are, therefore, sustainable and will be replicated across circles and product categories going ahead.

Revenues per minute should start improving from the current financial year, says Naveen Kulkarni, research analyst, MF Global. However, the revenue and margin boost for Bharti is expected to come in the second half of FY12 as rates for existing customers change. The boost may also be muted, points out HSBC research, as minutes of usage could see some contraction in reaction to higher rates as elasticity reverses. Whether the revenue per minute uptick is sufficient to compensate for the volume contraction will be a key metric over the next quarter. The most significant risk is whether Idea and Vodafone will also raise rates. Should that happen then rate rises for 2G data usage could be at hand, say analysts, which would improve the outlook for the sector considerably.