Strong volumes set to drive telcos' Q4 earnings growth

Operators estimated to report 5 per cent sequential growth in revenue and volume

Telecom companies are expected to exit FY14 on a good note, with healthy revenue and volume growth. Analysts expect wireless players to report a sequential revenue growth of five-six per cent, driven by higher volumes. In January, most large players added millions of new subscribers and they would contribute to higher volumes (total minutes of use). Idea added 4.5 million subscribers in January, while Bharti and Vodafone added 4.9 million and 5.9 million, respectively.

Most are expected to report a sequential volume growth of five per cent, driven by higher subscriber addition. Edelweiss Securities has pegged volume growth of 4.7 per cent, 5.2 per cent and 4.9 per cent for Bharti, Idea and Reliance Communications, respectively.

Although the telecom sector's growth is assessed on a sequential basis, it is expected to do much better on a year-on-year (y-o-y) basis, too. Deutsche Bank Markets Research expects the sector to lead earnings growth by reporting an 86 per cent y-o-y growth in earnings.

This volume-led growth is also expected to have a rub-off effect on margins. Also, voice realisations have been on the rise for the past three quarters. While voice realisations are expected to improve one per cent for Bharti Airtel and Idea, earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins are expected to improve 30 basis points.

Bharti Airtel is expected to report an Ebitda margin of 36.2 per cent in the fourth quarter compared to 36 per cent clocked in the third quarter of FY14. Idea's Ebitda margin is estimated to improve by 30 basis points sequentially to 31.4 per cent. In the voice segment, revenue per minute is expected to improve sequentially by one per cent for all three listed players.

However, Religare Institutional Equities expects Bharti (India) and Idea to report a 30 basis points decline in Ebitda margins sequentially, on higher network investments.

Bharti Africa is expected to report a flat quarter due to seasonality. While margins are expected to remain stable at 24.8 per cent, analysts expect, tax rates could remain high on account of withholding taxes.

Even as FY14 has been a year of recovery for the beaten-down sector, analysts advise a degree of caution in FY15. Management commentary on capital expenditure, rates and data growth will be keenly awaited. If operators invest heavily in building network capacity to boost data, margins could come under pressure.