Telecom: Margin expansion to be muted in Q4

Bharti, Idea set to end FY12 with robust growth in volumes and revenues

The last year has been a roller-coaster ride for the telecom sector. Regulatory uncertainties and hyper competition were the major concerns at the start of the fiscal, some of which progressively eased. The outlook on profitability, however, changed around July-August, when companies raised prices and new subscriber additions slowed. Since the tariff hikes, most firms have seen a rise in revenue per minute (RPM), a key indicator of profitability.

However, analysts don’t see any meaningful expansion in voice RPM for most companies, as the fourth quarter (Q4) has seen competitive intensity increase from December. Telecom companies have been aggressive on customer acquisitions in Q4, especially after the Supreme Court cancelled 122 licenses in February. While new subscriber additions would result in higher volumes (minutes under usage) for most players, the impact on margins would be negligible. According to Credit Suisse, a three-six per cent top line growth should help expand margins by 50-80 basis points (bps) quarter-on-quarter. However, the brokerage believes margins may shrink.

Bharti Airtel has indicated its volume growth is likely to be better on higher subscriber additions. Edelweiss Securities expects it to report a 3.2 per cent sequential growth in total minutes compared to 0.8 per cent in the previous quarter. Idea Cellular, too, has remained aggressive and is, therefore, expected to report a volume growth of nearly seven per cent.

Though the growth in minutes should lead to better margins, Bharti’s Ebitda margins are expected to expand by not more than 50 bps in Q4, thanks to higher marketing spends on subscriber additions and launch of Airtel Money. In Q3, Bharti had several one-off sponsorship expenses, so margins were to get a boost in Q4, but this is unlikely. Also, as the rupee has risen this quarter, some of its forex losses would get reversed. Analysts expect volume growth in Africa to be muted.

So, what’s in store for the key players? Analysts expect Idea to report a revenue growth of eight per cent sequentially and 28 per cent year-on-year (yoy), besides earnings growth of 43 per cent sequentially and five per cent annually. Bharti is expected to report a revenue growth of 3.5 per cent sequentially and 17 per cent yoy. Margins are expected to be broadly stable. Reliance Communications may post another muted quarter.