Telecom: Tough times ahead

Though tariff wars appear to be stabilising for now, the sector is still not out of the woods.

Telecom space has seen hectic activity during the September quarter — auction of 3G spectrum, new entrants like Uninor, MTS and Videocon, tariff wars and developments on the mobile number portability (MNP) front.

With new operators not being able to make much of a dent, analysts see the tariff war peaking soon. Revenue growth in the second quarter of the current financial year will be keenly watched, adjusting for the fact that this is a seasonally slow quarter in terms of minutes of usage.

Also, with tighter security norms impacting low-end customer segment usage, churn has picked up as well, besides lower subscriber addition in the North-East and Jammu & Kashmir. Analysts expect an average four-five per cent year-on-year (y-o-y) revenue growth this quarter for the telecom majors.

However, the revenue and margin outlook isn’t as sanguine. Once MNP is implemented, a fresh round of tariff cuts is expected for customer acquisition. The tests for MNP have started, say analysts, but implementation is expected to miss the October-end deadline. There will be additional costs related to the rollout of 3G services, including upgradation of the existing network. The tower infrastructure companies are also likely to come under the telecom regulator’s licence fee, further pushing costs.

After under-performing the BSE Sensex for about two years, stocks of Bharti and Idea have outdone the index by 15 per cent and five per cent, respectively, over the last three months, with Bharti’s free cash flow generation by 2011-12 being a strong motivator. Valuations relative to the market are attractive, but caution is a watchword, given the policy uncertainties and intensity of competitive trends. Any disappointment regarding subscriber usage or revenue per minute may impact these stocks in the near term and provide more attractive entry points to investors.