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If telecom service providers can conduct profitable operations and generate higher return on capital employed, their realisations can go up by more than 20%, says Avendus.
This increase in margins, Avendus says, may not even require a revision of voice tariffs. “Cash drought faced by most Indian telecom service providers increases the likelihood of sustained improvement in realisations. Key Indian telecom service providers may require realisations to increase between 20% and 92% for specific financial goals,” a research report by the investment bank, said.
The report also dispels theories that increase in tariffs would reduce the consumer spending on telecom. “A 20% rise in average revenue per user (ARPU) led by a 20% rise in realisations is likely to lead to an ARPU per capita of 3.5% for the year ended March 2014. This is the same level as that for the year ended March 2012. Thus, a 20% rise in realisations may not impact usage,” Avendus said.
Increased costs, which has been affecting telecom companies in the last few quarters, is also likely to fall. The report forecasts a 216 bps during 2013-14 and 2014-15 in EBITDA (earnings before interest, tax, depreciation and amortisation) margins.
“The positive influence of pricing rebound and selling, general and administrative (SG&A) costs on EBITDA margins is likely to be partially offset by a rise in network operating expenditure, measured as a percentage of sales,” said Abhay Moghe, research analyst at Avendus, said in the report.
In the next two years, costs as a percentage of sales, is likely to fall up to 221 bps. The forecast says that improved EBITDA margins are likely to aid earnings growth, leading to earnings growth rate of up to 34%.
Positive estimates of growth has already started resulting in earnings upgrades, and subsequently their valuations. “After our forecast revision, we upgrade IDEA to 'Buy', upgrade RCOM to 'Hold' and maintain 'Add' on BHARTI,” the report said.
