Idea Cellular may outperform again in Q4FY12: Nirmal Bang

Volume to drive Idea’s revenue growth again, Bharti Airtel growth seen subdued: We expect Bharti Airtel, Reliance Communications (RCOM) and Idea Cellular to post a combined 2.2% QoQ growth in 4QFY12 revenues at Rs291.8bn. Combined wireless revenues (only India in the case of Bharti) are expected to grow 2.8% QoQ to Rs198.2bn. However, on a company-specific basis, we expect Idea to continue to outperform on revenue growth (5.5% QoQ growth in India mobile revenues) led by strong growth in minutes of usage (MoU). We expect Bharti to report a subdued 2.2% QoQ growth in India mobile revenues as revenue per minute (RPM) and average revenue per user (ARPU) remain flattish owing to greater aggression in the market. Overall, we expect a slower 1.4% QoQ revenue growth for Bharti, as its key Africa business is likely to report growth of just 0.7% QoQ, in rupee terms, owing to slow volume uptick on account of the January strike in Nigeria, its biggest market and slight rupee appreciation of 1.4% QoQ on the quarterly average rate. We expect RCOM to report a 1.7% QoQ growth in revenues. On a YoY basis, consolidated revenues for the three telecom majors are expected to grow 2.7%, while mobile revenues are expected to rise 12.4%. However, for RCOM, it should be noted that YoY revenue is likely to fall 34.8% owing to a one-time change in its accounting policy for indefeasible rights of use (IRU) sales in 4QFY11 which inflated revenue.

Margins to be range-bound: We expect margins for the three telecom companies to be by and large range-bound in 4QFY12. We expect Bharti to report a 90bps QoQ expansion. It should be noted that the company had a number of one-offs in 3QFY12, which were not specifically quantified. As per our estimates, adjusting for these one-offs, sequential margins for Bharti will be flattish. For Idea and RCOM, we expect a slight decline in margins by 25bps and 32bps QoQ, respectively. On a YoY basis, we expect Idea to register a 109bps expansion and Bharti a 60bps contraction. RCOM is expected to report a 2,077bps YoY decline in margins owing to the onetime accounting policy change for IRUs which inflated EBITDA in 4QFY11.

Sri Lankan rupee depreciation to impact Bharti’s net profit: We expect Bharti to report a 12.4% QoQ growth in 4QFY12 net profit. However, we expect a forex loss owing to depreciation of the Sri Lankan rupee against the Indian rupee. Bharti’s Sri Lankan subsidiary has taken around Rs10bn loan from the parent company and with the Sri Lankan rupee ending 4QFY12 lower by nearly 15% against the Indian rupee (end-of-period rate) it is likely to result in around Rs1.5bn translation loss. For Idea, we expect 5.8% QoQ net profit growth, while for RCOM we expect a 4.3% QoQ rise. YoY, we expect Bharti to report an 18.9% decline and Idea a 22.6% fall in net profit. This will be the ninth successive quarter of YoY net profit decline for Bharti.

Key factors to watch out MoU growth for Bharti, RPM trend: In 3QFY12, MoU growth was disappointing for Bharti, while Idea registered robust growth. We expect the latter to continue on its strong growth path in 4QFY12, while we expect a rebound in growth for Bharti given its increased aggression over the past few months. We would also watch the players’ RPM trend in the wake of increased aggression from the market leader, which implies flattish RPM in 4QFY12. We would also watch the forex impact. For Bharti, we would also observe growth in Africa in the wake of the January strike in Nigeria, its largest market in the continent.

Our estimates versus consensus estimates: Our estimates are in line with consensus estimates on the revenue and EBITDA fronts. On net profit, however, our estimates for Bharti and Idea are 8.9% and 15.2% below consensus estimates, respectively as we believe consensus estimates are on the higher side.

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