Debt May Play Spoilsport For Telecom Companies In The Second Quarter 

The second quarter is expected to be a tepid one for telecom companies, with Bharti Airtel Ltd. and Idea Cellular Ltd. likely to report lower revenue, earnings before interest, tax, depreciation and amortisation (EBITDA), and net profit compared to the last quarter of this financial year, Bloomberg consensus estimates suggest.

Net profit for both companies could also decline on a yearly basis due to increase in interest cost and operating expenses.

Bharti Airtel

Following the latest spectrum auction earlier this month, the company has 936.7 MHz of spectrum across four bands and 22 circles, and can now provide 4G services across all 22 circles. Thus far, it could provide 4G services in only 16 circles with an average speed of 11 megabytes per second (MBPS).

In the July to September quarter, revenue is expected to increase around 4 percent on a yearly basis, but decline 3 percent sequentially, according to Bloomberg consensus estimates.

According to most brokerages, the pressure on the topline could come mainly from weakness in its Africa business which is expected to report lower revenue due to devaluation of the Nigerian currency Naira, and sale of operations in two countries in the region – Burkina Faso and Sierra Leone.

Airtel’s net profit is expected to decline 5 percent quarter-on-quarter and 9 percent year-on-year on account of higher foreign exchange losses and interest expenses.

The average revenue per user (ARPU) is expected to be around Rs 193. i.e., Rs 3 lower than the figure reported in the last quarter.

Idea Cellular

Idea Cellular boosted its spectrum holding to 545.3 MHz following the latest spectrum auction across five bands and 22 circles. The company is now equipped to provide 4G services in 20 circles as opposed to 11 circles earlier with an average speed of 7.5 megabytes per second (MBPS).

According to Bloomberg consensus estimates, for the second quarter, Idea Cellular’s revenue is expected to grow around 9 percent on a year-on-year basis, and show a marginal quarterly decline. EBITDA margin is expected to fall 160 basis points quarter-on-quarter and 440 basis points year-on-year due to higher network cost.

Fall in earnings before interest, tax, depreciation and amortisation coupled with higher depreciation and interest cost is expected to keep the bottomline under pressure. Net profit could see a decline of 80 percent on a yearly basis, and 26 percent in the quarter.

The average revenue per user (ARPU) is expected to come in at Rs 174 – a decline of Rs 7 from a quarter ago.

Going Forward

The impact of new entrant Reliance Jio Infocomm Ltd., which was launched only in September, will not be significant in this quarter, brokerages say. The real impact is likely to be seen in the third quarter, by which time Reliance Jio would have increased its distribution coverage and been operational for an entire quarter. Reliance Jio had 16 million customers at the end of September.

Though Airtel and Idea have fortified their 4G capacity spectrum to counter Reliance Jio, near-term revenue growth and subscriber base growth is expected to be vulnerable, given Reliance Jio’s free voice and data services until December 2016 and low-priced 4G/LTE data services.

In the near term, Airtel and Idea will not only see competitive pressures from Reliance Jio, but also from Vodafone India and the newly merged entity formed by Reliance Communication and Aircel.

Vodafone is expected to launch its initial public offering (IPO) by end of this year. It currently holds around 579.25 MHz of spectrum in four bands across 22 circles. It had a debt of around Rs 30,000 crore ahead of the auctions. It also bid for over Rs 20,000 crore worth of spectrum in the recently-concluded auctions.

The merged entity of Reliance Communications and Aircel will hold over 490 MHz of spectrum in four bands across 22 circles with an ability to provide 4G services across all circles and will have a debt of Rs 28,000 crore and Rs 7,000 crore of deferred spectrum liability.

(These expectations have been compiled from reports of Bank of America Merrill Lynch, HSBC Global Research, Motilal Oswal and Religare Institutional Research.)