Kbsl_telecom Sector Result Update

Result Update – Indian Telecom Sector (Sept-09)

Overall Outlook OVERALL OUTLOOK: •

The three major Telecom Operators Bharti Airtel, Reliance Communications & Idea Cellular came out with their Q2FY10 results in October 2009.

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While Bharti Airtel & Idea cellular came out with results around analysts expectations Reliance Communications posted figures which were way below street expectations

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The companies witnessed muted growth on top line front with sales not growing as analysts expected. This was due to less than expected growth in subscribers and with a decline in ARPU’s and MOU’s over the last five quarters

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Among the key revenue segments Wireless services registered a less than expected increase with Passive Infrastructure(towers) business registering a healthy increase The companies witnessed muted growth in EBITDA margins but PAT margins registered a healthy increase mainly on account of cost cutting and decreasing interest costs

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The current outlook of the telecom operators looks bleak considering growth which was a major factor for the valuations which the companies used to command is bottoming out because we are witnessing teledensity of more than 100% in the major metros which are major revenue drivers, intensifying competition because of entry of new players like MTS, Tata DOCOMO and with companies like Uninor, Swan, Loop due to start operations existing operators do have to slug it out to fight competition of falling call rates and subscriber churn

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Increasing competition and muted growth has made telecommunication a matured play and with the rural market being a low margin segment the rural growth story will not command higher valuations and with new services like 3G and Wimax being delayed due to regulatory hurdles the present outlook for the industry doesn’t looks favorable and with Mobile Number Portability (MNP) due to come there would be a churn in subscriber base making it all the more difficult for the existing players

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Our analysis concludes that declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S, saturation of urban customer base, increasing competition and regulatory hurdles makes telecom an unfavorable play to be in at the moment and until there is a clear picture on revenue front which would come out after 3G auctions and with the regulatory hurdles sorted out any valuations made for these companies would be unjustified so we would suggest staying away from this sector even though all major players have seen their stock price tumbling by 30-50% and with most of the damage already being discounted

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We strongly believe that Bharti Airtel is the only stock in the sector which is to some extent suited to investment and one can add the stock to their portfolio since it would benefit with entry into the 3G spectrum (largest 2G subscriber base) and value unlocking from Bharti Infratel and Indus Towers

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Result Update – Indian Telecom Sector (Sept-09)

Fact Sheet Average Revenue per User (ARPUs) ARPUs (Rs.)

30-Sep-08 31-Dec-08

31-Mar-09

30-Jun-09 30-Sep-09

Bharti Airtel

331

324

305

278

252

Reliance Comm. Idea Cellular

271 263

251 268

224 255

210 232

161 209

Source: Company Filing

Minutes of Usage (MOUs) MOUs

30-Sep-08 31-Dec-08

31-Mar-09

30-Jun-09 30-Sep-09

Bharti Airtel

526

505

485

478

450

Reliance Comm. Idea Cellular

423 421

410 416

372 402

365 399

340 375

Source: Company Filing

Market Share Market Share

30-Sep-08 31-Dec-08 31-Mar-09 30-Jun-09 30-Sep-09

Bharti Airtel

24.60%

24.70%

24.00%

24.00%

23.50%

Reliance Comm. Idea Cellular

18.10% 15.20%

18.00% 14.50%

18.80% 14.50%

18.97% 12.90%

18.50% 12.40%

Source: Company Filing

Operating Margin EBITDA Margin

30-Sep-08 31-Dec-08 31-Mar-09 30-Jun-09 30-Sep-09

Bharti Airtel

40.29%

40.09%

39.32%

40.56%

40.78%

Reliance Comm. Idea Cellular

39.60% 26.33%

38.33% 25.52%

35.48% 27.61%

36.80% 28.90%

33.00% 27.22%

Source: Company Filing

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o ARPUs have declined continuously with increasing competition leading to price wars o MOUs have along being declining with saturation of high usage metro circle and entry into the low usage rural circles o Bharti and Idea’s market share has declined and Reliance Communication’s has increased. However this is mainly on account of entry into the GSM spectrum o All of this has lead to a slowdown in revenue growth, however the operating margins are maintained on account of reduction in advertising expenses and interest cost

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Result Update – Indian Telecom Sector (Sept-09)

Bharti Airtel Limited BSE NSE Bloomberg CMP Sector View

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Bharti Airtel Limited declared its second quarter result on October 30th, 2009.The results came marginally above the street expectations. The net sales were up by around 16.04% over the Bloomberg estimates while net profit was up by 32.54%

532454 BHARTIARTL BHARTI IN Rs 299.95 Telecom Neutral

Market Data as on 26.10.2009 LISTING MARKET CAP (Cr.) 52-WEEK HIGH 52-WEEK LOW BETA CURRENT PE (TTM) INDUSTRY PE (x)

RESULT HIGHLIGHTS: •

NSE/ BSE Rs. 115518.9 Rs. 990 Rs. 280.05 0.8668 12.87 11.78

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PRICE PERFORMANCE (%) as on 3rd November 2009 Time Period 1 MONTH 3 MONTH 1 YEAR

Stock -27.79% -28.68% -7.495

Nifty 50 -7.56% 2.8% 62.86%

FINANCIALS Fig in Crores

Particulars Net Sales Other Operating Income Total Income Total Expenditure EBIDTA EBIDTA Margin (%) Depreciation EBIT EBIT Margin (%) Operating Profit Other Income Interest Profit Before Tax Tax Provision Minority Interest Net Profit NPM (%) Diluted EPS

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Q2 2009 10,355.16 0.00 10,355.16 6,132.60 4,222.56 40.78% 1,499.68 2,722.88 26.29% 2,722.88 37.90 159.10 2,601.68 296.08 50.90 2,254.70 21.77% 5.94

Q2 2008 8,923.57 0.00 8,923.57 5,328.44 3,595.13 40.29% 1,102.18 2,492.95 27.94% 2,492.95 29.16 1,099.56 1,422.55 -292.10 46.53 1,668.12 18.69% 4.39

Growth 16.04% 16.04% 15.09% 17.45% 4 8 .9 bps 36.06% 9.22% -1 6 4 .2 bps 9.22% 29.97% -85.53% 82.89% -201.36% 9.39% 35.2% 3 0 8 .0 bps 35.27%

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Bharti Airtel’s consolidated net sales for Q2FY09-10 grew by around 16.04%, YoY to Rs.10355.16 cr. This was mainly on account of a increase in revenues from Mobile services The company’s consolidated EBITDA was at Rs 4222.56 cr up by 17.45% over the FY08-09 figure Key Segmental revenue Growth: o Revenue from mobile services stood at Rs 8123.04 cr up 11% over the FY08 figure of Rs 7299.38 cr o Revenues from Telemedia services remained flat at Rs 855.50 cr up 1.5% over FY08 figure of Rs 843.60 cr o Revenues from Enterprises segment stood at Rs 2158.35 cr up 4 % over the FY08 figure of Rs 2077.48 cr o Passive Infrastructure witnessed a jump in revenues by 35% standing at Rs 1664.20 cr up from FY08 figure of Rs 1227.87 cr o Revenues from Other services stood at Rs 130.47 cr up 41% over the FY08 figure of Rs 92.56 cr Its EBITDA margin stood at 40.78% up 48.9 bps compared to the same quarter a year ago Operating profit of the company witnessed a muted growth of just below 10% whereas because of a decline of 85% in Interest costs over previous year the company was able to post a healthy net profit of Rs 2254.70 cr up 35.2% over previous year whereas net profit margins have increased by 308 bps over previous year EPS increased by 35.27% in FY09 over the previous year and stood at Rs 5.94 The company witnessed an increase in subscriber base by 7.83 % q-o-q and is India’s biggest operator in terms of subscriber base and revenues with its subscriber base as on 30th Sep 09 at 110.51 million with a market share of 23.5% The telemedia business of the company did not grow much with current subscriber base at 2.92 million growing by 3.5 % q-o-q

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Result Update – Indian Telecom Sector (Sept-09)

Reliance Communictaions Ltd BSE NSE Bloomberg CMP Sector View

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532712 RCOM RCOM IN Rs 165.90 Telecom Negative

Reliance Communications Limited declared its September quarter result on October 31st, 2009. The results came way below the street expectations. Net sales grew by a meager 6.5% to Rs 5352.36 cr whereas EBITDA suffered a decline of 17.27% over the previous year standing at Rs 1813.49 cr

RESULT HIGHLIGHTS:

Market Data as on 3.11.2009 LISTING MARKET CAP (Cr.) 52-WEEK HIGH 52-WEEK LOW BETA CURRENT PE (TTM) INDUSTRY P/E (x)

NSE/ BSE Rs. 35026.53 Rs. 359 Rs. 131.35 1.48 6.94 11.78

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Key Segmental revenue Growth: o Revenue from wireless services stood at Rs 4009.99 cr down 7.5% over the FY08 figure of Rs 4335.61 cr o Revenues from Global services remained flat at Rs 2264.32 cr up 33.86% over FY08 figure of Rs 1691.49 cr o Revenues from Broadband segment stood at Rs 769.96 cr up 27.84 % over the FY08 figure of Rs 602.28 cr o Revenues from investments stood at Rs 59.76 cr down 34.29% from the FY08 figure of Rs 90.95 cr o Revenues from Other services stood at Rs 216.28 cr up 50.5% over the FY08 figure of Rs 143.65 cr

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The company witnessed a decline in EBITDA by 17.27% and saw its EBITDA margins contracting by 660 bps down to 33% over the FY08 figure of 39.60% Operating profit for the company declined by 9.12% as a result of poor revenues Net profit for the company declined by 51.6% in Q2 FY09-10 on a y-o-y basis even after an increase in Other income which was offset by a significant increase in Interest costs. As a result PAT margins declined by 1418.4 bps. MTM losses of Rs 283 cr also contributed to a decline in PAT The company had 86.11 million subscribers as on 30th Sep 09 up by 8.16% over the previous year figure of 79.61 million The company witnessed its market share declining to 18.5% vis a vis 18.95 a year ago

PRICE PERFORMANCE (%) as on 3rd November 2009 Time Period 1 MONTH 3 MONTH 1 YEAR

Stock -45.08% -39.73% -22.76%

Nifty 50 -7.56 2.8 62.86%

FINANCIALS Fig in Crores

Particulars Net Sales Other Operating Income Total Income Total Expenditure EBIDTA EBIDTA Margin (%) Depreciation EBIT EBIT Margin (%) Amortisation of ESOS Operating Profit Other Income Interest Exceptional Items Profit Before Tax Tax Provision Minority Interest Share of Associates Net Profit NPM (%) Diluted EPS

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Q2 2009 5,352.36 143.89 5,496.25 3,682.76 1,813.49 33.00% 714.37 1,099.12 20.00% 0.00 1,099.12 206.31 655.13 2.85 647.45 -173.93 80.48 0.60 740.30 13.47% 3.44

Q2 2008 5,026.31 509.25 5,535.56 3,343.42 2,192.14 39.60% 918.02 1,274.12 23.02% 64.68 1,209.44 109.44 -235.25 0.00 1,554.13 -56.67 79.79 0.23 1,530.78 27.65% 7.02

Grow th 6.49% -71.74% -0.71% 10.15% -17.27% - 6 6 0 .6 b ps -22.18% -13.73% - 3 0 1 .9 b ps

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-9.12% 88.51% -378.48% -58.34% 206.92% 0.86% 160.87% -51.6% - 1 4 1 8 .4 b p s -51.00%

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Result Update – Indian Telecom Sector (Sept-09) Idea Cellular BSE NSE Bloomberg CMP Sector View

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532822 IDEA IDEA IN 50.60 Telecom Negative

IDEA Cellular declared its second quarter result on October 26th, 2009. The results came slightly below the street expectations. The net sales were up by around 29.10% YoY, while EBITDA was up by 33.47% YoY

RESULT HIGHLIGHTS:

Market Data as on 26.10.2009 LISTING MARKET CAP (Cr.) 52-WEEK HIGH 52-WEEK LOW BETA CURRENT PE (TTM) INDUSTRY PE (x)

NSE/ BSE Rs.2,366.80 crs Rs. 91.70 Rs. 39.30 1.111 15.52 11.78

PRICE PERFORMANCE (%) as on 3rd November 2009 Time Period 1 MONTH 3 MONTH 1 YEAR

Stock -32.36% -33.07% 19.62%

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Key Segmental revenue Growth: o Revenue from mobile services stood at Rs 2926.14 cr up 27.5% over the FY08 figure of Rs 2295.88 cr o Revenues from Long Distance services stood at Rs 269.03 cr up by 84% over FY08 figure of Rs 143.94 cr o Revenues from Passive Infrastructure segment stood at Rs 224.65 cr up 2488 % over the FY08 figure of Rs 8.68 cr

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Its EBITDA margin stood at 27.22% up 88.9 bps compared to the same quarter a year ago, while the net profit margin (NPM) increased by 115.4 bps for the quarter ended September 2009 standing at 7.4% PAT increased in Q2FY10 by 53% standing at Rs 220.15 cr over the previous year figure of Rs 143.93 cr due to an increase in revenues also coupled with an increase in Other Income and reduction of Interest costs The company’s subscriber base stood at 46.8 mn up by 9.34% over the previous year figure of 42.8 mn The market share of the company declined in Sep-09 to 12.4% from 15.2% a year ago

Nifty 50 -7.56 2.8 62.86%

FINANCIALS Fig in Crores

Particulars Net Sales Other Operating Income Total Income Total Expenditure EBIDTA EBIDTA Margin (%) Depreciation EBIT EBIT Margin (%) Operating Profit Other Income Interest Profit Before Tax Tax Provision Net Profit NPM (%) Diluted EPS

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Q2 2009 2,968.24 5.67 2,973.91 2,164.37 809.54 27.22% 479.65 329.89 11.09% 329.89 31.69 105.72 255.86 35.71 220.15 7.40% 0.71

Q2 2008 2,299.20 4.15 2,303.35 1,696.83 606.52 26.33% 303.19 303.19 13.16% 303.19 0.30 149.67 153.82 9.89 143.93 6.25% 0.46

Growth 29.10% 36.63% 29.11% 27.55% 33.47% 88 .9 bps 58.20% 8.81% -2 07 .0bps 8.81% 10463.33% -29.36% 66.34% 261.07% 53.0% 1 15 .4 bps 52.96%

IDEA Cellular’s consolidated net sales for Q2FY10 grew by around 29.10%, YoY to Rs. 2968.24 cr. This was mainly on account of a increase revenue from mobile services and the passive infrastructure business of the company The company’s consolidated net profit were at Rs 220.15 cr, up by approximately 53% YoY

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Result Update – Indian Telecom Sector (Sept-09)

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