Q3 Update Telecos

Earnings Update: Telecos

Earnings Update of Telecom Operators and sector outlook

Bharti Airtel

CMP

628

Target 822

Results Highlights           

Consolidated revenues zoomed 39% at Rs. 9,667 crore while net surged by 39.6% at Rs. 2,023 yoy. Sequentially revenues grew by 8.3% while net by 18%. Revenues from mobile services grew by 42%, Telemedia revenues by 16% and Enterprise revenues by 52.2%. ARPU fell down by 9.2% during the last 9 months and 2.1% qoq to 324 while MoU too plunged by 4% qoq to 505. Total traffic on its network has continued to rise. It increased by 6% qoq. Tower sharing factor got better to 1.34 from 1.26 in previous quarter. Forex loss has been reported at Rs 222.1 crore against Rs. 586.2 crore a quarter ago. It maintained its EBIDTA margin above 41% despite 3 new launches and increasing input costs. It added 8.28 million subscribers during the quarter. Capex for the Q3 stood at Rs 3,877.5 crore and the company expects the same level of capex of FY2009 in the following FY as well. The company has raised $1.35 billion for the expansion purposes and the rest will be raised by way of loans, which have already been tied up.

Quick comments on Q3 numbers: Despite difficult financial environment and cut throat competition, the company has been able to maintain its hegemony in the sector by outperforming on every parameter: financial as well as operational. Though mobile EBIDTA margin has been declining but this quarter it improved by 124 bps to 31.44%. It achieved a milestone when it had a free cash flow of close to Rs. 400 crore since its inception. However, the investors should not expect dividends in future as it requires huge funds to invest in new technologies like 3G as and when the auctions happen.

Bharti Consolidated P&L Account

Deepak Tiwari Research Analyst [email protected] T: + 91 22 4063 3007

Quarter ended

Rs Crore Net Sales Operating expenses Gross Profit Selling & marketing expenses General & Admin expenses EBIDTA Depreciation Operating Income Other Income Interest PBT Taxes Net Profit EPS

Dec-08 9667 4473 5194 673 645 3876 1249 2627 21 458 2191 167 2023 10.41

QoQ % Growth 8.3% 7.7% 8.9% 14.0% 10.4% 7.8% 13.3% 5.4% -27.5% -58.4% 54.0% -157.2% 18.0% 18.5%

YoY % Growth 39.1% 46.0% 33.7% 37.0% 31.9% 33.4% 26.6% 36.9% -68.8% -7.8% 46.9% 303.2% 39.6% 36.4%

9 months ended Dec-08 27097 12437 14660 1814 1906 10939 3348 7591 112 1463 6241 292 5948 30.61

YoY % Growth 41.5% 48.6% 36.0% 37.4% 27.1% 37.4% 26.0% 43.1% -47.6% 554.8% 17.9% -60.5% 30.6% 29.3%

Sources: Company, Artha Money Research

January 30, 2009

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Year ended Mar-08 27012 11853 15160 1906 2103 11151 3591 7560 280 528 7312 816 6495 34.19

Reliance Communications

CMP

162

Target 319

Results Highlights          

Consolidated revenues zoomed 20% at Rs. 5,850 crore while net surged by 3.5% at Rs. 1,444 yoy. Sequentially revenues grew by 3.6% while net shrank by 10.4%. Wireless segment grew by 1.8%, Global segment tanked marginally by 0.8% and Broadband segment grew by 8.6% on qoq basis. ARPU fell sharply down by 20.8% during the last 9 months and 7.4% qoq to 251 while MoU too plunged by 3.1% qoq to 410. Total NLD and ILD traffic on its network has continued to rise. It increased by 6.9% qoq. It maintained its EBIDTA margin above 40% however trend is declining. It added 5.3 million subscribers during the quarter. During the quarter, the company launch nation wise GSM services and has already crossed 10 million subscribers on this platform. The company has revised its capex plan for FY09 downward to Rs 200 billion from earlier Rs 300 billion. Expansion plans are on right track and sees no financial crunch. The capex for FY10 is expected at Rs 150 billion.

Quick comments on Q3 numbers: For the largest CDMA player which recently launched its services on GSM platform, Q3 numbers were disappointing. Though it posted 20% growth in topline but bottomline was flat 3.5%. In comparison to arch rival Bharti, it’s performance was abysmal. On every parameter like ARPU, net addition of subscribers and MoU, its performance was not satisfactory. Moreover, of late it has launched two services - DTH and GSM mobile services. This apart, it has to participate in 3G and Wimax auction, which will further require huge funding. Its debt-equity ratio is already at 0.64:1.

Rcom Consolidated P&L Account Rs Crore Net Sales Operating expenses Gross Profit Selling & Admin expenses EBIDTA Depreciation Operating Income Other Income Interest PBT Taxes Net Profit EPS

Quarter ended Dec-08 5,850 2,474 3,376 1,024 2,353 1,043 1,310 0 -150 1,459 15.3 1,444 7.0

QoQ % Growth 3.6% 6.7% 1.5% -0.2% 2.2% 6.1% -0.7% -36.4% -6.1% -127.0% -10.4%

YoY % Growth 20.0% 25.5% 16.3% 28.6% 11.7% 43.8% -5.2% 0 -1.4% -4.8% -88.9% 3.5%

9 months ended Dec-08 16,817 6,873 9,945 3,041 6,904 2,953 3,951 0 -619 4,570 -61 4,631 22.4

YoY % Growth 22.3% 25.7% 20.0% 26.3% 17.4% 46.2% 2.3%

Year ended Mar-08 18827 7463 11365 3406 7959 3947 4012 240 -400 4652 284 4368 21.2

58.0% 7.4% -119.6% 17.4%

Sources: Company, Artha Money Research

January 30, 2009

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Idea Cellular

CMP

45.3

Not Rated

Results Highlights          

Consolidated revenues zoomed 59.7% at Rs. 2,731 crore however net tanked by 7.3% at Rs. 220 yoy. Sequentially revenues grew by 18.6% while net zoomed by 52.5%. ARPU fell down by 7.3% during the last 9 months and 1.9% qoq to 266 while MoU declined marginally by 0.2% qoq to 410. Total traffic on its network increased by 10.8% qoq. Its EBIDTA margin has declined sharply since Q2 to 25-26% from earlier over 33%. It had 17.6% market share in net additions during the quarter. The capex for FY09 was Rs 65 billion and for FY10 it is expected at Rs 60 billion. The company has received infusion of Rs 21 billion. The company is numero uno player in 4 circle of India. It is in JV with Spice where it holds 41.9%.

Quick comments on Q3 numbers: The company’s margins are under immense pressure thanks to its aggressive expansion plans. In the last 12 months it has almost doubled its network capacity on all-India basis. Moreover, this capacity is largely coming on a rental basis rather than owned sites. And since the rentals of such sites are as high as 145% it is pulling down its margins. In future too, this pressure is unlikely to abate.

Idea Consolidated P&L Account Rs Crore Net Sales Operating expenses EBIDTA Depreciation Operating Income Interest PBT Taxes Net Profit EPS

Quarter ended Dec-08 2,731 2,034 698 394 304 87 216 -3.1 220 0.71

QoQ % Growth 18.6% 19.8% 15.0% 29.8% 0.1% -41.6% 40.7% -131.3% 52.5% 42.0%

YoY % Growth 59.7% 78.2% 22.5% 72.9% -11.1% 11.8% -17.9% -111.6% -7.3% -21.1%

9 months ended Dec-08 7,213 5,188 2,025 972 1,053 390 663 37 627 2.21

YoY % Growth 51.8% 64.4% 26.9% 57.5% 7.6% 147.9% -19.3% -34.9% -18.1% -24.1%

Year ended Mar-08 6720 4468 2,252 877 1,375 278 1,115 73 1,042 3.96

Sources: Company, Artha Money Research

January 30, 2009

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Outlook for the Industry At a time when every sector is bearing the brunt of global recession and slowdown in the demand, telecom sector is one of those few sectors that is not only faring well, its growth prospects are also heartening. The telecom operators are adding about 8-10 million subscribers every month and growing exceptionally though few players are reporting not so good bottom lines but that is because of their aggressive investment plans. The industry added 32 million customers in the last quarter which is outstanding. Still in the rural markets mobile penetration is yet abysmal and yet to catch up with urban markets. There are immense growth potentials for the sector as only one out of every three Indians has a phone now. We have yet to see how 3G services flourish in the fastest growing Indian markets where tariffs are lowest in the world. Indian telecom sector is plagued with uncertainties vis-à-vis policies which are tweaked every now and then by the Department of Telecommunications (DoT). This sector has also witnessed numerous tussles amongst various Government and nodal agencies such as DoT, TRAI, Telecom Commission and Ministries of Finance and defence as well as telecom operators and their bodies etc. It is obvious when huge interests are at the stake. 3G and Wimax auctions have been again delayed and unlikely to happen during the tenure of this outgoing UPA govt. Moreover, policies related to Mobile Number Portability (MNP), Mobile Termination Charges (MTC) and vacation of spectrums by the defence are not clear and no development has been made. As far as new players are concerned, though they have been allocated spectrums in certain circles, none of them have launched their services hitherto. This is why incumbents are so aggressive to usurp the uncharted territories to take the bigger pie.

Relative Stock Performances vis-à-vis Sensex 140% 120% 100% 80% Bharti 60%

Idea Rcom

40%

Sensex 20%

1-Jul-08 8-Jul-08 15-Jul-08 22-Jul-08 29-Jul-08 5-Aug-08 12-Aug-08 20-Aug-08 27-Aug-08 4-Sep-08 11-Sep-08 18-Sep-08 25-Sep-08 3-Oct-08 13-Oct-08 20-Oct-08 27-Oct-08 4-Nov-08 11-Nov-08 19-Nov-08 26-Nov-08 4-Dec-08 12-Dec-08 19-Dec-08 29-Dec-08 5-Jan-09 13-Jan-09 20-Jan-09 28-Jan-09

0%

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A comparative Analysis

Subscribers base in Mn 90.00

Bharti

Rcom

% Share in Net Additions

Idea

35.00% Bharti

80.00

Rcom

Idea

30.00%

70.00 25.00% 60.00 50.00

20.00%

40.00

15.00%

30.00 10.00% 20.00 5.00% 10.00 0.00%

0.00

Trend in ARPU

Trend in Minutes of Usage

450

600 Bharti

Rcom

Idea

Bharti

Rcom

Idea

400 500 350 300

400

250 300 200 150

200

100 100 50 0

0

Comments: The chasm of subscriber base is getting wider amongst Bharti, RCom and Idea. Even in net additions, Bharti is far ahead of its rivals. The spread of ARPUs between Bharti and RCom has expanded while Idea has outperformed arch rival RCom this quarter as the ARPU of RCom fell below that of Idea. The similar trend is witnessed in Minutes of Usage whereas RCom’s MoU has declined sharply. Bharti however has been able to maintain its hegemony from every corner.

January 30, 2009

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EBIDTA Margins 45.0%

Bharti

Rcom

Idea

40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

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