Telcos poised for strong Q3 show, but revenues may lag

Written by Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Jan 24 2011, 08:21am hrs
The Indian telecom sector is expected to witness a stronger revenue growth in the December 2010 quarter (Q3 FY11), since this quarter has been seasonally better on account of festivals driving mobile usage.

However, the revenue growth will be offset by increased spending on network rollout (2G as well as 3G) and higher advertisement and promotional spend, feel experts.

Operators increased roll-out intensity from the September 2010 quarter, as the issues related to security clearance of imported equipment were resolved. We expect network costs to inch up due to full impact of increased roll-out activity for 2G as well as 3G networks, said Shobhit Khare and Nirav Poddar of Motilal Oswal Securities (MOSL) in a note.

Analysts expect Bharti Airtel, Reliance Communications (RCom) and Idea Cellular to report a revenue growth of 4.5%, 5% and 2% on a quarter on quarter (QoQ) basis, led by growth in mobile traffic. Being a seasonally stronger quarter due to festivals like Diwali, Christmas and New Year's eve, minutes of usage (MOU) is expected to see a huge growth. Minutes on network is likely to show a sharp growth QoQ in Q3FY11 of 5%-10%. For 3QFY11, we expect MOU for Airtel and Idea to grow marginally by 0.5% and 0.2% QoQ, respectively; whereas for RCom, we expect MOU to continue to decline at 1% qoq, said Angel Broking in a report .

Despite a revenue growth, bottomline for these telcos may not be impressive. Bharti's bottomline is likely to be flat due to its re-branding expenses and lack of forex gains. While profit after tax (PAT) for Idea is expected to grow by 9% sequentially, the same for RCom will decline by almost 20%.

"For Idea, we expect PAT growth of 9%, led by ebitda growth. We expect RComs proforma net profit to decline 20% QoQ, said the report by MOSL.

The quarter witnessed the most awaited launch of 3G services. 3G was kicked off by Tata Docomo, followed by RCom. With this, the confidence of no further possibility of a price war resurfacing was instilled as the pricing move by both these operators was not irrational. Average revenue per minute (ARPM) would also stabilise as tariff cuts have been more on a regional basis than any pan Indian, said Elara Capital in a note.

Increased subscriber base and mobile network traffic, coupled with no disruptive pricing will lead to a marginal improvement in average revenue per user per month (ARPU). The subscriber growth for the month of December , excluding Reliance Communications (RCom) and Tata Teleservices (TTSL), came in strong at 17.1million.

For 3QFY11, we expect the combination of flat ARPM and marginal improvement in MOU to push average revenue per user (ARPU) marginally up by 0.4% and 0.3% QoQ for Airtel and Idea, respectively. However, for RCom, ARPU is expected to fall by 2.0% QoQ due to slippage in MOU, the report by MOSL added.