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Result Preview – Telecom sector – Pressure from Jio to Dampen Earnings

The stocks under our coverage are expected to report a revenue de-growth of 11.7% yoy. This revenue de-growth would be strongest for Idea Cellular (down 27.1% yoy), which is likely to continue to see significant erosion of ARPU. As per the latest subscriber data from Trai, the number of wireless subscribers grew by 1.4% mom in April 2018. The fastest growing subscriber growth for the month of April 2018 came from Jio (5.2% mom), followed by Idea (2.6% mom) and Bharti (1.5% mom). However, incumbent operators stand to benefit from the exit of Aircel.

Jiophone drives strong rural additions for Q1FY19

In the Reliance Industries AGM, it was announced that Jio’s subscriber base had recently crossed 215mn. This implies a subscriber growth of ~15% qoq in Q1FY19. This growth is likely to be driven by strong rural penetration enabled by the launch of the Jiophone. At a low price point of Rs1,500 per handset, Jiophone has been crucial in enabling rural users to get cheap access to the internet.

Subscriber growth in Q1FY19E

(in millions) Q4FY18 Q1FY19E qoq growth (%)
Bharti Airtel 304.2 317.9 4.5
Idea Cellular 211.2 227.2 7.8
Reliance Jio 186.5 215 15.3
Vodafone India 222.7 224.1 0.6
Others 258.8 257.9 -0.4
Total 1,183.4 1,242.6 5.0

Jio to keep telecom margins under pressure

EBIDTA margins for the universe are expected to shrink by 292bps yoy in Q1FY19 as the pressure from Jio would lead to lower margins for all incumbents. We expect EBITDA of Idea to decline by 43.8% qoq due to this reason. Bharti Airtel would see a milder decline of 5.6% qoq in EBITDA owing to the ramp-up of the Africa business. EBITDA for the universe is expected to decline by 9.1% qoq. Thus, PAT for the telecom universe is expected at a loss of Rs1,241cr.

We have negative view on Idea Cellular owing to its high debt levels and significant erosion in ARPU.

We have positive stance on Bharti Airtel and Bharti Infratel

Bharti Airtel

Q1FY19E Q1FY18 YoY Q4FY18 QoQ
Sales   19,958.0   21,958.0 -9.1   19,634.3 1.6
EBITDA     6,696.1     7,758.4 -13.7     6,929.9 -3.4
EBITDA margin (%)           33.6           35.3 -178           35.3 -174
PAT       -223.4         407.5 -154.8         407.6 -154.8
The Indian wireless business is likely to see softening ARPUs due to pressure from Jio and consolidation of Telenor. Top-line for the Africa wireless business would benefit from a weakening rupee, supporting a 1.6% qoq increase in revenue for 1QFY19E.
Bharti Infratel
Q1FY19E Q1FY18 YoY Q4FY18 QoQ
Sales     3,577.9     3,523.9 1.5     3,662.2 -2.3
EBITDA     1,503.4     1,575.0 -4.5     1,592.3 -5.6
EBITDA margin (%)           42.0           44.7 -268           43.5 -146
PAT         596.6         663.9 -10.1         656.0 -9.1
Revenue and earnings to shrink 2.3% and 9.1% qoq in 1QFY19E mainly owing to loss of tenancies from Telenor. Tenancy gains to remain muted due to the impact of Jio.
Idea Cellular
Q1FY19E Q1FY18 YoY Q4FY18 QoQ
Sales     5,957.0     8,166.5 -27.1     6,137.3 -2.9
EBITDA         812.9     1,875.4 -56.7     1,447.1 -43.8
EBITDA margin (%)           13.6           23.0 -932           23.6 -993
PAT   -1,570.8       -814.9 92.8       -962.2 63.3
Softening ARPU to continue to impact revenue (down 2.9% qoq) and earnings (expected loss of Rs1,571cr in 1QFY19E), albeit at a slower pace. Revenue to also be impacted by sale of tower business to ATC.
Tata Communications
Q1FY19E Q1FY18 YoY Q4FY18 QoQ
Sales     4,011.0     4,310.0 -6.9     4,008.6 0.1
EBITDA         553.1         558.6 -1.0         555.5 -0.4
EBITDA margin (%)           13.8           13.0 83           13.9 -7
PAT         -43.4           32.2 -234.8           41.1 -205.6
Losses from Growth and Innovation services would remain high in 1QFY19E, with the Voice segment continuing its decline. However, growth in traditional services would compensate for these negatives and revenue and EBITDA for 1QFY19E is likely to be flat qoq. – IIFL
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