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Published on 4/01/2018 5:41:51 PM | Source: Kotak Securities Ltd

Telecom - 3QFY18E preview - MTR cut and more - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Telecom Sector #Sector Report

3QFY18E preview – MTR cut and more.

3QFY18 is likely to be another weak quarter for the Indian wireless names. 57% cut in mobile termination rate (MTR), effective Oct 1, 2017, is likely to impact Bharti’s and Idea’s India wireless EBITDA by around 8% and 11% (on 2QFY18 base), respectively. Accelerated ex-IUC ARPU downtrading on account of expanding the scope of unlimited bundled plans to non-4G handset owners is likely to exert further pressure. BHIN and TCOM are likely to have subdued prints, too.

Wireless revenues – still under pressure; MTR cut to result in a sharp qoq decline

Three key factors at play, in our view, as far as likely 3QFY18E wireless revenues prints are concerned –

* Impact of the sharp 57% cut in mobile termination rate to 6 paise/min from 14 paise/min. Our math suggests that mobile termination contributed to as much as 14-15% to Bharti’s India wireless revenues and a similar proportion to the segment’s EBITDA in 2QFY18. A 57% cut in MTR, ceteris paribus, should result in around 8% sequential dip in India wireless revenues for Bharti. For Idea, the contribution to revenues and EBITDA in 2QFY18 was 14-15% and 20-21%, respectively, per our math. A 57% cut, ceteris paribus, would therefore mean an 8% impact on revenues and nearly 11-12% impact on EBITDA on a sequential basis.

* Expanded scope of unlimited bundled plans. Incumbents opened up their aggressively priced unlimited bundles to all subs during 3QFY18 (end-Oct/early-Nov); these plans were earlier restricted to 4G handsets only. TRAI’s 2QFY18 industry report suggested that there were as many as 109 mn 3G subs in the industry at end-2Q; we believe a bulk of these would be with the three incumbents. These subs, who had not upgraded to a 4G handset yet, could not avail of the best data plans in the market until 2QFY18. Incumbents making their most aggressive bundled plans available to all subs would have seen ARPU-dilutive accelerated adoption, in our view.

* Pressure on postpaid revenues – widening value-for-money gap in favor of prepaid customers has seen postpaid subs, corporate as well as individual, starting to demand more from their operators, primarily incumbents again. Incumbents have responded with a direct price cut or aggressive retention discount for such subs.

In essence, the wireless revenue story of 3QFY18 is that of – (1) regulator-induced pressure, and (2) the two segments least impacted by R-Jio so far (3G-only data customers and postpaid) coming under pressure. With these last segments also having seen ARPU dilution, we believe benefits of uptrading should start reflecting in ARPU levels starting 4QFY18; the pace may be slow to begin with, however.

Wireless EBITDA – steep decline trend likely to continue

The 9-9.5% qoq revenue decline we build for Bharti and Idea is likely to result in a sharper 12% qoq EBITDA decline for Bharti and as much as 25% qoq EBITDA decline for Idea. Higher EBITDA decline for Idea is also on account of higher impact of MTR rate cut as discussed earlier.

BHIN and TCOM likely to report subdued quarters

With Jio tenancy momentum still slow, BHIN’s earnings print is likely to be weak; Jio is the only source of growth for the tower industry at this point; ex-Jio towerco revenues are declining.

Pressure on voice and India data businesses is likely to reflect in another subdued print for TCOM. We expect EBITDA to be flat both qoq and yoy.

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