Telecom Sector: Actual trend playing out even more duller than anticipated - IndiaNivesh

IndiaNivesh | Jan. 5, 2017, midnight


The incumbents felt the full quarter impact of the launch of services by Jio in Q3FY17 with voice segment taking a beating as ARPMs fell on account of high volume‐low yielding terminating minutes on their network. Jio has reached surpassed 100 mn subscriber mark within 170 days of its launch and targets to achieve 400 mn base by FY18 end. Typically, number of calls from a network operator to the network operator use to be 1:1 which has fallen to 1:2 for the incumbents post. Typically a terminating call cost the operators 40 paise pe min for which Jio is currently compensating 14 paise per min, making the operators to loose 26 paise per min.


Telecom sector performance during the quarter was well below our estimates. Continued support from non‐mobile segment was not able to compensate for drop in mobile business for Bharti Airtel. Idea reported first ever loss since its IPO.


The sector has seen a decent rerating in the past month owing to talks of consolidation in the sector with potential Vodafone‐Idea merger on the anvil. We continue to remain wary on streets expectation of reduction in internal rivalry if the numbers of players are reduced. On the contrary the merger may make it a 3‐way price war supported byall players able to raise sizeable war chest. We continue to maintain our HOLD on AIRTEL and IDEA.


Outlook


We continue to hold our cautious stance on the telecom space as the actual trend is playing out even more duller than anticipated. MoU growth in both Airtel and Idea was led by higher terminations on their network, which have relatively lower yields. Market wide practice of ring fencing customers with attractive data packs led to rise in data traffic at the cost of continued fall in ARMBs. We believe the trend would continue atleast till free data by Jio is withdrawn. We would like to reiterate the earnings sensitivity in the telecom space and any dip in the topline will have disproportionate bearing on bottomline owing to high interest cost. We have a HOLD on AIRTEL & IDEA with a target price of Rs. 408 and 102 respectively.


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