It’s Their Call

Given the falling tariffs in the mobile segment, only telecom players with diversified services offerings can fare well in future

MOBILE phone companies Bharti Airtel, Idea and Reliance Communications can no more rely on mobile phone business for profit growth. They have to look to other businesses from now on to improve their profitability as their main business reels under pressure due to intensifying tariff war. 

    With the initiatives such as per second billing, lower tariffs and a possibility of mobile number portability, the telecom sector has entered into a low profitability zone. This necessitates diversification for telcos into other related service lines. Considering this, Bharti looks to be in a comfortable spot. It has increased emphasis on enterprise connectivity, direct to home service, and national and international long distance business. This business is shielded from the tariff war in mobile segment. In the September quarter, this portfolio contributed 35% to operating profit before depreciation. 
    Since companies including Idea Cellular and Tata Teleservices (Maharashtra) by and large rely on basic wireless services, they may not see the benefit of diversification. So, Bharti looks to be the best, if at all one is still interested in telecom stocks, even as the sector loses sheen. 
    Telecom stocks have underperformed the broader market since October this year. Uncertainty in the future growth prospects due to the streak of tariff cuts and lacklustre September quarter results are the major concerns for investors. Top mobile phone firms are expected to report lower revenue and profitability growth for at least next two quarters as they fight to protect market share. The things are likely to stabilise only when subscription numbers, which are slowly losing relevance, are not counted. 
    Between October 1 and November 19, the top three telecom scrips tumbled more than 10% while the broader market indices witnessed a moderate decline. Bharti Airtel, the country's biggest telco fell by 33%. Idea Cellular, the third biggest, fell a similar amount. 
    The country's second largest telecom service provider, Reliance Communications (RCom) was the worst hit with 45.6% fall in its market value during the period. In contrast, the benchmark Sensex fell by 2% during the period. 
    The downward journey of the telecom scrips began in the first week of October when RCom introduced its new low-cost tariff plan. Within a day, telecom shares lost 7-10% in anticipation of a sharp fall in average revenue per user (ARPU), a key performance measuring metric for the industry. 
    RCom's decision to charge flat 50 paise per minute was followed by other telcos who introduced similar low-cost options to subscribers. Analysts expect the new tariff regime to effectively pull down the ARPU to as low as Rs 120-150 from an average of Rs 207. 
    RCom's tariff plan has created a lower level of ARPU, which its rivals can't ignore. This way, RCom, which currently operates at the low end of ARPU range, has pulled its peers down to lower ARPU level than trying to improve its own. 
    While, the tariff war took some wind out of the telecom stocks in the first week of October, the quarter ended September results declared by them in the following weeks failed to cheer investors. At the aggregate level, the top three telecom players including Bharti Airtel, RCom, and Idea reported 2.8% drop in revenue on sequential basis. In the previous quarter, aggregate revenue had grown marginally by 1%. 
    The pressure on telcos' margins was reflected in the profit after tax. Aggregate PAT fell crashed 19.6% sequentially, compared with 12% increase in the June quarter. Average level of ARPUs dropped sequentially 14% to Rs 207 in the September quarter. Average minutes of usage (MOU) for the three players fell by 6%. 
    The remaining two quarters of the current fiscal are likely to be even worse for the sector since these would fully reflect the fallout of rapidly shrinking mobile tariffs. For instance, the average revenue per user for Bharti is expected to be at least 35% lower in the March 10 quarter than the current levels. 
    Telecom stocks are currently trading at the lowest ever valuations considering any of the valuation parameters that are used to assess telecom companies. The stocks of top three companies are available at an enterprise value (EV), which is six-seven times earnings before depreciation, interest, and taxes (EBITDA). Also, the current levels of EVs are 2-3 times FY 10 sales estimates considering the low tariff regime. 
    sanjit shinde@timesgroup.com