● It has been a little over two months since headline tariffs started
going up in the India telecoms sector. We study the changes to
consensus estimates on Bharti/Idea during this period to check
the extent to which consensus has factored in these tariff hikes.
We believe consensus has fully factored in the impact of recent
headline tariff increases onto RPM. However, there is still scope
for small upside from increases in call rates on STVs, in our view.
● On the other hand, consensus margin estimates have hardly
moved (as against theoretical 300-400 bp implied by the RPM
increase + other recent cost savings). We thus believe that
significant margin/earnings upside exists, and should come
through as margins start going up in the coming quarters.
● Increases in tax rate assumptions have been a dampener on
Bharti’s EPS estimates. Assuming tax increases are behind us,
we should start seeing EPS upgrades for Bharti.
● We believe the upgrade cycle in Indian telecoms is far from over;
we remain positive on the sector. Idea is our top pick. While we
rate Bharti OUTPERFORM, we believe the near-term earnings
pressure from non-cash forex losses could keep the stock volatile.
What are theoretical RPM and margin impacts?
For the headline tariff increases that happened recently starting mid-
July (on-net call rates up 20%, off-net call rates unchanged), the
implied RPM increase for a subscriber on the base plan is about 8%
(assuming no loss of usage). The overall impact on reported numbers
could be lower since not all subscribers would be on the base persecond
plan (e.g. many subs might be using special tariff vouchers
[STVs]). Based on our discussions with the industry, we believe that
large incumbents should be carrying 60-70% of calls on base tariffs
(the number would be lower for weaker operators who compete
primarily on STVs). Using this information, the net increase in RPM for
incumbent operators should be about 5.5%, from headline tariff
increases alone. (Note that call rates on even STVs went up recently,
thus the real RPM increase could be higher than 5.5%—for more
details see our notes on 30 June 2011 and 8 September 2011).
Assuming no change in usage and given current margin levels, every
1% RPM increase should lead to 65 bp and 75bp margin increases for
Bharti (mobile) and Idea, respectively. Further, we note that cost
control by the industry over the last few months (reduction in channel
margins, reduced gross adds, etc.,) should lead to much higher
margin upside than implied by only tariff increase. On the other hand,
this could get offset to some extent by (1) operators choosing to invest
some of the savings into the business, and (2) the fall in usage. At the
earnings level, every 1% RPM increase (all else constant) should lead
to EPS uplift of 3.5% and 12% for Bharti and Idea, respectively.
Figure 1 shows consensus revenue, EBITDA and EPS estimates for
Bharti and Idea pre-tariff hike and now (see below on how we distil
consensus estimates on Bharti’s SA mobile business from
consolidated estimates).
Headline RPM impact of tariff increases seem to be
factored in
We notice that consensus revenue estimates have gone up 4.7% and
5.8% for Bharti (mobile) and Idea, respectively, from early July levels.
If we assume that all changes to consensus happened only due to the
tariff increase—we can conclude that consensus has fully factored in
the base tariff increase. We note that there is still scope for small
upside from the impact of increases in call rates on STVs.
However, margins have hardly changed
At 30 bp and 127 bp for Bharti and Idea, respectively, EBITDA margin
increases corresponding to the above RPM/revenue increases are low,
compared with the 300-400 bp increases that the sensitivity
mentioned earlier implies. We thus believe that the big margin benefit
of tariff increase is yet to show in consensus—this should start flowing
through as we expect margins to go up in the coming quarters.
Why are Bharti’s EPS estimates not going up?
While Idea’s EPS estimates have gone up sharply (16%+) in the
recent upgrade cycle, Bharti’s EPS has actually come down by 1%.
This is despite revenue and EBITDA estimates going up—as we have
seen earlier. The reason behind this trend is the increase in tax rate
that the street had to build in post 1Q12 results and the tax guidance
(CS tax estimates have gone up post results). Assuming tax shocks
are behind us, we expect to see consensus EPS upgrades.
Note: Extracting Bharti’s mobile consensus estimates
We break down old consensus revenue/EBITDA numbers between
South Asia mobile and other businesses, using FY3/11 revenue
mix/mobile EBITDA margins for the company. Next, we assume that
other business estimates have not changed and that all increases in
consolidated estimates were driven by changes to the mobile
business. Since our focussing is on changes to estimates, the errors
in mix/margin assumptions do not have a significant bearing on our
findings.
One obvious limitation of the analysis in this report is that we assume
all consensus changes over the last two months have happened only
due to the RPM increase.
going up in the India telecoms sector. We study the changes to
consensus estimates on Bharti/Idea during this period to check
the extent to which consensus has factored in these tariff hikes.
We believe consensus has fully factored in the impact of recent
headline tariff increases onto RPM. However, there is still scope
for small upside from increases in call rates on STVs, in our view.
● On the other hand, consensus margin estimates have hardly
moved (as against theoretical 300-400 bp implied by the RPM
increase + other recent cost savings). We thus believe that
significant margin/earnings upside exists, and should come
through as margins start going up in the coming quarters.
● Increases in tax rate assumptions have been a dampener on
Bharti’s EPS estimates. Assuming tax increases are behind us,
we should start seeing EPS upgrades for Bharti.
● We believe the upgrade cycle in Indian telecoms is far from over;
we remain positive on the sector. Idea is our top pick. While we
rate Bharti OUTPERFORM, we believe the near-term earnings
pressure from non-cash forex losses could keep the stock volatile.
What are theoretical RPM and margin impacts?
For the headline tariff increases that happened recently starting mid-
July (on-net call rates up 20%, off-net call rates unchanged), the
implied RPM increase for a subscriber on the base plan is about 8%
(assuming no loss of usage). The overall impact on reported numbers
could be lower since not all subscribers would be on the base persecond
plan (e.g. many subs might be using special tariff vouchers
[STVs]). Based on our discussions with the industry, we believe that
large incumbents should be carrying 60-70% of calls on base tariffs
(the number would be lower for weaker operators who compete
primarily on STVs). Using this information, the net increase in RPM for
incumbent operators should be about 5.5%, from headline tariff
increases alone. (Note that call rates on even STVs went up recently,
thus the real RPM increase could be higher than 5.5%—for more
details see our notes on 30 June 2011 and 8 September 2011).
Assuming no change in usage and given current margin levels, every
1% RPM increase should lead to 65 bp and 75bp margin increases for
Bharti (mobile) and Idea, respectively. Further, we note that cost
control by the industry over the last few months (reduction in channel
margins, reduced gross adds, etc.,) should lead to much higher
margin upside than implied by only tariff increase. On the other hand,
this could get offset to some extent by (1) operators choosing to invest
some of the savings into the business, and (2) the fall in usage. At the
earnings level, every 1% RPM increase (all else constant) should lead
to EPS uplift of 3.5% and 12% for Bharti and Idea, respectively.
Figure 1 shows consensus revenue, EBITDA and EPS estimates for
Bharti and Idea pre-tariff hike and now (see below on how we distil
consensus estimates on Bharti’s SA mobile business from
consolidated estimates).
Headline RPM impact of tariff increases seem to be
factored in
We notice that consensus revenue estimates have gone up 4.7% and
5.8% for Bharti (mobile) and Idea, respectively, from early July levels.
If we assume that all changes to consensus happened only due to the
tariff increase—we can conclude that consensus has fully factored in
the base tariff increase. We note that there is still scope for small
upside from the impact of increases in call rates on STVs.
However, margins have hardly changed
At 30 bp and 127 bp for Bharti and Idea, respectively, EBITDA margin
increases corresponding to the above RPM/revenue increases are low,
compared with the 300-400 bp increases that the sensitivity
mentioned earlier implies. We thus believe that the big margin benefit
of tariff increase is yet to show in consensus—this should start flowing
through as we expect margins to go up in the coming quarters.
Why are Bharti’s EPS estimates not going up?
While Idea’s EPS estimates have gone up sharply (16%+) in the
recent upgrade cycle, Bharti’s EPS has actually come down by 1%.
This is despite revenue and EBITDA estimates going up—as we have
seen earlier. The reason behind this trend is the increase in tax rate
that the street had to build in post 1Q12 results and the tax guidance
(CS tax estimates have gone up post results). Assuming tax shocks
are behind us, we expect to see consensus EPS upgrades.
Note: Extracting Bharti’s mobile consensus estimates
We break down old consensus revenue/EBITDA numbers between
South Asia mobile and other businesses, using FY3/11 revenue
mix/mobile EBITDA margins for the company. Next, we assume that
other business estimates have not changed and that all increases in
consolidated estimates were driven by changes to the mobile
business. Since our focussing is on changes to estimates, the errors
in mix/margin assumptions do not have a significant bearing on our
findings.
One obvious limitation of the analysis in this report is that we assume
all consensus changes over the last two months have happened only
due to the RPM increase.
No comments:
Post a Comment