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Telecom: Q3FY18 Preview - Expect a weak quarter impacted by IUC

Service providers to see impact of interconnect usage charge (IUC) cut: We expect Indian telecom wireless players to report a weak quarter despite seasonal tailwinds. 3QFY18 will see the full quarter impact of the IUC cut (from Rs0.14 to Rs0.06). This impact coupled with continued price erosion, led by down trading in high ARPU segment will weigh on the overall ARPU performance. We expect the sector to witness a sharp sequential decline in revenues and EBITDA. On the other hand, we expect capital intensity in the sector to continue, as incumbents (particularly Bharti Airtel) rollout 4G services aggressively to keep up with market shift towards long-term evolution (LTE) data.

Bharti Airtel (Bharti): For 3Q, we expect Bharti to report consolidated Rev/EBITDA/PAT of Rs206bn/Rs74bn/Rs3bn, respectively. Drag on the India wireless business is likely to continue due to IUC cut and price erosion. Despite strong subscriber addition, we estimate Bharti Airtel’s India wireless revenues to drop by 9% QoQ to Rs111bn. We estimate India wireless Average Revenue per User (ARPU) of Rs130, India wireless EBITDA of Rs36.9bn and margin of 33.2% (2QFY18 34.4%). The Africa business is expected to report flat Rev/EBITDA sequentially.

Idea Cellular (Idea): Idea will see slightly higher impact on wireless revenues, as we expect their subscriber addition to trail Bharti Airtel’s. Overall, we estimate Idea to report Revenues/EBITDA of Rs66bn/Rs12bn, a decline of 12%/17% QoQ, respectively. This decline is led by sharp drop in ARPU to Rs118 (Rs132 in 2QFY18), which will lead to a PAT loss Rs13bn.

Bharti Infratel: We expect a weak quarter on metrics from Bharti Infratel, led by exit of select players (Reliance Communication, Tata Tele Services Ltd and Aircel in select circles). While this exit will drive higher churn, overall gross adds for the quarter are unlikely to offset this drag. We estimate churn to increase to 2.5% this quarter, which will lead to net tenancy drop QoQ (end of period basis). As most of these exits have come at the end of 3Q, we do not expect a major impact on the financials for this quarter. We estimate Revenues/EBITDA/PAT of Rs22.7bn/Rs15.8bn/Rs6.7bn, a growth of 7.5%/7.3%/9% YoY.

Tata Communications (TCOM): We expect TCOM to report a mixed quarter, with continued weakness in voice but growth in data services. Overall, we expect EBITDA margins to remain stable sequentially on a consolidated basis at 13.2%. We expect voice margin to moderate to 6% (7.2% in 2QFY18). Importantly, we expect the data business to recover with 2.1% QoQ revenue growth and stable EBITDA margins. On a consolidated basis, we expect TCOM to report Revenues/EBITDA of Rs42.5bn/Rs5.6bn, +1%/-1%  QoQ. 

3QFY18 to be the bottom quarter: While it is no surprise that this quarter is likely to be weak, the bigger question for investors is when metrics would begin to stabilise. In our view, 3QFY18 should be a bottom quarter for Bharti Airtel, if not the sector. While metrics are not likely to improve even in 4QFY18, we do think that elasticity, rising data adoption and consolidation-led market share gains will prevent further worsening, particularly for Bharti Airtel.

Key monitorables in 3QFY18 results

• Capex guidance from Bharti Airtel and Idea Cellular. We expect Bharti to maintain its guidance.
• Update on timelines and progress of Idea Cellular–Vodafone merger.
• Commentary on impact of down trading and bundling penetration.
• TCOM’s commentary on turnaround in data margins and the TTSL enterprise business buyout
• Clarity on Indus stake sale from the incumbents.