NEW DELHI: India's top mobile phone companies - Bharti Airtel, Reliance Communications and Idea Cellular - are expected to report lower profits for three months ended March 2011 despite record customer additions and increased usage, say analysts tracking the sector.
The primary factors leading to lower profits and a squeeze on margins include 3G launch costs, impact of mobile number portability (MNP) and small tariff cuts at the state level.
The primary factors leading to lower profits and a squeeze on margins include 3G launch costs, impact of mobile number portability (MNP) and small tariff cuts at the state level.
The January-March period will be the first quarter of MNP implementation, the facility that allows customers to change their operators, but retain their mobile number.
According to the estimates of four brokerage firms, Bharti Airtel may report an 18% drop in net profit while Idea Cellular is likely to see a 15% slide.
Analysts at HSBC Global Research, CLSA and Moitlal Oswal are of the view that Reliance Communications, which has more than $7-billion debt, may post a steeper fall in profits ranging from 65% to 77% on an year-on-year (Y-oY) basis.
"Our skepticism around Reliance Communications is driven by its rebalancing initiatives - this would limit usage growth - and 3G launch expenses," HSBC Global Research analysts Rajiv Sharma and Harbhajan Singh said in a note.
The monthly average revenue per user - a key indicator of profitability - is also expected to drop between 3% and 5% for the operators on a quarter-on-quarter basis despite a stable pricing environment, analysts said.
While 3G rollout costs and MNP will drag down margins, the industry is largely of the view that the full impact will only be felt in the coming quarters. Since its implementation in late January, about nine million customers have opted to port their numbers, with Vodafone Essar witnessing maximum net additions.
The industry is however divided on portability having a big impact on the financials of telcos going forward. "We continue to believe that MNP is unlikely to be a game changer, given the largely pre-paid nature of the Indian market (>96% of subscriber base) and high churn levels (50-120% per year)," analysts at Motilal Oswal said in their results preview note last month.
In the case of Bharti Airtel, its March quarter numbers are not strictly comparable to its performance in the corresponding period in the previous year as the company has consolidated its Africa operations into its financials as well as adopted accounting principles laid down by International Financial Reporting Standards . But over the last two quarters, its loss-making African operations have been a drag on the company. Bharti had set a target of US$ 5 billion in revenues and $2 billion in EBIDTA for the year-ended FY 2013 for its loss making Africa businesses and analysts remain divided if the company can achieve these targets.
Last week, Credit ratings agency Fitch had reduced Bharti Airtel's outlook to 'negative' from 'stable' citing risks involved in its African operations.
"Fitch is concerned that ongoing execution risk attached to Bharti's African operations could potentially lead to lower-than-expected performance," it said while adding: "Specific concerns include rising competitive intensity (in certain African markets), operational challenges, higher network operating costs and comparatively low network coverage, which may result in higher-than-expected capex ($800 million) in FY'12."
The credit rating agency is of the view that Bharti would find it tough to achieve its goal of bringing its Africa EBITDA margin level to 40% from the current 25% (normalised margins) due to a slew of factors including lower termination rates, cost efficiencies on selling, general and administration expenses.
Reliance Communications, India's second largest telco in terms of customers has accelerated subscriber additions in the January-March quarter. But it has lost out on mobile number portability and has recorded a net loss of about a million customers.
CLSA said that Idea revenue growth too is expected to be robust (+5% QoQ), but added that higher interest cost and depreciation will cause profit to be 13% Qom lower.
Industry watchers are of the view that things are looking up for sector after savage price wars over the last 18 months had sent the profits and revenues of all companies tumbling.
"Positive signals include the fact that there have been no major cuts in tariffs since 2010 and revenue per minute has stabilised over the past two quarters," Sharma and Singh at HSBC Global Research added.
Besides, all top operators are also rolling out third generation services across major cities and analysts estimate that these high-end data services will contribute 1-2% to mobile revenue in FY12 and 3-4% in FY13.
Incumbent telcos are also set to gain with the competitive landscape as all new entrants who launched services in 2008 are facing significant financial and regulatory challenges.
"Ongoing policy revamp (regulatory reforms) could drive consolidation, which is a positive for GSM incumbents. Revenue and EBITDA growth is likely to rebound in FY12, driven by robust traffic growth, lower RPM decline and launch of 3G services," analysts at Motilal added in their note.
According to the estimates of four brokerage firms, Bharti Airtel may report an 18% drop in net profit while Idea Cellular is likely to see a 15% slide.
Analysts at HSBC Global Research, CLSA and Moitlal Oswal are of the view that Reliance Communications, which has more than $7-billion debt, may post a steeper fall in profits ranging from 65% to 77% on an year-on-year (Y-oY) basis.
"Our skepticism around Reliance Communications is driven by its rebalancing initiatives - this would limit usage growth - and 3G launch expenses," HSBC Global Research analysts Rajiv Sharma and Harbhajan Singh said in a note.
The monthly average revenue per user - a key indicator of profitability - is also expected to drop between 3% and 5% for the operators on a quarter-on-quarter basis despite a stable pricing environment, analysts said.
While 3G rollout costs and MNP will drag down margins, the industry is largely of the view that the full impact will only be felt in the coming quarters. Since its implementation in late January, about nine million customers have opted to port their numbers, with Vodafone Essar witnessing maximum net additions.
The industry is however divided on portability having a big impact on the financials of telcos going forward. "We continue to believe that MNP is unlikely to be a game changer, given the largely pre-paid nature of the Indian market (>96% of subscriber base) and high churn levels (50-120% per year)," analysts at Motilal Oswal said in their results preview note last month.
In the case of Bharti Airtel, its March quarter numbers are not strictly comparable to its performance in the corresponding period in the previous year as the company has consolidated its Africa operations into its financials as well as adopted accounting principles laid down by International Financial Reporting Standards . But over the last two quarters, its loss-making African operations have been a drag on the company. Bharti had set a target of US$ 5 billion in revenues and $2 billion in EBIDTA for the year-ended FY 2013 for its loss making Africa businesses and analysts remain divided if the company can achieve these targets.
Last week, Credit ratings agency Fitch had reduced Bharti Airtel's outlook to 'negative' from 'stable' citing risks involved in its African operations.
"Fitch is concerned that ongoing execution risk attached to Bharti's African operations could potentially lead to lower-than-expected performance," it said while adding: "Specific concerns include rising competitive intensity (in certain African markets), operational challenges, higher network operating costs and comparatively low network coverage, which may result in higher-than-expected capex ($800 million) in FY'12."
The credit rating agency is of the view that Bharti would find it tough to achieve its goal of bringing its Africa EBITDA margin level to 40% from the current 25% (normalised margins) due to a slew of factors including lower termination rates, cost efficiencies on selling, general and administration expenses.
Reliance Communications, India's second largest telco in terms of customers has accelerated subscriber additions in the January-March quarter. But it has lost out on mobile number portability and has recorded a net loss of about a million customers.
CLSA said that Idea revenue growth too is expected to be robust (+5% QoQ), but added that higher interest cost and depreciation will cause profit to be 13% Qom lower.
Industry watchers are of the view that things are looking up for sector after savage price wars over the last 18 months had sent the profits and revenues of all companies tumbling.
"Positive signals include the fact that there have been no major cuts in tariffs since 2010 and revenue per minute has stabilised over the past two quarters," Sharma and Singh at HSBC Global Research added.
Besides, all top operators are also rolling out third generation services across major cities and analysts estimate that these high-end data services will contribute 1-2% to mobile revenue in FY12 and 3-4% in FY13.
Incumbent telcos are also set to gain with the competitive landscape as all new entrants who launched services in 2008 are facing significant financial and regulatory challenges.
"Ongoing policy revamp (regulatory reforms) could drive consolidation, which is a positive for GSM incumbents. Revenue and EBITDA growth is likely to rebound in FY12, driven by robust traffic growth, lower RPM decline and launch of 3G services," analysts at Motilal added in their note.
