INDIAN TELECOM: 1QFY11 aggregate AGR up 4% QoQ; GSM incumbents strong; Tata Tele, PSUs lose market share

- TRAI released telecom industry revenue data for 1QFY11.
- Aggregate industry AGR (adjusted gross revenue) increased by 4% QoQ v/s 6% growth in 4QFY10 and negative growth in 2HCY09.
- Tata Tele and BSNL/MTNL reported QoQ decline of 2% and 6% respectively v/s robust growth by all other major operators.
- While RCom reported the highest (13%) QoQ growth in AGR, gross revenue increased by only 1% QoQ (v/s 3.4% for industry).
- We believe that RCom's higher AGR growth is largely driven by one-off interconnect charges in 4QFY10 which resulted in lower AGR base in 4QFY10.
- Aircel continued to lead the growth with gross revenue and AGR growth of ~9% QoQ.
- We highlight that muted revenue growth in CY09 was led by tariff discounting by new GSM entrants and loss of market share for incumbents.
- 1QFY11 revenue data confirms the rebound in industry revenues led by robust traffic growth and market share gain by GSM incumbents.

Industry wide AGR up 4% QoQ to ~Rs215b, second consecutive quarter of growth after 4 dull quarters

- Adjusted gross revenue (gross revenue less interconnect charges) increased ~4% QoQ and ~5%YoY to ~Rs215b.
- AGR growth was driven by robust traffic growth reported by GSM incumbents.
- Gross revenue of the industry increased ~10% YoY and ~3% QoQ to ~Rs287b.

Bharti gains market share by 40-100bp; Tata Tele/PSUs key losers

- Bharti's AGR share increased by ~40bp QoQ to ~33.3% while gross revenue share increased by ~100bp to 32.5%.
- RCom's AGR market share increased ~80bp QoQ to ~10% but gross revenue share declined by ~30bp.
- Idea and Aircel increased their all India market share by 20-25bp QoQ to ~13% and ~5% respectively.
- Tata Tele's market share declined from ~9% in 4QFY10 to ~8.4% in 1QFY11, down ~50bp QoQ but up ~150bp YoY.
- BSNL/ MTNL's market share declined for the third consecutive quarter (~90bp QoQ and ~190bp YoY) to 8.6%.

Market share realignment leading to skewed growth among operators

- AGR for new entrants (such as Sistema Shyam Teleservices, Uninor, etc) increased by just ~8% in 1QFY11 vs strong growth of ~44% QoQ in 4QFY10.
- Bharti reported ~5% QoQ growth in AGR, reflecting relatively stable market share despite significant increase in competitive intensity.

- Increased competitive intensity from rollouts by Aircel and other entrants has likely impacted BSNL/MTNL more than Bharti, Idea, and Vodafone.

RCom's revenue (reported financials v/s TRAI) differential has stabilised at ~22%

- RCom's 1QFY11 access revenue (as per TRAI report) grew lower than industry at ~1% QoQ although AGR growth was significantly higher at ~13% likely due to one-offs.
- Traffic growth for RCom is likely to pick-up as rationalization process (taking out free/discounted minutes) is largely through.
- The difference between reported revenues in TRAI report and investor report remains stable at ~22%.

Sector Outlook

- Traffic growth has been strong for GSM incumbents (Bharti, Idea and Vodafone).
- We expect RPM decline to be lower going forward given no major head-line tariff cuts and more rational competition from new GSM entrants.
- Realignment of revenue market share is likely to continue; weak performance from new GSM entrants may pose risk of another tariff war especially post MNP (expected by calendar year end).
- We believe growth outlook has improved due to 1) robust traffic growth, 2) lower pricing pressure, and 3) 3G launch expected by 4QFY11.
- We expect 12-14% wireless revenue CAGR over FY10-12E v/s an estimated ~5% industry revenue growth in FY10.
- Valuations at 6.7-7.7x FY12 EV/EBITDA remain attractive.

Source : Equity Bulls

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