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Why telecom sector is out of the woods
A lot has changed in the Indian telecom space, especially after the Supreme Court's order in February 2012 for the cancellation of 122 licences.
Since then, telecom companies faced many regulatory hurdles and took a significant hit on their balance sheets. However, a new dawn seems to be on the horizon, according to a Kotak Securities report. This can be reflected in the improvement in financial results in both the April-June 2013 and July-September 2013 quarters.
Investors too have rewarded companies. Shares of Idea Cellular and Reliance Communications jumped 65% and 97% respectively in the last one month, largely outperforming the BSE Sensex index, while Bharti Airtel stock rose nearly 13%.
Here are four reasons why the outlook for telcos have improved:
Operating margins widen:
Operating margin is a calculation of how much a company makes on every sale. This does not take into consideration costs like depreciation, interest on debt and taxes. A widening of operating margins reflect a company's efficiency in generating revenue with minimum expenditure. It is measured by dividing Earnings before Interest, Taxation, Depreciation and Amortization (EBITDA) by total revenue.
In the June quarter, margins rose 2.6-5.3% for Bharti Airtel and Idea on year-on-year basis. This improved further in the September quarter. EBITDA margins widened 1.44% for Bharti Airtel year-on-year, on the back of a 15% rise in EBITDA. For Idea, margins rose 4.4% as EBITDA jumped 38.6% from the previous year. This shows, the profitability of telecom companies is improving.
Revenues per minute (RPM):
RPM is an important metric for the telecom sector. It measures the amount a company earns on every minute of a voice call, and reflects the growth in voice business. According to the Kotak report, voice RPM grew strongly in the first quarter for telcos in the range of 3.6-5.1%. Both Idea and Bharti witnessed a further increase of 2.3% and 1% in RPM in the quarter-ended September.
Average revenue per user:
For the first time, telecom companies hiked call prices in the fiscal year. Despite that average revenue per user (ARPU) - how much a company earns from each mobile connection - rose from the previous year. This means, companies have got back pricing power as the consumer has not responded negatively to the rise in prices. This is good news for the sector. The top telcos saw a 8-13% growth in ARPU levels in the June quarter. Bharti's voice ARPU rose 9% in the second quarter on YoY basis, while Idea's ARPU increased 10.8%.
Data consumption has jumped significantly from the previous year - both in terms of higher number of data users as well as increase in consumption per user. This is despite price hikes in data tariffs. And this is in both 3G or third-generation and 2G or second-generation wireless data services. This has led to a rise in contribution of data services to total revenues for telecom players.
In a country with a population of 120 crore, only 90.618 crore use wireless or wired telephone services, according to the Telecom Regulatory Authority of India (TRAI). Of this, 876.72 million are wireless mobile users. However, only 83.94% of the total wireless subscribers were active as of August 2013. 60.57% of these users are located in urban areas.