Bharti Airtel vs Idea Cellular - Which is the best Telecom stock?

The options for investing in Telecom are quite limited in India. Only the No.1 (i.e. Bharti Airtel), No.3 (i.e. Idea Cellular) & No.4 (i.e. Reliance Communications) mobile operators in India are listed on Indian stock exchanges. Tata Teleservices (Mah.) Ltd., which is a small part of the No.7 operator TTSL, is also listed, but can be termed as a regional player due to it's 2-circle operations. Another option that can be ignored is MTNL, which is again a 2-metro circles operation only and can be termed as completely lacklustre due to it's past performance.

Other players like Vodafone, Uninor, Aircel, BSNL, etc. are unlisted entities. Amongst the listed options, it is only the Top-2, i.e. Bharti Airtel & Idea Cellular, which are reporting strong growth in their India operations and also commanding strong market shares and consistant profitability. Bharti Airtel has operations in about 20 countries, which includes India and few other South-Asian countries and also in many countries of Africa. Bharti Airtel is also not just a pure-play mobile services provider, but it offers a gamut of services like DTH, Wireline, International Bandwidth, etc. The contribution from India-based business is nearly 60-65% in Bharti Airtel's Topline. On the other hand Idea Cellular is a pure-play mobile services provider based only in India.

In terms of size, Bharti Airtel is nearly 3 times the size of Idea Cellular, when Toplines are considered. To compare their performances over the recent 3 years, what I did was to compare how much percentage was Idea Cellular's Consolidated T-T-M numbers compared to Bharti Airtel's Consolidated T-T-M numbers. If the 2 companies grew at the same pace, then the percentage number will remain stagnant, but if Idea Cellular has grown faster, then the percentage number will rise & vice-versa. Have a look at the charts below. I have compared T-T-M numbers from June'2012 to June'2015 to give us a reasonable idea of who outperformed over the last 3 years.

From the charts above, it is extremely obvious that Idea Cellular has been the clear outperformer on Total Income, EBITDA and Cash Profit front. In the case of Total Income, Idea Cellular's number was just about 28% of Bharti Airtel's number at the end of June'12, which remained around the same level till March'13. But over the next 9 quarters, that percentage has shot up to touch a figure of 35.8% by June'15. There are two primary reasons for this huge outperformance by Idea Cellular: One being Idea's faster growth by some margin in the Indian Telecom market; and Second being very slow or negligible growth in Bharti Airtel's Africa business, which contributes over 25% to the company's Total Income.

On the EBITDA and Cash Profit front, the outperformance by Idea Cellular is even more staggering!! At the end of June'12, Idea's EBITDA formed just 22.3% of Airtel's EBITDA. But the number has shot up to 37.6% by June'15, i.e. over the last 12 quarters. In case of Cash Profits, the percentage number has nearly doubled from a level of 21.9% in June'12 to 42.8% in June'15. This is just too big an outperformance to ignore. Now look at the progress of T-T-M Cash Profit margins for the two companies. Bharti Airtel's Cash Profit margin dropped from 24.1% in June'12 to a figure of 21.5% in June'14, but has started improving after that to touch a figure of 22.8% in June'15. In case of Idea Cellular, the change has been consistently positive from a level of 19% in June'12 to a very very respectable figure of 27.3% in June'15.

Valuations: At the current price of Rs.157 per share, Idea Cellular commands a Market Cap of Rs.56,500 crores, which is 6.2 times it's T-T-M Cash Profit. In case of Bharti Airtel, the Market Cap stands at about Rs.1,52,000 crores at the current price of Rs.380 per share. At this price, it trades at about 7.2 times it's T-T-M Cash Profit. What this means is that despite strong outperformance on all Financial parameters over the last 3 years, Idea Cellular still trades at about 15% cheaper valuations compared to it's larger peer Bharti Airtel.

Could this mean that the market expects Bharti Airtel to better face the upcoming competition compared to Idea Cellular? If we look at the spectrum holdings in Indian space, Bharti Airtel is clearly the better bet as it holds considerable amount in all crucial frequencies like 900 MHz, 1800 MHz, 2100 MHz and 2300 MHz in various circles. After the recent auctions, Bharti Airtel is now said to be able to offer 3G services on either 2100 MHz or 900 MHz spectrum in 21 of the 23 circles in the country and hence will be less dependent on Roaming arrangements. Bharti Airtel can use it's 2300 MHz and 1800 MHz band holdings for 4G services, but it doesn't have these holdings in all the circles at the moment. On the other hand, what Idea Cellular has done is to ensure that it has enough spectrum holdings in all it's prime circles where it is No.1 or 2 operator and is able to combat any competition as these circles contribute nearly 65-70% of it's Revenues and almost all it's profits. Idea Cellular has a combination of holdings in the 900 MHz, 1800 MHz and 2100 MHz bands in most of the circles of operations. Idea Cellular will use a combination of 3G and 4G technologies using these bands to protect it's revenues from upcoming competition. 4G on 1800 MHz band in certain circles and 3G on 900 MHz and 2100 MHz bands in most of the other circles.

The developments are going to be fast & very very interesting to watch in the coming few quarters. The upcoming competition from RelJio is not very far and the existing operators will have to move swiftly to try & protect their revenues. The Data services market has been exploding over the last few years and the growth is expected to remain strong over the next few years. Every operator is trying to arm themselves with capacities to take a good chunk of this growth. I am not going to hazard a guess as to who will do better in protecting their revenues from the new competition next year onwards or whether the new competition will actually make a huge dent in the market shares or not. I would like to wait for more things to unfold & then take a calculated guess.

Adani Power Ltd. - Focus will now shift to profitability.

Adani Power Ltd. has been in the news quite often over the last 12 months over acquisition of different Power projects. In August'14, Adani Power announced signing of agreements for acquisition of Lanco's 1200 MW Udipi Power plant and the deal was completed just after Q1 of this fiscal started. In November'14, Adani Power has announced takeover of Avantha Group's Korba West unit of 600 MW Coal-based plant. That deal too is expected to be completed anytime now. Apart from the Korba unit, Adani Power's operational power generation capacity stands at 10,440 MW, almost all of it being Coal-based projects. The addition of Korba unit will take it to over 11,000 MW capacity, consolidating it's position as the largest Private sector Power Producer in India.

Adani Power will not stop expanding here. As per currently known plans, the Korba West unit is already implementing addition of another 600 MW capacity, which Adani Power will expedite soon after completing acquisition formalities. Adani Group has also signed agreements for setting up 10,000 MW Solar power capacities with Govt. of Rajasthan. But this agreement has been signed by Adani Enterprises and not Adani Power. So it's likely that Adani Power may not play any role in that investment.

Quarterly Numbers

Adani Power is likely to pursue acquisition of other troubled Coal-based Power projects to add to it's capacities in the coming years. But at the moment, it will surely be looking at boosting profitability of it's existing operations. Things have been turning favourable on this front with substantial drop in Coal prices and increased production volumes by Coal India, which in turn is making more Coal available in the domestic market. A substantial part of Adani Power's capacity is running on imported Coal, which is putting pressure on the company's profitability. I think Adani Power would like to partly compensate that with domestic Coal to bring down the average cost.

Two other developments are under process, which should boost Adani Power's operations: One is the refinancing of it's debt under RBI's 5/25 scheme, where Banks can extend loans to large Infrastructure Projects for longer durations of upto 20 or 25 years, depending on the project's expected cash flows. Adani Power is already to talking to it's Bankers to converting it's loans under this scheme. If successful, it should help reduce the pressure to some extent on the company's Cash outflows towards Interest payment as well as Principal repayment. This will be an incremental gain apart from the possibility of reduction of rates in the coming monitory policy announcements.

The Second reason is the Govt of India's action towards improving the health of the several financially ill State Discoms. The Central Govt is closely working with many State Govts to work out packages for turning around their Discom's operations to make them sustainable. Thanks to huge accumulated losses as well as ongoing operating losses, many of the state discoms were either not able to make full payments towards power purchased from producers or not able to purchase more power to meet the increasing demand for power, leading to continued Load-shedding in several regions of different states. On one hand the Discoms are being pushed to reduce their leakages, which will make their operations become sustainable and on the other hand the Govts will step in to workout a package to take care of their past dues. This process will happen in stages over the next 1-2 years and we could start seeing some evident results only by end of next year.

The demand for power normally grows at a rate faster than the economy's growth rate. If the economy is expected to grow at 7-8% Y-o-Y, then Power demand could post a growth of around 10%. Many of the older power plants, which have been in operations for over 30 or 35 years, will need to be shut sooner or later as they are a lot less efficient than the newer ones, leading to high pollution as well as high cost of production. This is where the newer projects will come in as replacement capacities for the older capacities, primarily owned by State Utilities or NTPC.

To summarise..... the worst seems to be over for most of the troubled as well as operational power producers, who haven't seen profits since a very long time. Things are expected to improve substantially over the coming 4 to 8 quarters, though the improvements will vary from project to project.

TTML Q1-FY'16 Update - Positive progress, but is it too late?

Tata Teleservices (Mah.) Ltd reported a sharp improvement in it's quarterly numbers for Q1 of this fiscal. TTML's Total Income was flat Q-o-Q at Rs.758 crores despite the fact that revenues from Interconnect charges had reduced sharply during this quarter. This was made possible by continued growth in revenues from Wireless Data revenues. Stable revenues with a sharp drop in Interconnect Costs & Employee expenses resulted in a sharp 28% jump in TTML's EBITDA for the quarter to it's best ever figure of Rs.219 crores and an EBITDA margin of 28.9%, which is 640 bps higher than the previous quarter. The higher EBITDA also helped TTML bring down it's Interest Cost by 5% Q-o-Q and resulted in the company posting it's best quarterly Cash Profit figure in the last 5-6 years!!

Have a look at the charts below:

Quarterly numbers

TTML's Total Income has been growing at a slow pace of around 5% Y-o-Y, while it's larger competitors are posting healthy double-digit growth rates. It's mainly because the larger operators have been aggressive both on 3G network rollout and marketing of it's services. TTML on the other hand expanded it's 3G coverage in RoM&G circle beyond the top few cities only in the last 2-3 quarters. Over the last few years, TTML was adding good number of subscribers to it's GSM network, but also losing substantial number of subscribers from it's CDMA network. The proportion of CDMA voice subscribers on it's network is now very small. The company could soon be using it's 800 MHz spectrum holdings for 4G rollout in both Mumbai and RoM&G circles, especially since the company has acquired fresh 2.5 MHz in this band in the recent auctions.

Coming back to Q1 numbers, TTML's EBITDA jumped from about Rs.170 crores to about Rs.219 crores Q-o-Q. This is despite a 5% jump in Network Operating costs on the back of expanding 3G coverage.

Quarterly Numbers

The primary reasons being 25% drop in Interconnect Costs on the back of reduction in interconnect fee from 20 paise/min to 14 paise/min by the telecom regulator and 44% drop in Employee Costs. (Have a look at the charts alongside) As we can see from the charts, the Interconnect Cost was rising sharply from the Sept'14 quarter to the March'15 quarter on the back of increased voice call volumes on TTML's GSM network after the company got aggressive on the 3G rollout front. In June'15 quarter, the Interconnect cost has dropped to less than Rs.125 crores from over Rs.168 crores in the previous quarter, translating into a savings of over Rs.43 crores for the company. Add to that the company's Employee costs have dropped by about Rs.19 crores to hit the lowest level in many years. The reasons behind this are unknown.

The total savings of about Rs.62 crores from these 2 parameters helped improve TTML's EBITDA by about Rs.49 crores, which improved the company's Cash position and helped in a reduction of about Rs.9 crores in the company's Interest Cost Q-o-Q, which bolstered it's Cash Profit further to hit a level of over Rs.52 crores from a Cash Loss of Rs.5 crores in the previous quarter. This smart return to Cash Profit should make the company's Bankers happy, who will now have more confidence in the company's 4G network rollout plans. We should see some action on the 4G front from TTML early in 2016, soon after RelJio's commercial launch of 4G services by the end of this year.

Over the next few months we could also see Tata Teleservices dropping the 'DoCoMo' brand and adopting a new Brand name. It will be interesting to see if the company drops the brand only after definitive agreement is signed with another Telecom company for sale of stake in the company or the company reverts to something like the Tata Indicom brand before that. Or they could synchronize the change of Brand name with the launch of 4G services. We will have to wait for a few months to get more details on this.

Coming to TTML's VLR subscriber base (i.e. Active subscriber base), it's quite interesting to note that the company experiences a drop during the months of March to May of every year. In the year 2014, TTML saw a drop of over 2.5 lakh VLR subscribers during those 3 months, which were more than recovered in the following 3 months. This year too TTML's VLR base dropped by over 4 lakh during the same 3 months of March to May. I am guessing that it is because these months include summer vacations for schools in India and many families travel to their home towns during this period. Since there are many people in Maharashtra who are natives of other states, it does make sense that there is an outflow of people from the state during the summer vacations. A drop in VLR base must be having a negative impact on the company's revenues. And despite this negative impact of near 6% drop in VLR base during these months, TTML managing to hold to it's Total Income figure is a definite positive. We could see some decent growth in the company's Total Income during the current quarter as the VLR base returns back to normal during these months. 

Reliance Power - on a Sasan UMPP booster!!

Until Q4 of FY'15, Reliance Power's Quarterly Total Income had stabilised around the Rs.1800 crores mark & Cash Profit was around the Rs.375 to 390 crores range. In my previous report on Reliance Power I had mentioned my expectations from the company's first UMPP at Sasan. I was expecting an addition of about Rs.800-850 crores to the Quarterly Revenues and an addition of Rs.100 crores to the Quarterly Cash Profit, on the conservative side. The Interest burden was expected to consume most of the revenues from this project.

But the Q1-FY'16 result clearly proved that my estimates were quite conservative truly. RPower's Total Income jump was around Rs.1000 crores, while Cash Profit jumped by around Rs.200 crores. Infact the project even contributed to the company's Net Profit right in the first quarter of consolidation!! This performance is much better than expected. In absolute sense, RPower's Total Income was higher by 58% Y-o-Y, EBITDA was higher by 82%, Cash Profit was higher by 58% and Net Profit was higher by 41%. We can expect similar kind of number for the remaining 3 quarter of this year.

Trailing-Twelve-Months Numbers

We can expect RPower's T-T-M Total Income to progress from a little over Rs.8200 crores currently to closer to about Rs.12000 crores by the end of this fiscal. RPower's T-T-M EBITDA, which currently stands at little under Rs.3500 crores, will progress to a little over Rs.5000 crores over the next 3 quarters and the Cash Profit will go past the Rs.2300 crores mark. Now look at the Market Cap chart above. RPower's Market Cap has continuously fallen from levels close to Rs.30,000 crores at the end of June'14 to under Rs.12,000 crores today (at a price of under Rs.42/- per share today.). This is completely senseless, isn't it? RPower's annual Cash Profit is expected to improve to over Rs.2300 crores in the next three quarters and the company is valued at just about 5 times of that number!! This is irrationally low valuation and reflects the fear that investors have in their minds about Power companies in general and the disappointment & anger associated with RPower during it's IPO time. But it is excellent opportunity for those investors who can ignore the above two factors.

Reliance Power is one company in the power sector which is have good operational projects with no issues related to fuel availability to these operating projects. No issues related to repayment of debt even at the consolidated level. All it's projects are working at very healthy PLF levels of over 80% comfortably, quarter after quarter. RPower clearly has healthy Cash Position, unlike most other Private sector power producers who are struggling even to cover their operating costs & interest payments. Despite all these positives, RPower is trading at such pathetic valuations. Just doesn't make any sense.

I think RPower deserves to double from current levels over the next 3-4 quarters to get to a Market Cap of 10 times it's annual Cash Profits, if not more. At a price of about Rs.80-85 per share, RPower will still be trading at about 18 times it's T-T-M expected EPS of about Rs.4.50 to 5/-.

Another positive is that RPower is not going aggressively after increasing it's Thermal Power capacities. I think this is positive because there are many thermal power projects which are currently struggling. Instead RPower is increasing it's Renewable Power capacities, mainly Solar. RPower has 45 MW Solar PV capacity operational in Rajasthan since the last year or so, and another 45 MW Wind Power capacity operational in Maharashtra. Both these projects together are generating about 3.5 crore units of electricity every quarter, translating into revenues of around Rs.200 crores & with negligible operating costs. During the June'15 quarter, another 100 MW Concentrated Solar Plant in Rajasthan has started generating electricity and will add to the company's revenues and cash profits from Sept.'15 quarter. At the same time RPower is working on commissioning another 700 MW Solar PV capacity, which could get operational sometime during the next 12-18 months.

During the recent Bangladesh visit of our PM, there was news about Adani Power & Reliance Power investing in setting up Thermal power capacities in that country. In case of Reliance Power, that project is not going to entail Huge Capex as the company already has Project Equipment ready & unused at one of it's proposed project site in Andhra Pradesh, which never took off due to lack of Gas availability. Reliance Power has announced that it will be using the same equipment for the Bangladesh project. I am not giving too much importance to this project currently because it is atleast 3 years away from commissioning.

As of now we should focus on the current operating capacities and the upcoming Solar capacities only.