Telecom AGR: Q4 Analysis - BSNL/MTNL & Idea are biggest gainers.

TRAI released the Gross Revenue & AGR details of all telecom operators for the March'16 quarter this week. It is very interesting to see the kind of progress made by different operators & different circles. The Industry wide AGR has jumped 4.4% Q-o-Q and 11.25% Y-o-Y to touch a figure of Rs.39985 crores in March'16. This is a healthy growth rate & the Industry should be happy about it. The Top-3 circles in terms of contributions to the AGR continued to be Maharashtra, Andhra Pradesh & Karnataka, who together contributed about 25.6% of Total AGR of all 22 circles. Despite their size, these circles have reported a Y-o-Y growth in AGR of around 16%, which is noticeably higher than National AGR growth rate. The Top-3 circles in terms of fastest Y-o-Y growth rate were the relatively smaller circles of Himachal Pradesh, J&K and North-East, who have grown at 21-22% and have seen their combined contribution to National AGR improve from 2.3% in March'15 to 2.5% in March'16. With increased economic activity even in these regions, we should see them continue with the strong progress.

Coming to operator-wise performance, I have focused my attention studying details of only the Top-4 operators as they together contribute about 82% of Industry-wide AGR.

1) Bharti Airtel : Airtel's Y-o-Y AGR growth was healthy at 15.26%, but the Q-o-Q growth was disappointing at just under 3%. This Q-o-Q disappointment resulted in it's Market Share slipping from 30.5% in Dec'15 to 30.1% in March'16. Nevertheless Bharti Airtel's market share has still managed a 110 bps improvement Y-o-Y, which is still commendable for a company of it's size. Bharti Airtel also crossed the Rs.12000 crores Quarterly AGR mark during this quarter. In fact Airtel's one quarter's AGR is even larger than the Annual AGR of No.5 operator in the country!!

The largest contributing circles to Airtel's AGR are: Karnataka (12.9%), Andhra Pradesh (11%) and Tamil Nadu (9.5%). These 3 circles together contributed over Rs.4000 crores in AGR during March'16. In terms of Market Share, Airtel commands over 40% share in 9 of the 22 circles in the country, but most of them are the relatively smaller ones. The most disappointing circle for Airtel is Kerala, where it commands just 7.6% share and has lost about 2% in the last 1 year. The reason could be the lack of 3G license for this circle. Airtel is trying to correct that with an aggressive 4G rollout across the state of Kerala and we could see things turning around for the operator even in this region.

The circles where Airtel has gained over 2% market share in the last 1 year include Kolkata (+7.6%), Mumbai (+4.7%), Haryana (+3.3%), Gujarat (+2.8%) and Tamil Nadu (+2.1%). Most of these circles have seen aggressive 3G/4G rollout by Airtel during the last few quarters. Acquisition of Loop's Mumbai operations did boost Airtel's standing in the crucial Metro circle.



2) Vodafone India: India's No.2 operator has had a relatively disappointing year. Even though Vodafone managed to match Q-o-Q Industry growth with 4.6% AGR growth, it's Y-o-Y growth at just 10% was lower, which has resulted in 30 bps reduction in it's Market share from 21.8% in March'15 to 21.5% in March'16. Another worrying factor for Vodafone India is the limited circles where it can offer 4G service currently, that too on very limited spectrum. It will certainly need to open it's purse strings during the upcoming auctions to become more competitive in the 4G space in the country.

The Top-3 contributors to Vodafone's AGR during March'16 were Gujarat (10.6%), Maharashtra (10.4%) and Tamil Nadu (9.7%). Vodafone commands over 25% market share in 8 of the 22 circles, which includes a few prominent ones like Delhi, Gujarat, Mumbai & UP(E). The circles where Vodafone has managed to improve it's market share over the last 1 year are: Assam (+4.6%), North-East (+3.3%), Orissa (+2.2%), Bihar (+1.7%) and Himachal (+1.1%). Most of these are insignificant circles. In most other circles Vodafone has either barely managed to maintain it's share or has even lost significant share. Vodafone has even lost some share in the Top-3 contributors to it's AGR, i.e. Gujarat, Maharashtra & Tamil Nadu. It has also lost 1.7% market share in Delhi and 1.1% in Andhra Pradesh circle.

Vodafone certainly needs to get it's act together soon. It needs to do something to stop the market share erosion in circles which are very important to it like Delhi, Gujarat, Maharashtra, Mumbai, Tamil Nadu & UP(E). It is already facing the heat from existing competition and things will get even tougher with new competition coming in.




3) Idea Cellular: India's No.3 operator has been the best & most consistent performer over the recent many quarters. With Y-o-Y AGR growth of 19.8% and Q-o-Q Growth of 6.84%, Idea Cellular has once again demonstrated it's superior growth. Idea Cellular's market share has grown from 17.8% in March'15 to 18.7% in Dec'15 and now to 19.2% in March'16. That means a 140 bps improvement in the last 1 year. Idea Cellular is rapidly catching up with the No.2 operator. The gap between Vodafone & Idea's AGR in March'15 was about Rs.1430 crores, which is now down to just about Rs.960 crores in March'16.

The Top-3 contributing circles to Idea's AGR are: Maharashtra (15.9%), Madhya Pradesh (11.8%) and Kerala (11.8%). These 3 circles together contribute close to 40% of Idea's Total AGR. The smallest contributors to Idea's AGR are circles like Assam, Himachal, J&K, Kolkata, North-East, Orissa, Tamil Nadu & West Bengal. These 8 circles together contributed just 5.5% of Idea's Total AGR in March'16. But their contribution was just 3.4% during March'15. The AGR from these 8 circles has almost doubled in the last 1 year. Idea has probably started operations in these circles on it's own network in the recent couple of years.

Idea Cellular commands over 40% market share in 2 circles of Kerala & Madhya Pradesh, while it commands over 30% market share in 3 other circles of Maharashtra, Punjab and UP(W). Idea Cellular has managed to increase it's market share by over 2% in 6 circles over the last 1 year, which include prominent ones like Bihar, Kerala, Punjab, Tamil Nadu & UP(W). Even in Metro circles of Delhi & Mumbai, where it entered very late, Idea has managed to improve it's market share by about 1% each. During the last couple of spectrum auctions, Idea Cellular did the smart thing of bolstering it's 3G/4G capable spectrum holdings in all the large revenue contributing circles. Idea Cellular has 4G capable spectrum in 10 of it's important circles, which should help it insulate to some extent from aggressive competition.

4) BSNL/MTNL: The famous Sleeping Giant of the Indian Telecom industry, which slept through nearly a decade of strong industry growth, is certainly showing signs of waking up from it's long slumber now. After many many many quarters of either negative or zero growth in AGR, the PSU behemoth has shown signs of stability or positive growth in the recent few quarters. BSNL/MTNL combine reported 14.5% growth in AGR during March'16 quarter, both Y-o-Y as well as Q-o-Q. There has been a sudden jump in AGR reported by MTNL for both it's Metro circles. MTNL reported over 21% Y-o-Y and an astonishing 56% Q-o-Q growth during this quarter. Looks very very unusual and it seems like many of it's customers have suddenly come out of dormancy and started generating revenues for the company. Things will be more clear after the AGR numbers for June'16 quarter are announced.

Excluding MTNL circles, BSNL still did a fairly good job on the growth front during March'16 quarter. BSNL's 20 circles reported 12.8% Y-o-Y and 6.6% Q-o-Q growth in AGR, both of which have been better than the Industry growth rates. This is something that BSNL must have delivered for the first time in the last many years. Apart from Mumbai & Delhi, the 3 biggest AGR contributors for BSNL during March'16 quarter were Maharashtra, Kerala and Tamil Nadu. Out of the 20 circles, BSNL's 13 circles reported Q-o-Q growth, 11 of which posted strong double digit Q-o-Q growth. These are very very positive signals coming from BSNL. Hope that this is not a one-off and the company is able to sustain decent growth rates in the coming quarters.

BSNL/MTNL combine managed to grab 11.2% of market share in March'16 quarter, which is higher than the number in March'15 as well as Dec'15. BSNL/MTNL's market share across the 22 circles is well spread out with the combine managing to grab over 15% market share in only 6 circles. The circles where BSNL/MTNL managed to increase their market share by over 150 bps are: Andhra Pradesh, Delhi, Haryana, Maharashtra, Punjab & West Bengal, most of which are relatively larger circles. Lets see how BSNL/MTNL consolidate on this growth momentum in the coming quarters.


Summary: The Top-4 players in the Indian Telecom Industry have been increasing their dominance with their combined AGR Market Share increasing from 79.5% in March'15 quarter to 81% in Dec'15 quarter and 82% in March'16 quarter. The AGR numbers over the recent quarters have clearly proved that Idea Cellular is currently best performer in the Industry, followed by Bharti Airtel. The combine of BSNL/MTNL could prove to be a strong challenger, but it needs to show more consistency. Vodafone India, after having been on a very strong footing for many years, is showing slight signs of weakness compared to it's immediate peers. But this cash-rich operator certainly has the ability to bounce back, but might need a good outcome in the upcoming spectrum auctions and a few quarters of time to do so.

Amongst the smaller operators, who have been losing market share repeatedly, there is a possibility of a strategic merger between RCom, Sistema (MTS) and Aircel getting completed in the near future. But the merged entity is expected to hold the No.5 position in AGR market share, a little behind BSNL/MTNL. The possibility of a merger/acquisition between Tata Tele & Telenor is still uncertain as neither of the management's have uttered anything about it. Until these things work out, we will continue to focus on the Top-4 players. Reliance Jio will join the fray, hopefully before the end of this year. Once it does, it will be interesting to see how the numbers start changing for the Top-4 players.

Eicher Motors Ltd - Analysis of Royal Enfield sales growth.

Eicher Motors Ltd. stock has been one of the most Glamorous stock of this decade. The share price of Eicher Motors hit the 4-digit mark for the first time sometime in the middle of the year 2010. From there it took just about 4 years for the stock to hit 5-digit mark!! That means a 10x multiple in just 4 years!! Did it stop there?? NO, Not at all. Eicher Motors stock hit the Rs.20,000 mark in less than 1 year after crossing the Rs.10,000 mark. I have seen many small retail investors/traders discuss this dream run on Eicher Motors stock and buy into it during the last 1 year. But Eicher Motors stock has not continued with it's dream run during the last 1 year. It's been about 9-10 months since it hit the Rs.20,000 mark for the first time and it still trades around the same level. It has spent most of the last 1 year moving in the range of Rs.16,000 to Rs.21,000.

The start of this huge multi-multibagger rally in Eicher Motors' stock price was mainly due to it's JV with Volvo for Commercial Vehicles manufacturing & sales in India. But most of the run, over the last 3-4 years has been due to stupendous success of Eicher Motors' golden baby, Royal Enfield, which is famous for making bikes with that 'Thumping' sound. I have discussed the journey of progress of Eicher Motors in my report about a year ago. Following is the link to that report:

http://stockslogic.blogspot.in/2015/03/eicher-motors-ltd-royal-ride-to-super.html

During the time of writing that report, Eicher Motors' 12-months EPS stood at Rs.227 and the share price was close to Rs.16,000.

Over the last 5 quarters since then, the company's EPS has shot up to Rs.399 (75% increase) and the share price now trades around the Rs.20,000 mark (25% increase). This clearly suggests that the share price had run way ahead of the company's fundamentals and is now consolidating to let the fundamentals catch up with it. The P/E ratio was around 70 that time and it is now down to about 50 levels. Even at this level of a P/E ratio of 50, it would have been fine if the company can continue to grow it's profits at the rate of around 50% easily for the next 2-3 years. To analyse this we should analyse the performance of the business which is the main driving force behind the company's profits.

At the time of writing the report last year, Royal Enfield had touched a monthly sales figure of just under 30,000 bikes. As of now the same has reached a figure of just under 50,000 bikes. With a monthly volume of almost 50,000 bikes, Royal Enfield is now making all the mass-volume bike makers in India hugely jealous!! The cheapest Royal Enfield bike costs nearly 3 times the average per unit realisation of most other mass-volume bike makers in India. And while most of them are struggling to maintain even a single-digit growth rate, Royal Enfield continues to grow at a very strong double-digit rate.

Have a look at the chart alongside. I have used 3-months moving average of monthly sales numbers to slightly even out odd spikes. From monthly sales of just over 30,000 units in March'15, Royal Enfield is now doing sales of very close to 50,000 units in the last couple of months. In order to achieve this terrific growth, Royal Enfield has expanded it's presence well beyond the major cities, to most of the major towns across the country over the last 2 years. I am a resident of a small coastal town & we got a Royal Enfield showroom over a year ago. And now we can see hundreds of blokes riding their Bullets with great pride. In fact the sight of a Bullet is getting just too common now a days. My personal opinion is that the 'Uniqueness' factor of owning a Bullet bike is very close to wearing away. The domestic sales of these bikes may not continue to grow at such scorching pace and we will see a substantial slowdown in growth over the next 12 months. But the company could push more units into the Export market in the coming months. As of now only about 2-3% of Royal Enfield's monthly production is exported. Going forward I am expecting Export sales to grow at substantially faster pace than domestic sales, thus increasing the proportion of Exports in monthly numbers.

Have a look at the chart alongside which shows the Y-o-Y monthly Growth rates posted by Royal Enfield's sales. Despite increasing comparison base, the company has managed to grow it's sales at a rate over 50% during the last 8-9 months. But I am expecting this growth rate to sharply come down to levels of under 40% over the next 3-4 months and then to levels of under 30% by the end of this year. Mind you that even at levels of around 25 to 30%, the growth will still be considered very healthy as the base is getting larger & larger. 

Coming back to Eicher Motors' valuation, I am expecting the company's EPS to grow from Rs.399 posted for FY'16 to somewhere around Rs.525 to 550 for FY'17. Even then the current share price of the company trades in the P/E range of 35 to 40 considering 1 year forward EPS. I still think it is a bit on the expensive side and hence don't expect big returns from this stock over the next 1 year, unless the company continues to positively surprise me on the sales growth front. I would reiterate my opinion, which I had shared during my last year's report. I will prefer to Not be invested in Eicher Motors, purely because of it's current expensive valuations. I have no doubts on the company's growth prospects. But I still feel that the fundamentals of the company are yet to catch-up with it's Market Cap.