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RCom vs Bharti Airtel

October 31, 2008

Reliance Communications and Bharti Airtel both reported their Q2 numbers and here is a brief comparison on the same.

RCom reported 2Q FY09 net profit at Rs15.3bn, up 17% YoY and flat QoQ; reported results were boosted by ~Rs919mn of one-time income from FLAG arbitration. Adjusting for this, RCom’s EBITDA margin fell ~250bps QoQ to 39.8%.

High debt levels (~70% of which is forex debt), possible pressure on EBITDA margins from network expansion and increasing competitive risks in the Indian telecom sector remain key risks in our view. The Co continues to capitalize (MTM) losses (~Rs23bn) on its forex exposure.

EBITDA forecast is cut by 5-7% for FY09-10E & lowered wireless margin by 100-300bps across years. We now forecast RCom’s FY08A-10E EBITDA CAGR at 18% vs 30% CAGR for Bharti. RCom is expected to report an EPS of Rs 25 for FY09 and is expected to stay flat or decline in FY10.

Bharti Airtel:
The company continues to be the darling of Telecom Investors in India. Bharti reported 2Q FY09 profit at Rs20.46bn, up 27% YoY & flat QoQ. Net income was flat at INR20.4bn, wireless margins were stable at 30.5% and consolidated margins were 41%. On the operational side highlights included: MOU declined 1% on the back of seasonality and ARPU dropped 4% sequentially, network costs were 150bps higher due to rural penetration and higher energy charges and sales costs were down 140bps on rationalisation of distributor margins and elimination of wastage.

Network operating expenses for Bharti were up 17% QoQ (to 21% of net revenue) vs 6% QoQ topline growth. Despite this, margin slippage was limited as Bharti’s selling & admin overheads stayed flat QoQ.

Bharti Airtel is expected to report an EPS of Rs 45.09 and Rs 52 for FY09 and FY10 according to HSBC estimates. DSP ML expects EPS to be Rs 44 and Rs 58 for FY09 and FY10.

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