Index. Sector Update >> Q3FY2016 Telecom earnings preview

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1 Visit us at January 05, 2016 Index Stock Update >> KDDL Sector Update >> Q3FY2016 Telecom earnings preview REGISTRATION DETAILS Regd Add: Sharekhan Limited, 10th Floor, Beta Building, Lodha ithink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai , Maharashtra. Tel: Sharekhan Ltd.: SEBI Regn. Nos. BSE - INB/INF ; BSE- CD ; NSE - INB/INF ; CD-INE ; msei - INB/INF ; CD-INE ; DP - NSDL-IN-DP-NSDL ; CDSL-IN-DP-CD- SL ; PMS-INP ; Mutual Fund-ARN ; Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX ; (MCX/TCM/ CORP/0425) ; NCDEX ; (NCDEX/TCM/CORP/0142) ; NCDEX SPOT-NCDEXSPOT/116/CO/11/20626 ; For any complaints at igc@sharekhan. com ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do s & Don ts by MCX & NCDEX and the T & C on before investing.

2 stock update KDDL Reco: Buy Stock Update Robust model, fundamentals intact; maintain Buy with revised PT of Rs400 CMP: Rs352 Price target: Market cap: 52-week highlow: BSE volume: (No of shares) Rs400 Rs356 cr Rs424/ lakh BSE code: Sharekhan code: Free float: (No of shares) Public & Others 26% Jan-15 Company details Shareholding pattern Price chart Price performance KAMLADLS 0.5 cr (%) 1m 3m 6m 12m Absolute Relative to Sensex Promoters 48% May-15 Foreign 15% Non-promoter corporate 11% Sep-15 Jan Key points Ethos business robust; manufacturing stable: Ethos (KDDL s subsidiary into watch retailing) continues to nurture and improvise its online lead generation platform (www. ethoswatches.com) and expects an incremental growth on every parameter from this mode. Further, it is also focused on its brand building and expects ad spends of around Rs9-11 crore annually for brand building. It has also ventured into direct e-commerce venture with a few of the brands that includes Fossil. Further, the manufacturing business that includes dials and hands had witnessed headwinds in the growth owing to muted demand coupled with withdrawal of certain export benefits, which have already been resorted albeit at low rates, thus by far the manufacturing performance is likely to remain flat. The precision engineering business is growing fast at a CAGR of around 30% which would aid in a healthy performance of the stand-alone entity. Q3FY2016 preview snapshot: Driven by festivals, Q3 is the healthiest quarter for Ethos. Led by healthy traction of lead generation and online trend (whereby we expect online lead generation to constitute around 28% to the total top line), resulting in robust same-store sales growth (expect 16% same-store sales growth), the overall revenue is expected to grow at 20% YoY. A strong top-line performance would result in positive operating leverage reflecting in a 60-basis point margin expansion from 6.7% in Q3FY2015 to 7.3% in Q3FY2016. On the manufacturing front, we expect top line to remain flat with 18.5% margin (down from 20% in Q3FY2015). Introducing FY2018 estimates, expect strong revenue and margin improvement: We remain confident of the omnichannel lead generation retailing model of Ethos which is delivering good performance (Ethos has posted over 25% Y-o-Y growth over the last six quarters). This strong growth is likely to continue with strong margin expansion ahead. We expect Ethos to post 26% revenue CAGR (FY ), coupled with a 300-basis point margin expansion over the same period resulting in a sharp 116% CAGR growth in net earnings from Rs2.7 crore in FY2015 to Rs19 crore in FY2018. On a consolidated basis, we expect the revenue and earnings to grow at a CAGR of 21% and 42% respectively. Maintain Buy with revised price target of Rs400: We continue to like Ethos unique, high-end watch retailing business, which is expected to grow manifold by cashing in on the growth in the luxury watch segment and the increasing trend towards online e-tailing. This unique high-growth potential business along with a steady manufacturing business that generates free cash continues to remain attractive and would witness multiple re-rating with the unfolding of the results and the further increasing foothold of its unique lead generation omnichannel thrust. Thus, we continue to remain positive on the stock. With the introduction of FY2018 estimates and rolling forward our valuation to an average of FY2017 and FY2018, we have revised our price target on KDDL upwards to Rs400 (manufacturing vertical valued at 6x; while Ethos valued at 25x average earnings of FY2017E and FY2018E). Valuation (consolidated) Particulars FY14 FY15 FY16E FY17E FY18E Net sales (Rs cr) Growth (%) Operating profit Growth (%) Operating profit margin (%) Net earnings post minority Growth (%) Fully diluted EPS PER (x) (diluted basis) RoCE (%) RoE (%) Sharekhan 2 January 05, 2016 Home Next

3 stock update Q3FY2016 Ethos performance preview Ethos quarterly performance Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16E YoY % Revenue Cost of goods sold Employee expenses Other expenses EBITDA EBITDA margin (%) PAT Q3FY2016 consolidated preview Particulars Q3FY16 Q3Y15 YoY % Q2FY16 QoQ % Net sales EBITDA EBITDA margin (19.5) PAT (3) Online as a % to Ethos revenue 30% 28% 25% 23% 20% 16% 15% 10% 10% 5% 0% Q3FY13 Q3FY14 Q3FY15 Q3FY16 Same-store sales growth 45% 40% 40% 35% 30% 25% 22% 20% 17% 16% 15% 10% 9% 5% 0% Q3FY12 Q3FY13 Q3FY14 Q3FY15 Q3FY16E Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 3 January 05, 2016 Home Next

4 sector update Telecom Sector Update > Q3FY2016 earnings preview Net earnings affected by spectrum amortisation cost; focus on improving data reach Q3FY2016 result expectations Good revenue growth QoQ; on account of weak base: Telecom service providers (Bharti Airtel [Bharti] and Idea Cellular [Idea]) wireless business performance is expected to be decent on account of weak Q2 base coupled with the general uptick in the traffic growth that rebounds after September. We expect Bharti (domestic mobile business) and Idea to post 2.2% and 3.5% growth (QoQ) respectively for the quarter. Bharti s DTH and African businesses are expected to post 4% and 2.9% growth (QoQ) respectively in revenues, resulting in a consolidated revenue growth of 1.6% for the quarter. On the domestic wireless business front, we expect both Bharti and Idea to post a traffic growth of 2.2% and 3.4% on a sequential basis, while the pricing is expected to remain in the falling zone (a marginal decline of 0.5% on a Q-o-Q basis). The data business is expected to continue its double-digit sequential growth momentum (averaging 16-18% QoQ) for both Idea as well as Bharti. Despite network expansion, EBITDA margin remains intact: Players across the board have upped their ante in terms of network expansion and rolling out of data services (both 3G as well as 4G across geographies). This would entail an increase in the network operating cost, despite which we expect Bharti s consolidated EBITDA margin to remain intact (benefit of data growth and leverage on fixed cost like employee expenses coupled with improving performance of DTH business), while Idea s EBITDA margin is expected to marginally decline for the quarter (down 18 basis points) at 35%. Net earnings to be affected by higher below EBITDA cost: The investment made in spectrum acquisition would start reflecting in the financials of the telecom service players in the form of higher depreciation and interest cost that would have an impact on the earnings. Thus, on account of higher interest and depreciation cost, we expect Bharti and Idea to post 13% and 15.9% sequential decline in the earnings respectively. Bharti Infratel; consistent performance: Bharti Infratel s consolidated top line is expected to grow by 2.0% on a Q-o-Q basis, largely led by an improvement in the average sharing factor. A sizeable effect of the same through the utilisation of Reliance Jio towers would be visible in the financials from ensuing quarters. Outlook Despite a strong market for data growth, the nearing of the impending launch of Reliance Jio s 4G services (commercial launch expected in March 2016, though soft launch for employees and vendors already done), and the strategy adopted by the deep pocket competitor remains the key overhang on the sector. Further, regulation on the sector continues to be strong, the latest is the call drop penalty issue which is under court, this also continues to weigh heavily on the sentiments as well as the financials of the players. Valuation Owing to various regulatory issues over the last four years, the telecom stocks had been ignored by investors and thus were commanding lower valuation on account of lingering uncertainty over the sector. The telecom operators stocks are currently trading at 6-7x its one-year forward EV/EBITDA. We believe that Bharti Airtel with its healthy spectrum inventory coupled with first-mover advantage in rolling out 4G services in various geographies is the best stock placed to withstand the futuristic competition coming in the form of Jio entry. Thus, we currently have a Hold rating on Bharti Airtel with a price target of Rs380. Also, from our soft coverage front, we like Bharti Infratel (a play on Reliance Jio and data potential in India). Preferred picks this earnings season: Bharti Infratel Q3FY2016 estimates of Sharekhan s telecom universe Company Sales (Rs cr) OPM (%) PAT (Rs cr) Q3FY16E Q3FY15 YoY % QoQ % Q3FY16E Q3FY15 YoY BPS QoQ BPS Q3FY16E Q3FY15 YoY % QoQ % Bharti Airtel 24,235 23, , ,729.1 (30) (13.0) Idea Cellular 8,995 8, (18) (11) (15.9) Bharti Infratel 3,099 2, Sharekhan 4 January 05, 2016 Home Next

5 sector update Valuations Particulars CMP (Rs) Price target Reco/ view FY14 FY15 FY16E FY17E EPS CAGR FY15 FY16E FY17E Bharti Airtel Hold Idea Cellular 136 NR Neutral (10.6) Bharti Infratel 420 NR Positive Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Sharekhan 5 January 05, 2016 Home Next

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