Currency Sell-Off: The Impact On Regional Telecoms

Concern over the Fed's tapering programme has sent emerging market currencies into sharp deterioration in the past month. In Asia, the Indian rupee experienced the hardest hit reflecting its big current account deficit, while the Indonesia rupiah slide followed a close second. BMI examines the financial impact this will bring in H213 to regional telecom operators with substantial India and Indonesia exposure.

SingTel: Stake In India's Bharti and Indonesia's Telkomsel

The regional currency weakness is relevant to SingTel given India and Indonesia contributed 6% and 21% respectively to the group's Q213 post-tax profit. The fact that Singapore dollar is up 14% and 11% year-to-date against the rupee and rupiah respectively - with substantial proportion of those gains recorded in the past two months - is clearly a challenge to SingTel consolidated results. In the latest quarterly results, the group's share of Bharti Airtel's pre-tax operating profit was up strongly by 32% in local currency terms, but profit contribution fell to 27% after including the 4% depreciation of the rupee against Singapore dollar in the quarter. Similarly, pre-tax profit contribution of Telkomsel fell from 11% to 6% after factoring in the weakening rupiah.

INR and IDR Fell The Most Against USD
YTD Changes In Currency Vs US Dollar

Concern over the Fed's tapering programme has sent emerging market currencies into sharp deterioration in the past month. In Asia, the Indian rupee experienced the hardest hit reflecting its big current account deficit, while the Indonesia rupiah slide followed a close second. BMI examines the financial impact this will bring in H213 to regional telecom operators with substantial India and Indonesia exposure.

SingTel: Stake In India's Bharti and Indonesia's Telkomsel

INR and IDR Fell The Most Against USD
YTD Changes In Currency Vs US Dollar

The regional currency weakness is relevant to SingTel given India and Indonesia contributed 6% and 21% respectively to the group's Q213 post-tax profit. The fact that Singapore dollar is up 14% and 11% year-to-date against the rupee and rupiah respectively - with substantial proportion of those gains recorded in the past two months - is clearly a challenge to SingTel consolidated results. In the latest quarterly results, the group's share of Bharti Airtel's pre-tax operating profit was up strongly by 32% in local currency terms, but profit contribution fell to 27% after including the 4% depreciation of the rupee against Singapore dollar in the quarter. Similarly, pre-tax profit contribution of Telkomsel fell from 11% to 6% after factoring in the weakening rupiah.

Based on BMI's currency forecast, we expect a scenario of further weakening of the rupiah but slight recovery in the rupee by end of 2013. The opposing foreign exchange movements should help cushion the impact on SingTel's H213 results. As the bulk of the Group's revenue is derived from the Singapore and Australia market, we expect a greater earnings impact to come from the Singapore/Australia dollar exchange rate (as compared to the rupee or rupiah against Singapore dollar), which has hitherto remained stable. While downside risk from regional currency weakness persists, the falling share price of these regional associates provides good entry opportunities for SingTel, in our view, as fundamentals have not changed. In a previous article, we outlined Bharti Airtel's investment attractiveness after SingTel increased its holding to 32.3% from 30.8% ( see 'Bharti Airtel Makes For An Attractive Investment', Aug 19).

Axiata Group: Stake in Indonesia's XL Axiata

As of Q213, XL Axiata contributes 35.5% to Axiata Group revenue. Operational wise, Indonesia's XL witnessed a modest recovery in Q213 from the weak Q113 results amid heightened market competition and increased network costs. Gross revenue was up by 3.6% on higher data and voice revenue, EBITDA grew by 3.9%, and post-tax profit posted an 11.4% growth to MYR110.9mn. While the group's Indonesia operation shows moderate results improvement, unfavourable foreign exchange movements will continue to put pressure on the consolidated results.

BMI predicts the rupee will continue to weaken slightly against the Singapore dollar by end 2013 by 3.5%. Since Fed Chairman Ben Bernanke's bond tapering suggestion on May 22 2013, Axiata Group's share price has outperformed XL by 18%, which implies the Malaysia's Celcom valuation has trended upwards. In our view, this is positive news for Axiata Group's consolidated result as the revenue contribution has shifted in favour of the Malaysian operation, which should help mitigate some of the downside foreign exchange risk.

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This article is tagged to:
Sector: Telecommunications
Geography: Asia, Australia, Indonesia, India, Malaysia, Singapore
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