Brazil telecoms hang on to profits as sales stagnate

Reuters News
Posted: Apr 29, 2013 6:01 PM
Brazil telecoms hang on to profits as sales stagnate

By Brad Haynes and Sérgio Spagnuolo

SAO PAULO (Reuters) - Brazilian phone companies relied on cost cutting and data-hungry cellphone plans to maintain profitability in the first quarter as quickening inflation and a saturated mobile market slowed sales growth to a trickle, according to a Reuters poll of analysts.

Revenue at Brazil's biggest telecom companies rose from a year earlier at a lower rate than the country's benchmark measure of consumer prices, underscoring the challenge of maintaining profitability after a bonanza of new cellphone subscribers have come and gone.

Analysts are now watching closely to see whether companies can deliver a meaningful boost to operating profit margins as they back off marketing expenses from the recent sales boom.

"While one might expect a ... jump in margins owing to lower commercial efforts associated with growth, we believe such a margin pop is unlikely to materialize," Credit Suisse Securities analysts led by Andrew Campbell wrote in a research note to clients.

Attention is also turning to how companies are managing capital as they carry out costly investments in next-generation networks while Brazil's central bank embarks on a cycle of interest rate increases.

TIM Participações SA, for example, is expected to post a modest gain in operating profit as rising labor costs offset strong growth of mobile data plans. The biggest boost to TIM's bottom line, however, may come from nearly halving its net debt, allowing the Brazilian unit of Telecom Italia to sharply reduce interest expenses.

TIM reports first-quarter earnings early on Tuesday.

Grupo Oi SA is expected to file its financial results later on Monday, highlighting gradual improvements that stemmed from a turnaround plan spearheaded by former Chief Executive Francisco Valim.

Since Valim's departure in late January, though, Oi's preferred shares have lost more than a third of their value as minority shareholders question controlling owners' commitment to both reducing debt levels and investing in a tough turnaround.

Oi's hefty debt load is unlikely to have changed much in the quarter, according to Campbell and his team, after most of its dividend payment was brought forward from May.

An underperforming fixed-line business likely held back sales growth at Telefonica Brasil SA to start the year, as it took longer than expected to roll out its home services triple play.

The Brazilian unit of Spain's Telefonica has relied on cost savings from a recent merger to bolster profits over the past year, but a voluntary retirement program could trigger one-time expenses of around 100 million reais ($50 million), according to some analysts, capping gains in the quarter.

Telefonica Brasil is due to report earnings on May 7.

(Reporting by Brad Haynes and Sergio Spagnuolo; editing by G Crosse)