We have downgraded our long-term recommendation from Neutral to
Underperform on Brazilian telecom carrier
) following its first quarter results. The company's first quarter
earnings missed the Zacks Consensus Estimate on struggling
Though the currently lagging fixed-line business is expected to
benefit from the expansion of video, broadband Internet and Pay TV
services, we remain skeptical about its ability to regain
profitability this year. Fixed line business is significantly
challenged by persistent erosion in its voice telephony
Additionally, competition in the local phone market remains
intense and the long-distance market has matured. The impact of
wireless substitution remains high as a growing number of customers
are taking advantage of discounted calling plans from the national
Coming to mobile business, Telefonica Brasil, a subsidiary of
) ,has attractive long-term opportunities thanks to continued
expansion of its subscriber base. However, the synergies derived
from the mobile business would be offset by intense inflationary
pressure, stiff competition from its rivals, such as
S.A.B. de C.V.
Telecom Italia S.P.A.
), and excessive government intervention.
Moreover, Telefonica Brasil will continue to suffer from tariff
cuts. Brazil's telecom regulator Anatel has cut both
fixed-to-mobile and mobile-to-mobile tariffs by 10.78% to BRL0.48,
effective from February 24, 2012. Similar reductions are expected
in 2013 and 2014.
Further, Anatel expects that mobile interconnection fees would
fall 80% by 2018 to BRL0.10. The drop in interconnection and
network usage fees would significantly hurt revenues going forward.
Besides, obtaining new licenses might be difficult in the
competitive industry and would drag down revenues and profits.
Hence, we have a negative outlook on the stock. Telefonica
Brasil also holds a Zacks #5 (Strong Sell) Rank for the short term
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