Updated Research Report on Telefonica Brasil - Analyst Blog

On Apr 1, 2014, we issued an updated research report on Brazilian telecom company Telefonica Brasil VIV. The company's competitive position is strengthening on its bundled offering and quality service. However, poor performance by Pay-TV business and reduction in fixed voice and access business remain concerns for the company. The leading telecom operator holds a Zacks Rank #3 (Hold).

The company's quality service based on its best-in-class network and brand is encouraging. Improved service has increased Telefonica Brasil's market share to around 29%. Telefonica believes 4G will remain a big opportunity going forward and expects to pick up pace in 2014.

The fixed-line business is expected to benefit from the expansion of video, broadband Internet and Pay-TV services. Further, full integration of Vivo helped the company to offer fixed line services throughout the nation and return to profitability.

Additionally, growing the fiber-to-the-home (FTTH) footprint would result in higher IPTV adoption in the country. The company is boosting its FTTH network, which reached more than 204,000 million homes at the end of 2013. The Brazilian operator expects to invest 18–19% of its revenues in deploying high-speed fiber optic cable in the state of Sao Paolo and increase its fiber coverage to 2.5 million households in 2014, thus enriching its value proposition.

However, the company's fixed line voice business is being exposed to competition from alternative services including wireless telephony, VoIP and cable service provider. The impact of wireless substitution remains high as customers taking advantage of discounted calling plans from national wireless operators keep increasing.

The company is also experiencing revenue loss especially in Pay-TV and Fixed accesses business units owing to disconnection of MMDS (Multichannel Multipoint Distribution Service) customers following spectrum acquisition by 4G operators. Moreover, increased marketing efforts and investment to improve service level are affecting its bottom line.  
Key Picks from the Sector

Better-ranked companies within the telecommunication sector include SK Telecom Co Ltd. SKM, Shenandoah Telecommunications Inc. SHEN and Level 3 Communications Inc. LVLT. SK Telecom and Shenandoah carry a Zacks Rank #1 (Strong Buy) while Level 3 Communications currently holds a Zacks Rank #2 (Buy).