Telefonica Brasil Climbs to Neutral

We are upgrading our recommendation on Telefonica Brasil SA ( VIV - Analyst Report ) to Neutral from Underperform.

Based in Sao Paulo, Brazil, Telefonica Brasil is the Brazilian subsidiary of Spanish telecom giant Telefonica SA ( TEF - Analyst Report ) . Telefonica Brasil enjoys being the leading telephone operator in the nation following the establishment of Vivo as the commercial brand for all services.

We expect Telefonica Brasil’s fixed-line business to benefit from the expansion of video, broadband Internet and Pay TV services. The company is also extending its Vivo brand to all the fixed-line Internet and pay television services, which are expected to fuel business growth. In an attempt to bring in more profits, the company is expected to launch various new products in the upcoming quarters and focus on areas with higher growth potential like data transmission and video services.

Additionally, Telefonica Brasil has attractive long-term opportunities in mobile business thanks to continued expansion of the subscriber base. The company continues to increase leadership in both data and post-paid segments by introducing various attractive data plans. These steps are drawing more customers, leading to subscriber growth, lower churn and greater data usage.

Telefonica Brasil is also progressing well in expanding its 3G network based on CDMA EV-DO and HSPA technologies that provide significant advantage over its peers. The company expanded its 3G network coverage to numerous municipalities, encompassing approximately 82% of the Brazilian population. The expansion of the 3G network is expected to be an additional source for wireless data revenue growth.

However, the company’s dull third quarter results keep us on the sidelines. Although the company’s revenue met our projection, earnings missed the Zacks Consensus Estimate due to low contribution from the land-line business. The wireline voice business is being increasingly exposed to competition from alternative services including wireless telephony, VoIP (voice over Internet Protocol) and cable services (voice, video and broadband).

Telefonica Brasil also remains vulnerable to risk factors such as tariff cuts, adverse effects from regulatory changes as well as unstable political and economic conditions. Hence, we see the company as having limited upside potential at current levels, and performing in line with the broader market.