Company Trend Analysis - TIM 2020 Targets Achievable, But 5G Threatens Margins - APR 2018

BMI View: TIM's strong performance in upselling services puts it in a good position to shift to a premium footing, a space currently occupied by rival Vivo. With its 2020 targets, TIM aims to have a similar EBITDA and postpaid profile to that currently enjoyed by Vivo, but the latter will remain a moving target.

With its 2017 year-end results, TIM Brasil updated its three-year strategy for the period 2018-2020. Its previous (2017-2019) strategic plan revolved around a commercial turnaround from a mid-market brand to a premium brand, eventually competing with Vivo in the premium space. However, few concrete initiatives were outlined to achieve that goal and TIM was in danger of falling short of its targets. The new plan for 2020 is different in that it clearly outlines the goals it wants to achieve. Some of its key 2020 objectives include:

  • growing its postpaid share to 50%;
  • revenue diversification through expansion of its services portfolio through OTT partnerships, content and IoT; and,
  • achieving an EBITDA margin of at least 40%.
4G And Postpaid Migration Pulling ARPUs Up
TIM - Historical Mobile Data
Source: TIM Brasil

The new plan, with clearly signposted aspirations, puts TIM in a much stronger position to achieve its targets. It covers an inside-out shift in strategy, from a change in corporate culture to more customer-centric services, deepening relationships to reduce churn and improve monetisation. Leveraging its leading 4G coverage of the country, TIM has been successful in migrating customers to 4G plans, which as of Q417 accounted for 47.1% of its mobile subscriptions, up from 26.7% a year earlier. This has been paired with a pronounced rise in postpaid subscriptions, the share standing at 30.4% of the mobile market in Q417, compared to 23.5% a year earlier.

We believe these favourable fundamentals bode well for TIM achieving its ambitious targets, supported by an improving economic climate. Growing 4G and postpaid bases put upward pressure on ARPUs, but most importantly they are crucial for TIM's ability to upsell advanced services and content to their customers, growing diversified revenue streams.

A target of a 40% EBITDA margin might seem very ambitious, but if TIM is to keep its current postpaid and 4G migration momentum, the target would be within reach by 2020. Sustaining such a high margin might not be possible in the longer term, however, as 5G licences are expected to be launched early in the new decade and would require significant investments in infrastructure and services as well as the winding-down of existing 3G platforms.

Our medium to long term outlook for economic growth suggests that many consumers will not see an appreciable increase in spending power, so there will be a natural limit on the number of new premium postpaid customers TIM can address. Therefore, we expect that the 50% postpaid share target will prove unrealistic within the 2020 timeline unless there is a radical overhaul of data pricing models in the meantime. TIM might be tempted to significantly reduce out-of-bundle data rates as a means of securing and subsequently upselling low-cost users, as Vodacom is doing in Sub-Saharan Africa but the risk - as always - is that, once data prices have been cut it is difficult to raise them to more sustainable levels if margins are eroded too steeply.

EBITDA On Upward Trend
TIM - Operating Revenues (BRLmn) And EBITDA Margin (%)
Source: TIM Brasil