Telefonica Brasil SA (ADR) (VIV), TIM Participacoes SA (ADR) (TSU), Oi SA (ADR) (OIBR) – The Great Telephone Operators of Brazil: Which Ones to Buy?

Brazil is fifth-largest mobile market in the world. As wireless penetration in Brazil is over 130%, it is important for companies to focus on efficiency rather than growth. Also, wireless revenue faces added pressure after Anatel mandated industry-wide fee cuts.

TIM Participacoes SA (ADR) (NYSE:TSU)

There is a fixed-to-mobile services substitution, but internet penetration is still rather low and is expected to surge over the next few years along with economic growth. Pay television also offers an opportunity over the longer term, as penetration rate is still less than 30%.

Top choice — Leading position

Based in Sao Paulo, Telefonica Brasil SA (ADR) (NYSE:VIV) is the Brazilian subsidiary of Spanish Telefonica Brasil SA (ADR) (NYSE:VIV). With the acquisition of Vivo, Telefonica Brasil SA (ADR) (NYSE:VIV) now enjoys the position of being the leading telephone operator in Brazil.

Its fixed-line arm, Telecomunicacoes de Sao Paulo (Telesp), dominates the state of Sao Paulo with nearly 95% of market share, which gives it a sustainable competitive advantage over peers. The fixed-line business is lagging, but Telefonica Brasil SA (ADR) (NYSE:VIV) is expected to benefit from the expansion of video, broadband Internet, and Pay TV services.

On the mobile business front, given the fact that the penetration rate is reaching 140% in Brazil, Vivo’s incremental subscriber is less profitable than before. While subscriber growth was up 6.4% year-over-year in 2012, average revenue per user (ARPU) has fallen on a year-over-year basis for five consecutive years.

However, its sector leading postpaid market share allowed the company to generate ARPU growth of 3.4% year-over-year in the first-quarter of 2013. Postpaid customers are typically smartphone users who consume more data. Vivo’s share of these higher-end subscribers increased from 32.2% in 2009 to almost 37% in 2012.

Telefonica Brasil SA (ADR) (NYSE:VIV) is also progressing well in expanding its 3G network based on CDMA EV-DO and HSPA technologies that provide significant advantage over its peers.

First-quarter revenue rose 2.9% year-over-year to $4.3 billion. Its mobile service operation grew 7%, offsetting a drop of 8.9% in the fixed-line segment

Second choice — Mobile market

TIM Participacoes SA (ADR) (NYSE:TSU), which stands for Telecom Italia Mobile, is Brazil’s second-largest mobile operator.

TIM Participacoes SA (ADR) (NYSE:TSU)’s first-quarter results showed solid postpaid subscriber growth which was offset by soft ARPU. Revenue rose 5.4% year-over-year to $2.35 billion, but mobile termination rate cuts continue to pressure ARPU, which fell 3.6%. However, subscriber mix continued to improve as TIM’s postpaid base increased 13.2%, three times as fast as its prepaid segment.

TIM Participacoes SA (ADR) (NYSE:TSU) was severely hurt a few years ago when it lost significant market share after number portability was introduced. At the time, it lost four customers for each one it added. Since 2009, the new management team has re-positioned the brand toward high-value/postpaid clients, improving overall market share from 23% to 27%.