TSC Ratings Update: Buy Turkcell

Tuckcell's gross profit margin for the latest third quarter declined 534 basis points to 60.82% from 66.16% a year ago, due to 17% increase in direct cost of revenue to $935.5 million from $799.9 million. Depreciation and amortization expenses declined 14.9% to $172 million, whereas selling and marketing expenses spiked 23.5% to $366.8 million. Similarly, administrative expenses rose 54.5% to $87.9 million from $56.9 million. Consequently, operating margin declined 68 basis points to 32.46% from 33.14% in the third-quarter of 2007. Interest expenses rose 57.2% to $19.19 million from $12.21 million, thereby deteriorating the interest coverage ratio to 34.87 from 46.81.

Overall, net income surged 50.5% to $603.79 million, or 69 cents per share, from $401.19 million, or 46 cents per share, in the prior year's quarter.

For the quarter ended Sep. 2008, Tuckcell's cash and cash equivalents spiked 21% to $3.21 billion from $2.66 billion. Moreover, a quick ratio of 1.95 reflects the company's strong ability to cover any short-term cash obligations. Total debt rose 10.9% year-over-year to $820.89 million from $739.95 million, whereas shareholders' equity advanced 24.4% to $6.65 billion from $5.35 billion. As a result, the company's debt-to-equity ratio improved to 0.12 from 0.14.

Furthermore, return on assets escalated 389 basis points to 20.06% from 16.17%, while return on equity ascended 575 basis points to 28.87% from 23.12%.

During the quarter under review, the company completed the acquisition of an 80% stake in Belarusian Telecommunications Network (BEST). The company also announced that it is in talks to buy a 51% stake in Datacom Solutions Pvt. Ltd. Furthermore, TKC signed an agreement with Apple (AAPL Quote) to sell the third-generation iPhone in Turkey. Recently, Turkcell Iletisim Hizmetleri A.S. announced that its wholly owned subsidiary, Turktell Bilisim Interaktif Hizmetleri A.S. (Turktell), has sold its 55% in Bilyoner Interaktif Hizmetler A.S. to Demir Toprak A.S.