Fwd: Antique: Initiating Coverage: Indian Telecom Sector – At best a “hope”- Bharti (HOLD) and Idea Cellular (Hold)
Deepak Vaishnav
Please find enclosed Initiating Coverage: Indian Telecom Sector
Indian Telecom Sector - At best a “hope”
Investment rationale
· Indian rural region ... low teledensity with high BPL population: Today India is one of the fastest growing telecom markets in the world with penetration level as high as 150% in urban areas. Future growth is expected to be driven by rural areas (which accommodates ~70% of the Indian population) where penetration levels (~33%) are still low, though we believe that incremental subscriber addition will come at low ARPUs and at a slower pace due to presence of a huge BPL (below poverty line) population.
· Indian wireless market - highly competitive: Currently there are six major players in the telecom space fighting viciously to increase their market share in the low ARPU rural market. Till now all the above players were busy in tariff war and were launching unique schemes to lure subscribers (TTSL per second plan, Reliance 0.50/minute and R2R unlimited calls plan), however to our surprise for the first time all the major players have come out with tariff revisions as recently as July 2011; although we still need to wait and watch the possible impact of the same in coming quarters.
· Sector facing internal as well as external headwinds: We believe that Indian telecom sector has gone through a massive transformation during the last two decades and has gained a significant presence in the global arena. However, currently a number of challenges are faced by the sector including: Industry challenges - High penetration levels, high BPL population, limited 3G demand and fierce competition; Sector challenges - Resource constraints, new telecom policy, lower availability of 3G spectrum, excess spectrum charges, and abolition of 3G roaming charges; Regulatory challenges - Non-clarity on M&A, exit policies and 2G Spectrum overhang.
Initiating coverage on Bharti and Idea with a “HOLD” rating
· Bharti Airtel: Although Bharti Airtel is our preferred pick in the Indian telecom services space based on its capability to turnaround Africa operations, we believe that incremental subscribers in Africa will have lower ARPUs comparatively. Moreover, presence of multiple operators competing for the wallet share of Indian households act as a bottleneck for any meaningful tariff hike and ARPU growth. Considering the above factors, we value Bharti at INR379 or at a P/E multiple 17x on our FY13e EPS, implying a 10% upside from current levels. We initiate coverage on Bharti with a HOLD recommendation.
· Idea Airtel: Although Idea has added 12.3m subscribers in the last seven months, we believe the same will slow down due to high penetration levels. We also strongly believe that although there will be a nominal increase in ARPU due to growth in 3G services but the overall macro factor of low per capita income will put a cap on the usage/monthly spend by a subscriber/household, and will take away the benefits of recent tariff hikes resulting in lower MOU going forward. Considering the above factors, we value Idea at a P/E multiple 24x on our FY13e EPS of INR3.2, implying a target price of INR74, or 10% downside from current levels. We recommend a HOLD on Idea.