Telecom
Consolidation, pricing improvement inevitable; increased focus on profitability
Raising target prices; upgrading Bharti to Buy
We are upgrading Bharti from Neutral to Buy, and increasing our target prices for the Telecom stocks under our coverage. The target price increases reflect the rollover to FY15 estimates as well as higher EV/EBITDA multiple for Bharti/Idea, as we believe sector earnings have bottomed, and consolidation / pricing improvement are inevitable. Our recent industry interactions suggest increased focus on profitability across challengers, likely led by non-availability of further "loss funding". Apart from taking extreme measures like discontinuing operations altogether from several circles, many challengers also seem to be aggressively pursuing time-bound breakeven targets within the current span of operations. Industry measures like decline in channel commissions and promotions indicate shift from reliance on "volume/subscriber growth" to "pricing/margin improvement". Five consecutive months of decline in the industry subscriber base is probably the best measure reflecting this. While most challengers continue to face financial distress, significant spectrum liabilities for GSM incumbents also seem to be crystallizing, given the unaccommodative government stance. With high leverage levels across operators, continued decline in traffic growth, and low contribution from data revenue, voice pricing improvement appears to be the only major lever available incrementally for the industry.
EBITDA ex-Indus (v/s 6.75x FY14E EV/EBITDA earlier), INR5m/tower for stake in Indus Tower (unchanged), and INR109b (INR33/share) for potential spectrum liability (v/s INR121b earlier; spectrum payment of INR20b for new circles now incorporated in estimates). Spectrum liability is based on 25% discount to liability due over next 4-years at reserve price/auction discovered price. We expect 18% EBITDA CAGR and 52% earnings CAGR over FY13-15. RCom: Maintain Neutral, with a target price of INR79 based on 6x FY15E EV/EBITDA. We expect 7% EBITDA CAGR and 45% earnings CAGR over FY13-15. While RCom has high sensitivity to pricing improvement, we remain Neutral, given concerns on high leverage (net debt/EBITDA of >5x).
Telecom
Our recent industry interactions indicate renewed focus on profitability and timebound breakeven targets. Formidable challengers like Aircel and Uninor have taken extreme steps like reducing their span of operations in order to restrict cash burn. While Uninor re-bid for only 6/22 circles in the 1,800MHz, Aircel has ramped-down operations in five circles - Madhya Pradesh and Chattisgarh, Gujarat, Haryana, Rajasthan and Punjab. Operating cash flow breakeven in India was termed as the primary focus area for 2013 by Telenor management during its recent analyst presentation. Operators like Sistema Shyam face licence cancellation effective 18 January 2013 as per the Supreme Court's February 2012 order cancelling 122 licences. We believe further pricing pressure is unlikely, given ongoing consolidation at operating level on a pan-India/pan-operator basis.
Circle-wise market share map: Footprint reduction across the board (%)
Bharti Delhi Maharashtra A.P. T.N. (incl. Chennai) Karnataka Mumbai U.P.(E) Gujarat Rajasthan Bihar Kerala U.P.(W) Punjab M.P. W.B. & A&N Kolkata Haryana Orissa Assam N.E. Jammu & Kashmir H.P. Aggregate 37 21 41 37 47 21 28 19 40 47 17 19 35 29 29 29 19 42 32 40 40 42 32 Vodafone 28 24 10 19 14 32 28 38 22 13 23 23 18 9 36 32 29 16 16 12 9 10 22 Idea 11 26 18 3 9 8 12 18 11 11 33 26 21 37 5 5 23 4 2 3 3 9 15 Tata Group 8 10 11 7 12 13 5 7 7 7 6 8 10 10 4 13 14 10 2 2 3 4 9 BSNL/ MTNL 3 6 9 6 6 3 9 5 6 5 14 8 7 8 8 4 8 15 9 12 16 15 7 RCOM 9 6 6 6 7 11 7 7 4 5 4 7 4 6 3 6 5 2 16 8 6 13 6 Aircel 3 1 2 19 2 2 4 1 5 5 2 3 2 1 5 5 2 8 22 23 24 7 5 Telenor 0 5 3 1 1 3 7 5 0 4 0 6 0 0 6 4 0 2 0 0 0 0 2 Sistema Revenue Mix 1 0 9 1 0 8 1 0 8 1 0 8 2 0 8 1 6 7 1 0 6 0 0 6 4 0 5 2 0 5 1 0 4 1 0 4 0 3 4 0 0 4 5 0 3 3 0 2 1 0 2 0 0 2 0 0 2 0 0 1 0 0 1 0 0 1 1 1 100 Source: Company, MOSL Others
7 January 2013
Telecom
Monthly wireless subscriber net additions: November 2012 to be fifth consecutive month of decline in subscriber base (m)
7 January 2013
Telecom
Bharti: Spectrum liability of ~INR360b crystallizing; ~70% due in four years (INR b)
Idea: Spectrum liability of ~INR203b crystallizing; ~70% due in four years (INR b)
Pricing increases inevitable given stressed balance sheets; voice traffic growth tapering; listed universe (including Vodafone) wireless revenue growth to decelerate to ~7% YoY in 3QFY13
While the industry has witnessed stable RPM post two consecutive quarters of decline in 4QFY12/1QFY13, we believe RPM improvement is inevitable. Balance sheets remain stretched across operators. GSM incumbents have been better placed but now face significant spectrum liabilities.
7 January 2013 4
Telecom
Wireless traffic growth continues to taper down, with YoY growth for our listed universe (including Vodafone India) declining to ~10% YoY in 2QFY13 and wireless revenue growth expected to decline to a low of 7% YoY in 3QFY13. We believe increase in effective tariffs is the only major lever available for the industry apart from reduction in channel commissions, which is underway already. There could be upside risk to our estimate of 3% CAGR in RPM over FY13-15, as bulk of the increase in our projections is attributable to growth in data revenue contribution.
Aggregate wireless traffic growth and RPM trend for wireless majors
7 January 2013
Telecom
327 19 Source: MOSL Driver Fair Value (INR b) 8.0 595 INR5m/tower 69* 97 109 460 3,303 Multiple Value/sh (INR) 181 21 29 33 140 110 28 Source: MOSL
Core Business (ex-Indus) FY15 EV/EBITDA 74 Stake in Indus Tower base 108,500 Less Net debt (FY15E) Less 75% of potential spectrum related payments within 4 yrs Total Value Shares o/s (m) CMP (INR) Upside (%) * 80% stake in ABTL which owns 16% stake in Indus towers
Source: MOSL
7 January 2013
Telecom
Comparative valuations
CMP Rating Mcap EV (INR) (USDb) (USDb) Bharti* 327 Buy 22.6 34.4 Idea 110 Buy 6.6 9.0 RCom 81 Neutral 3.0 9.5 * Proportionate EV/EBITDA and EV/sales FY13E 41.9 35.8 17.4 P/E (x) FY14E 30.8 23.6 12.9 FY15E 21.8 15.4 8.3 EV/EBITDA (x) FY13E FY14E FY15E 8.0 7.0 6.0 8.6 6.8 5.6 7.7 7.0 6.1 FY13E 2.5 2.3 2.5 EV/Sales (x) FY14E FY15E 2.2 2.0 2.0 1.6 2.3 2.0
RoIC (%) RoE (%) EBITDA Margin (%) Net Debt/EBITDA (x) Net Debt/Equity (x) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E Bharti Idea RCom 4.6 5.9 4.6 6.5 7.8 5.0 7.6 10.3 5.9 5.6 7.5 3.0 7.3 10.4 3.9 9.5 14.0 5.8 31.0 27.0 32.1 31.1 29.0 32.0 31.7 29.1 32.6 2.8 2.5 5.3 2.3 1.7 4.7 1.7 1.2 3.9 1.3 1.1 1.1 1.1 0.8 1.0 0.8 0.5 0.9
Capex/Sales (%) Sales Gr. (%) EBITDA Gr. (%) EPS (INR) EPS Gr. (%) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E Bharti Idea RCom 19.4 23.3 7.1 13.8 10.6 9.8 15.0 9.0 9.9 12.9 12.5 3.6 9.3 12.8 5.1 8.8 13.6 6.6 5.3 16.5 4.7 9.8 21.4 5.1 11.0 14.0 8.4 7.8 3.1 4.6 10.6 4.7 6.2 15.0 7.1 9.7 -30.5 40.2 -3.1 36.3 51.9 41.3 52.6
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Telecom
37 73 2.0
39 81 2.1
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10
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11
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12
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14
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