JM Financial: telecom: Buy Bharti, hold Idea, Sell MTNL

Buy the leader before growth gets priced in
􀂄 Africa to catalyse double-digit growth: We expect double-digit growth to
return in FY12E as companies digest significantly lower tariffs and growth
related charges in FY11E to deliver FY11-13E revenue, EBITDA and EPS CAGR
of 15%, 17% and 23% respectively. Bharti will become the fastest growing
telecom company across Asia and EMEA, as Africa delivers 45% revenue and
53% EBITDA CAGR during FY11-13E providing material uplift to both Bharti
and the India average (Exhibit 2).
􀂄 Meanwhile, domestic market regains stability: The sector lost a third of its
market capitalisation between Sept’09 and Mar’10 as growth came to a
grinding halt in FY10 (flat vs 20-30% earlier). Fierce competition cut tariff 2.3x
faster than previous years while usage elasticity and cost efficiencies failed to
keep pace, leading to declining profitability and return metrics even as a debt
overhang from funding 3G and BWA spectrum costs and additional downsides
from TRAI’s spectrum recommendations loomed large. Significantly reduced
tariff competition (high cash losses for new operators, 3G funding led to
stretched balance sheets), a return of usage elasticity over the past 2 quarters
are lead indicators of a recovery, in our view.
􀂄 BUY Bharti; traits of a global leader - new growth frontiers in place: We
expect domestic revenue growth to slow to 12% in FY10-13E with limited
room for tariff cuts or increased MOUs, but supported by a scope for rural
penetration and improved 3G based ARPUs over a slightly longer term. Africa
on the other hand is an opportunity which is perhaps larger than what India
was in 2003 with: 1) Near-perfect perfect blend of high population, low
penetration, high tarrifs and low minutes of use, and 2) Unique set of markets
which ensure sustained growth in the near, medium and long-term. With new
growth frontiers in place we recommend a BUY on Bharti, our top pick in the
sector, with a 12-month TP of `422.
􀂄 HOLD Idea; a strong player - primed to grow fitter, exploit opportunities
and deliver growth: Idea is a quality operator in a resilient wireless space
where incumbents will continue to dominate markets and remain favourably
positioned to capture mind-share and market-share as and when new market
opportunities (3G and wireless internet access) arise. We expect 3G and
mobile number portability to polarise markets further with resultant gains
accruing to incumbents. Importantly, we see immense opportunity for Idea to
deliver high EBITDA growth on the back of strong margin improvements in
both established and new circles. We recommend a HOLD on Idea with a 12-
month TP of `72 as we keep a close watch for surprises.
􀂄 SELL MTNL; poor business visibility – but government will ensure
survival: We are structurally negative on the wireline business which accounts
for c.64% of MTNL’s revenues and are unable to contemplate a scenario where
it usurps wireless market share in heavily competitive metro circles. Despite
an improved consumer appetite for both wireline and wireless broadband,
where MTNL could experience strong business salience, we expect MTNL’s
losses to grow exponentially and see a risk of networth erosion by FY14E
unless staff costs are controlled and/or the government infuses equity. We
recommend a SELL on MTNL with a 12-month TP `38.