Standard Chartered Research: India Telecom: Like Bharti and Idea.

While investor attention over the past 2 years has been on “what can go wrong”, we now
believe that upside scenarios from consolidation and/or 3G/data also needs to be
acknowledged. Stable tariffs post-FY12 (once the MNP impact on post-paid is absorbed)
could result in fair value upside of 10-30% for Bharti/Idea. A small uptick in rev/min
beyond FY12 and MOU growth would result in even greater upside. Despite the recent run
up, we maintain our positive stance with consolidation being key to continued re-rating.
 Material upside if tariffs stabilise – While our base scenario builds further tariff decline in
FY12 and beyond, any visibility about rev/min stability will be an upside trigger for earnings
and valuations. Our analysis indicates that there is significant valuation upside (Idea 30%,
Bharti 10%) if tariffs stabilize at FY12 levels (see table on page 2-3 for details). We analyse
earnings and DCF sensitivity in the following scenarios: Scenario I – Stable tariffs FY12
onwards, Scenario 2 – Stable tariffs + 2% pa MOU increase, and Scenario 3 – Tariff increase
of 1p/min in FY13 and stable thereafter (after bottoming in FY12).
 Collaboration to start with 3G; consolidation post FY11 – Post 3G allotment, we expect
meaningful competition in each circle to be limited to 3-4 players even after MNP
implementation. Since all players lack pan-India spectrum footprint, they need to collaborate
amongst themselves to provide their customers seamless 3G services. We also think that the
circumstances (low tariffs, EBITDA losses and stretched B/S post-3G) are conducive for a
favourable M&A policy, which will be a key for consolidation to commence.
 Why tariffs may not fall much? – MNP will have an impact on post-paid tariffs, however, the
overall impact will be limited given post-paid is ~15% of total revenues. Given the greater
stickiness of post-paids and the 3G “promise”, the incumbents may not be required to match
the tariff offers completely. Scattered 3G distribution will also make it difficult for other 3G
players (Tata-Docomo, Aircel, etc.) to make a broad-based impact. We do not factor in any
upside from 3G related revenues, which could provide upside to rev/min.
 “Consolidation” option not in the price – Though the stocks have had a decent run
recently, we believe valuations still do not factor in the “consolidation” option. We remain
positive and maintain Outperform on both Bharti and Idea. It should also be noted that Idea is
more leveraged to rev/min stability or an uptick.