UBS: Telecom: Buy Bharti, Sell Idea

Telenor CMD 2010: Takeaways for India
􀂄 Key takeaways from Telenor Capital Markets Day (CMD) 2010 for India
1) Uninor expects its revenues to grow to Rs1.6bn (+109% qoq) & active subs base
to ~7m in 3Q2010. The revenue growth will be partly driven by increasing usage.
2) Uninor expects to get clarity on TRAI recos by 1Q2011. 3) Uninor reiterated
their financial targets: achieve EBITDA breakeven in 3 years, cash flow breakeven
in 5 years and peak funding below Rs155bn. 4) Uninor management continues to
focus on: dynamic pricing, cost efficiency and strengthening its distribution model.
5) Uninor will delay capex deployment till existing circles improve performance.
􀂄 UBS view: New operators have no business case; Consolidation inevitable
We believe a new operator has no business case in India as they have poor quality
(1800 MHz band) and insufficient spectrum (2x 4.4 MHz), which limits its
coverage & capacity per base station. Current industry data points (revenue market
share and Uninor results) reiterate our view. We believe the only possibility for a
new operator to be profitable would be to get further spectrum. Given, limited
spectrum availability, we believe consolidation is inevitable. Please refer to our
report ‘Competitive intensity unlikely to worsen’ dated 09 Apr10 for more analysis.
􀂄 Maintain positive view on Bharti; Sell on Idea
We reiterate Buy rating on Bharti as: 1) We believe further downside in rev/min is
limited as cost/min for a new operator is high at Rs0.74 while rev/min is Rs0.40. 2)
We believe India mobile market will consolidate in the next 18-24 months. 3) We
believe Zain acquisition will be marginally value accretive. We maintain Sell on
Idea as we believe the positives are already priced in as Idea stock price has
outperformed BSE Sensex & Bharti by 14% & 17% respectively ytd 2010.