BNP Paribas: Upgrading outlook on Indian Telecom sector to POSITIVE

􀂃 Checks across value chain make us incrementally positive on the sector.
􀂃 Threat of recurrence of tariff war is fading; consolidation inevitable.
􀂃 Rural expansion and wireless broadband will drive future growth.
􀂃 Upgrade Bharti and Idea to BUY; reiterate REDUCE on RCOM.
Light at the end of the tunnel
Upgrading outlook on Indian Telecom sector to POSITIVE
Our discussions with equipment vendors, regulator and telecom operators
suggest that the competitive and regulatory overhang on the sector is easing.
Post the 3G auction, the sector looks well positioned to replicate the success of
2G wireless voice with 3G wireless data services over the next five years. We
prefer GSM incumbents Bharti and Idea to RCOM, with Bharti as the top pick.
Threat of tariff war recurrence is fading
We expect the full impact of the tariff cuts announced in 2QFY10, which translates
into an ARPM of ~INR0.40, to reflect in telecom operator’s financials in the
2QFY11, after a delay of one year (Exhibit 2). New entrants are unlikely to report
profits below ARPM of INR0.40 (Exhibit 3). Incumbents would restrain from
cutting tariffs and would focus on differentiating through their wireless data
services. Many new entrants have minimal network rollouts and are awaiting
regulatory nod for consolidation. Shareholders of Telenor are already demanding
a withdrawal from the Indian market. We do not expect ARPMs to fall significantly
below current levels, restoring pricing stability to the telecom market.
Rural expansion and wireless broadband to drive growth
The unparalled subscriber growth in India from 300m to 650m over the past two
years has been driven by the entry of new operators, adoption of multiple SIMs,
and increasing reach in rural areas. CDMA subscriber additions have dropped
after the launch of GSM operations by existing CDMA operators. Over the past
year, we believe CDMA revenues were primarily driven by EVDO datacard sales.
However, with the launch of 3G services, we expect the EVDO datacard additions
to taper off. Looking ahead, Bharti and Idea – with deeper rural coverage and
higher ARPU subscribers with the potential to adopt innovative devices (Apple
iPad, datacards) – should gain market share.
Bullish on the prospects of 3G in India
We are bullish on the prospects of 3G in India due to maturity of internet usage in
India (Exhibits 15 &16), declining prices and improving usability of smartphones,
evolution of new alternate devices (such as the iPad), and proliferation of mobile
application ecosystem. We forecast a business case for 3G even with payout of
~USD3b for spectrum with capex/subscriber of USD100 and data ARPU of
INR150. The incumbent GSM operators would have sufficient capacity on their
3G HSPA network to decongest voice and accommodate the needs of wireless
broadband to compete against the higher capacity of the dual-tech operators.
Downside from regulatory overheads is minimal
We do not expect the recent 2G recommendations to be accepted in the current
format. In the worst case, we estimate the downside from these regulations at
INR51 for Bharti, INR32 for Idea and INR61 for RCOM.