India Telecoms- Tariff and Regulatory Concerns Decreasing; 3G Upside - Morgan Stanley

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India Telecoms
Tariff and Regulatory Concerns Decreasing; 3G Upside
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Tariff Wars are subsiding: In the past 12 months following the launch of ‘per-second billing’ by Tata and the ‘Simply Reliance’ plan by Reliance Communications, which lowered all tariffs by 30% – we have not seen any further reductions in tariffs.
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Regulatory concerns could ease: We expect excess spectrum related payouts of the incumbents to be a fourth of what the Street expects. Some new operators may not achieve the three-year rollout obligations by 2011 and hence may be forced to give up spectrum, leading to consolidation.
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3G and broadband services to be launched by January 2011: Incremental capex to move to 3G should be lower than 2G, because of the existing passive infrastructure of operators. Industry should gain additional revenue of US$4.5 bn and 52mn users by F2015, which would increase industry EBITDA by US$1.6bn, lift post paid ARPU by Rs200 p.m., and reduce the fall in overall ARPU from 27-28% to 19-20%.
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Operational performances could improve in F2Q11: Revenue growth for the industry should rebound, with Bharti growing at 1.5%, and RCOM and Idea at 3-4%. With the dollar depreciating by about 3.5% to US$/Rs44.96, Bharti and RCOM should realize some FX gains.
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Overweight Idea, our top pick: Idea’s future capex could be less than the industry average due to higher spectrum per sub; the worst quarter in terms of peak losses is behind us.
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Overweight Bharti: Bharti has the strongest balance sheet among our coverage companies; its peak net debt/EBITDA of 2.9x should halve in two years.
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Equal-weight RCOM: Upgrade due to recent underperformance. However, RCOM has the highest net debt to EBITDA among its peers.
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Key risks: Entry of Reliance Industries in Broadband Wireless.