Citi :Telecommunications: 2011 Sector Outlook

Visit http://indiaer.blogspot.com/ for complete details �� ��


Filter the Noise
 Industry capacity utilization on the upswing — high network utilization
(>60%) is key to sector profitability. We believe industry capacity utilization
which had been hit by the spate of new launches last year, has now
rebounded from 1) higher-than-expected elasticity from tariff cuts, 2) new
entrants scale-back and 3) equipment ban (lifted just recently). The ongoing
spectrum controversy is likely to help maintain and improve this utilization
level as competitive intensity reduces with new entrants shift their focus
away from core operations/roll-outs.


 MNP: risk to rev/min but included in estimates — Pan-India MNP is around
the corner and full implementation is expected by March -11. We believe
that the divergence between pre-paid and post-paid tariffs ( 40% premium)
means that the post-paid tariffs are more than likely to come down especially
since new entrants (especially DoCoMo) have almost no post-paid
subscribers and will be aggressive. Our 3p rev/min decline in FY12E
however captures most of the downside.
 2G controversy: filtering the noise — the controversy, negative for the new
entrants is likely to provide a competitive breather to incumbents. The most
damaging of the TRAI recos – spectrum refarming is also likely to be put on
the back burner. However these positives will come at a cost – payment of
excess spectrum and license renewal linked to 3G prices, now looks almost
certain. We however include it our TP (Bharti – Rs18, IDEA – Rs11)

 Top Buys and Sells — Bharti is our top pick in India telecoms benefitting
both from the revival in domestic growth as well as from the Africa upside.
We believe Zain has been under analyzed and as a result undervalued by the
street. In mid-caps we like Onmobile with an improving domestic business
as well as the potential upside from the Telefonica agreement. RCOM is our
top sell with no visible signs of deleveraging and a lackluster business
momentum. While we have a Sell on IDEA, we will look to get constructive on
it at ~10% lower valuation premium to Bharti (30% currently).