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Telecoms
Action
After a disappointing 2010 (two out of three India telcos have underperformed the
broader market YTD), we don’t expect too many fireworks in 2011 either.
Competition should be more benign, but regulations and political intervention will
remain. 3G could surprise positively, and contrary to expectations that 3G will be
largely used to address decongestion, we think strong data demand bodes well for
the ARPU outlook. Rising proliferation of affordable smart-phones and applications
will be key. We see M&A as an ongoing theme. Bharti is our relative pick in India.
Catalysts
Price stability in wireless segment, data growth and M&A.
Anchor themes
Data could be the biggest surprise this year as 3G is rolled out, but the core wireless
segment could remain under pressure. The regulatory environment is uncertain.
Stability in adversity
2010 was another year of disappointment
2010 has been another disappointing year for Indian telecoms, with the sector up
2% on average, underperforming the local market by 10%. Positive operational
surprises have been rare, and incremental traffic has been highly sought after.
3G auctions have stretched balance sheets, limiting capacity to cut prices further,
as did the Chinese equipment ban issues earlier in the year, which hampered
rollout plans of many carriers. Regulations were a key nemesis and the new
telecoms minister is now heavily focused on the legitimacy of 2G licence
allocations – putting the overall sector under more scrutiny.
2011 – not expecting fireworks, but more rationality
For 2011F, we expect: 1) competition to be more rational in the wireless segment,
but overall prices to remain under pressure; 2) data to surprise on the upside,
which could provide resilience to ARPU; 3) more competition in the enterprise
segment; 4) upside capex risks as 3G/backhaul is extended; 5) no real M&A, but
potential exits by some newcomers; and 6) far more regulatory scrutiny in the
sector.
Bharti is our relative pick
We have a NEUTRAL rating on Bharti, but see scope for upside surprises
domestically, which could be offset by delays in operational turnaround in Africa.
We believe operating trends from quarter to quarter will remain volatile in the
coming year, which could see share price volatility, but on a fundamental basis
any significant upside in the stock will likely be dependent on the African
turnaround. We think Africa is a significant opportunity, but not without challenges,
and it could take more than a year to realise the upside/downside potential. We
have REDUCE ratings on IDEA and RCOM, due to expensive valuations and
execution challenges. IDEA is well positioned to participate in potential M&A, in
our view, but this needs regulatory amendments first, which could be a while
away. In the meantime, we see its earnings upside limited to warrant a FY12F
P/E of 25x.
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