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Telecom: Be selective in 2011
Key themes for 2011
Price competition not done: Technology-driven
efficiency is expected to create network capacity for 3G
telecom service providers. We believe network capacity
and opex efficiencies give telcos the ability to cut pricing
while protecting margins. Also we expect MNP (mobile
number portability) to impact post-paid pricing where
ARPM is at a 44% premium to pre-paid ARPM.
Focus on data economics: We expect data competition
to pick up as more telcos roll out services. Roaming
agreements would result in more than 3-4 3G service
providers in each service area and we expect this to drive
data pricing competition. Telcos with access to
international link capacity are better placed, in our view.
Regulatory clarity to be well received: The new
telecom minister has taken steps to drive regulatory
clarity and has also indicated a new telecom policy in
early 2011. We expect this to be well received given
recent issues around 2G spectrum pricing.
How the business is expected to evolve through the
year
We expect post-paid and data pricing competition to
pick-up in H1 2011, driven by the large and mid-sized
players. Meaningful consolidation – outside of the “new”
telcos which account for ~5% of the market – is required
before competition eases, in our view; however, we don’t
expect to see this in 2011. Regulatory clarity in 1H, if
any, would be welcome.
We expect margins to remain under pressure in early
2011 as a result of network expenses and SG&A. As
equipment import bans opened up toward the end of
2010, we expect capex-linked network opex to increase.
Furthermore, 3G service launches and MNP could drive
higher SG&A expenses. We are also cautious about
negative earnings revisions.
Sector view
We expect range-bound performance over the next few
months as competition moves to data and post-paid while
regulations could improve. We don’t expect any
meaningful sector consolidation over the next year.
Stock recommendations
Our top pick is Tulip Telecom – a niche enterprise data
connectivity player with a wide reach in the growing tier
2 towns in India and an expanding product portfolio.
Among the wireless service providers we prefer Bharti,
although it is not our top sector pick. We expect Idea
Cellular to be negatively impacted by pricing and margin
pressure.
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