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India Wireless
MNP: Round 1 to the Incumbents
MNP: Early days but trends beginning to emerge — We analyze the MNP data
available for the first 11 days since launch. Initial trends have been along expected
lines, reinforcing some widely held beliefs - incumbents benefit, BSNL/CDMA will
get hit – though also throwing a few surprises (DoCoMo and Aircel have gained).
However, it is still early days, and this data will have to be closely watched over the
next 3-4 months as operators change/modify their strategies to counter MNP.
Gainers: As expected but with some surprises — Vodafone has gained the
maximum number of subs (high in:out ratio at 2.15x), possibly helped by it being
perceived as a premium brand, while Idea seems to have benefited from its
aggressive ad campaign (which hit margins in 3Q). Bharti, however, has been the
least aggressive with only the 4th largest sub gains (behind Aircel) and a low in:out
ratio (1.27x). We believe Bharti could get more aggressive if this trend were to
continue. DoCoMo (1.6x) is the only new entrant that has benefited from MNP.
This is commendable given its 1) lower coverage (compared to incumbents) and
2) limited 3G footprint.
No surprise in losers, though — BSNL (0.22x) and CDMA operators (0.1x) have,
not surprisingly, been the hardest hit. All new entrants have been hit (albeit on a
small base), with Reliance GSM being the most impacted amongst all the new
entrants (absolute as well as in:out ratio).
Porting trends — The incumbents have primarily “lost” subscribers to other
incumbents, which highlights that subscribers focus on network quality/coverage.
Porting out of CDMA and new entrants, however, has been more broad-based and
could point to their subscribers being relatively more price sensitive than the subs
on the incumbents’ networks.
What to do with the stocks? — Bharti remains our only Buy. Our FY12E
estimates for Bharti include a 3p rev/min decline and flat YoY wireless EBITDA
margins - conservative assumptions, in our view, which provide a reasonable
cushion against any high competition from MNP. We believe the stock also has
valuation support trading at 16x FY12E PER and 6.5x P/CEPS. We maintain Sells
on Idea (high valuation) and RCOM (high leverage, challenges in business)
Bharti Airtel
(BRTI.BO; Rs337.00; 1L)
Valuation
Our target price of Rs400 comprises (i) core business value of Rs311 based on
Sep10 DCF. We estimate value accretion from Zain at Rs25/share. We add the
towerco value (100% Infratel + 42% of Indus) at Rs82 and reduce the potential
cash outgo (Rs18) related to one-time excess spectrum charges and license
renewal fees.
Risks
Our quantitative risk-rating system, which tracks 260-day share price volatility,
rates Bharti shares as Low Risk. We are comfortable with this for the following
reasons: 1) Bharti has a track record of profitability and execution and 2) strong
FCF generation notwithstanding the high debt following Zain acquisition.
Downside risks include competition-led tariff pressures, slower turnaround at
Zain and full implementation of the TRAI recommendations (low probability in
our view)
Reliance Communications
(RLCM.BO; Rs116.90; 3M)
Valuation
Our target price of Rs155 comprises (i) core business value of Rs115, based on
6.2x Mar-12E EV/EBITDA, at 20% discount to Bharti's implied target multiple
plus (ii) towerco value accretion of Rs40 based on long-term tenancy of 2.3. We
believe some discount to Bharti on the core business valuation is justified on
account of the inherent risks of dual network and higher leverage. Our towerco
net value accretion of Rs40 is based on the following assumptions: 1) Longterm tenancy of 2.3 with captive tenancy of 1.6; 2) Capex recovery of 13%, 3)
WACC of 11.3% and terminal growth rate of 3%. Note that the incremental
value accretion to RCOM is calculated after netting off the contribution from the
captive tenancy. Thus, it only reflects the value of the external revenues.
Risks
Our risk-rating system, which tracks 260-day share price volatility, assigns a
High Risk rating to RCOM. We however assign Medium Risk rating given the
improvement in the B/S and the credit markets. Upside risks to our target price
include higher-than-expected market share gains in GSM and a stake sale in
the core-business, for which board approval has already been given.
IDEA Cellular
(IDEA.BO; Rs71.30; 3M)
Valuation
Our target price of Rs72 is based on (i) core business value at Rs68/share
based on Mar-11 DCF plus (ii) the Indus stake valued at Rs15/share minus (iii)
Rs11 related to cash outgo related to one-time spectrum charges and license
renewals from TRAI recommendations. The DCF imputes FY12E EV/EBITDA
of 9.0x and P/CEPS of 7.6x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the High Risk
assigned by our quant risk rating system due to: 1) Idea has demonstrated
strong execution skills in new launches and operating leverage in the 11 old
circles; 2) stable credit markets has also provides comfort on the high-leverage
balance sheets like Idea Cellular's. Upside risks to our target price include
higher-than-expected market share gains, faster EBITDA breakeven in new
circles and M&A activity, as we believe that Idea will participate in the sector
consolidation. Several downside risks could impede the stock from reaching our
target price. Operationally, higher-than-expected competition will impact Idea
more than its peers given its smaller scale. A prolonged EBITDA breakeven in
new circles raises concerns on NPV accretion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Wireless
MNP: Round 1 to the Incumbents
MNP: Early days but trends beginning to emerge — We analyze the MNP data
available for the first 11 days since launch. Initial trends have been along expected
lines, reinforcing some widely held beliefs - incumbents benefit, BSNL/CDMA will
get hit – though also throwing a few surprises (DoCoMo and Aircel have gained).
However, it is still early days, and this data will have to be closely watched over the
next 3-4 months as operators change/modify their strategies to counter MNP.
Gainers: As expected but with some surprises — Vodafone has gained the
maximum number of subs (high in:out ratio at 2.15x), possibly helped by it being
perceived as a premium brand, while Idea seems to have benefited from its
aggressive ad campaign (which hit margins in 3Q). Bharti, however, has been the
least aggressive with only the 4th largest sub gains (behind Aircel) and a low in:out
ratio (1.27x). We believe Bharti could get more aggressive if this trend were to
continue. DoCoMo (1.6x) is the only new entrant that has benefited from MNP.
This is commendable given its 1) lower coverage (compared to incumbents) and
2) limited 3G footprint.
No surprise in losers, though — BSNL (0.22x) and CDMA operators (0.1x) have,
not surprisingly, been the hardest hit. All new entrants have been hit (albeit on a
small base), with Reliance GSM being the most impacted amongst all the new
entrants (absolute as well as in:out ratio).
Porting trends — The incumbents have primarily “lost” subscribers to other
incumbents, which highlights that subscribers focus on network quality/coverage.
Porting out of CDMA and new entrants, however, has been more broad-based and
could point to their subscribers being relatively more price sensitive than the subs
on the incumbents’ networks.
What to do with the stocks? — Bharti remains our only Buy. Our FY12E
estimates for Bharti include a 3p rev/min decline and flat YoY wireless EBITDA
margins - conservative assumptions, in our view, which provide a reasonable
cushion against any high competition from MNP. We believe the stock also has
valuation support trading at 16x FY12E PER and 6.5x P/CEPS. We maintain Sells
on Idea (high valuation) and RCOM (high leverage, challenges in business)
Bharti Airtel
(BRTI.BO; Rs337.00; 1L)
Valuation
Our target price of Rs400 comprises (i) core business value of Rs311 based on
Sep10 DCF. We estimate value accretion from Zain at Rs25/share. We add the
towerco value (100% Infratel + 42% of Indus) at Rs82 and reduce the potential
cash outgo (Rs18) related to one-time excess spectrum charges and license
renewal fees.
Risks
Our quantitative risk-rating system, which tracks 260-day share price volatility,
rates Bharti shares as Low Risk. We are comfortable with this for the following
reasons: 1) Bharti has a track record of profitability and execution and 2) strong
FCF generation notwithstanding the high debt following Zain acquisition.
Downside risks include competition-led tariff pressures, slower turnaround at
Zain and full implementation of the TRAI recommendations (low probability in
our view)
Reliance Communications
(RLCM.BO; Rs116.90; 3M)
Valuation
Our target price of Rs155 comprises (i) core business value of Rs115, based on
6.2x Mar-12E EV/EBITDA, at 20% discount to Bharti's implied target multiple
plus (ii) towerco value accretion of Rs40 based on long-term tenancy of 2.3. We
believe some discount to Bharti on the core business valuation is justified on
account of the inherent risks of dual network and higher leverage. Our towerco
net value accretion of Rs40 is based on the following assumptions: 1) Longterm tenancy of 2.3 with captive tenancy of 1.6; 2) Capex recovery of 13%, 3)
WACC of 11.3% and terminal growth rate of 3%. Note that the incremental
value accretion to RCOM is calculated after netting off the contribution from the
captive tenancy. Thus, it only reflects the value of the external revenues.
Risks
Our risk-rating system, which tracks 260-day share price volatility, assigns a
High Risk rating to RCOM. We however assign Medium Risk rating given the
improvement in the B/S and the credit markets. Upside risks to our target price
include higher-than-expected market share gains in GSM and a stake sale in
the core-business, for which board approval has already been given.
IDEA Cellular
(IDEA.BO; Rs71.30; 3M)
Valuation
Our target price of Rs72 is based on (i) core business value at Rs68/share
based on Mar-11 DCF plus (ii) the Indus stake valued at Rs15/share minus (iii)
Rs11 related to cash outgo related to one-time spectrum charges and license
renewals from TRAI recommendations. The DCF imputes FY12E EV/EBITDA
of 9.0x and P/CEPS of 7.6x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the High Risk
assigned by our quant risk rating system due to: 1) Idea has demonstrated
strong execution skills in new launches and operating leverage in the 11 old
circles; 2) stable credit markets has also provides comfort on the high-leverage
balance sheets like Idea Cellular's. Upside risks to our target price include
higher-than-expected market share gains, faster EBITDA breakeven in new
circles and M&A activity, as we believe that Idea will participate in the sector
consolidation. Several downside risks could impede the stock from reaching our
target price. Operationally, higher-than-expected competition will impact Idea
more than its peers given its smaller scale. A prolonged EBITDA breakeven in
new circles raises concerns on NPV accretion.
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