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India Connect
All Eyes on Charge-Sheet Filing on 2G Spectrum Probe
Past week’s India telecom trading – The Indian market posted a strong
performance, finishing the week up 5.2%. Idea performed in line with the market,
while Bharti bettered the market by 1.4%. RCOM, however, which had run up
significantly in the two preceding weeks on the back of towerco deal, lagged the
market (+2.2%) as no further details on the possible sale emerged.
2G spectrum investigation: Charge-sheet to be filed this week – The much
awaited charge-sheet by the investigating authority is expected to be filed during
the week and will be the key focus for the Street. The authority could also file
additional charges over the coming months as the investigation progresses.
MNP: trends remain firm – COAI has disclosed that 5m subscribers have opted
for MNP to date. The GSM incumbents continue to be net gainers, led by
Vodafone and Idea. RCOM on the other hand has failed to reverse subscriber
losses hurting in both GSM and CDMA networks. We continue to believe that it is
still early days and MNP is likely to impact all operators’ rev/min (post-paid tariffs
are 40% higher v/s pre-paid) and wireless margins (sub acquisition cost). These
however have already been built in to our estimates.
New Telecom Policy: Some positives begin to emerge – Media reports indicate
that the operators have found consensus across three key areas – 1) lowering of
uniform license fees to 6% (6-10% currently), 2) dilution of M&A norms to
encourage sector consolidation and 3) rejecting bringing towercos under the
licensing ambit. While dilution of M&A norms has been almost a certainty now, any
move to lower license fees should be a positive as it will help partially offset the
impact of the excess spectrum charges/license renewals on the incumbents.
Next week’s outlook – CBI much awaited charge-sheet filing for the 2G spectrum
probe could throw up some new information or unexpected surprises, which in turn
could impact price action. We expect RCOM to remain weak ahead of the filing.
Bharti Airtel
(BRTI.BO; Rs339.10; 1L)
Valuation
Our target price of Rs415 comprises: (i) Core business value of Rs332 based
on Mar-11E DCF; (ii) We estimate value accretion from Zain at Rs25/share; (iii)
We add the towerco value (100% Infratel + 42% of Indus) at Rs82; and (iv) We
reduce the potential cash outgo (Rs24) related to one-time excess spectrum
charges and license renewal fees. The DCF is based on a WACC of 11.2%, a
terminal growth rate of 3% and beta of 0.8. We prefer DCF as peak capex
burden is behind us and the company should start to generate significant free
cash flows. The domestic business DCF implies FY12E EV/EBITDA of 8.4x,
P/CEPS of 9.0x and P/E of 18.1x.
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 the Zain
acquisition. Downside risks that could impede the stock from reaching our
target price include: 1) business disruption through tariff pressures; 2) slower
turnaround at Zain; and 3) adverse regulations (low probability in our view).
IDEA Cellular
(IDEA.BO; Rs63.90; 1M)
Valuation
Our target price of Rs79 is based on (i) core business value at Rs81/share
based on Mar-11 DCF; plus (ii) the Indus stake valued at Rs15/share; minus (iii)
Rs17 cash outgo related to one-time spectrum charges and license renewals
from TRAI recommendations. The DCF is based on a WACC of 11.0%, a
terminal growth rate of 3% and beta of 1.1. We prefer DCF as peak capex
burden is behind us and the company should now start to generate free cash
flows. The DCF implies a FY12E EV/EBITDA value of 8.9x and P/CEPS of
7.5x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the Low Risk
assigned by our quant risk rating system as 1) Idea's already stretched balance
sheet is vulnerable to regulatory payments (high probability) and 2) smaller
scale and new launches mean it is more susceptible to business disruptions.
Downside risks that could impede the stock from reaching our target price
include: 1) Adverse regulations regulated to higher-than-expected regulatory
charges (license fee renewals and excess spectrum charges) are key risks
given relatively small B/S size; 2) Higher-than-expected competition would
impact Idea more than its peers given its smaller scale.
Reliance Communications
(RLCM.BO; Rs106.80; 1H)
Valuation
Our target price of Rs127 comprises (i) core business value of Rs110, based on
6.3x Mar-12E EV/EBITDA, at a 25% discount to Bharti's implied target multiple;
plus (ii) towerco value accretion of Rs25 based on long-term external tenancy
of 0.5x. We believe a 25% 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 Rs25 is based on the following assumptions:
1) Long-term tenancy of 2.15x with captive tenancy of 1.65x; 2) Capex recovery
of 12%, 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. We reduce Rs8/share from the on cash outgo based on a
50% probability of the Government charging the "market" value for the GSM
spectrum allotted in 2008 for Rs16.5bn (market value estimated at ~Rs49bn for
4.4MHz based on 3G spectrum thrice as efficient as 2G).
Risks
Our risk-rating system, which tracks 260-day share price volatility, assigns a
Medium Risk rating to RCOM. We however believe a High Risk is appropriate
given lackluster business momentum and possible penalties by the
Government on 2G spectrum especially in the context of its high leverage. Key
downside risks that could prevent the stock from reaching our target price
include: 1) Further deterioration in core business, 2) higher-than expected
penalties related to GSM spectrum allotted in 2008 and 3) inability to
deleverage through asset sale.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Connect
All Eyes on Charge-Sheet Filing on 2G Spectrum Probe
Past week’s India telecom trading – The Indian market posted a strong
performance, finishing the week up 5.2%. Idea performed in line with the market,
while Bharti bettered the market by 1.4%. RCOM, however, which had run up
significantly in the two preceding weeks on the back of towerco deal, lagged the
market (+2.2%) as no further details on the possible sale emerged.
2G spectrum investigation: Charge-sheet to be filed this week – The much
awaited charge-sheet by the investigating authority is expected to be filed during
the week and will be the key focus for the Street. The authority could also file
additional charges over the coming months as the investigation progresses.
MNP: trends remain firm – COAI has disclosed that 5m subscribers have opted
for MNP to date. The GSM incumbents continue to be net gainers, led by
Vodafone and Idea. RCOM on the other hand has failed to reverse subscriber
losses hurting in both GSM and CDMA networks. We continue to believe that it is
still early days and MNP is likely to impact all operators’ rev/min (post-paid tariffs
are 40% higher v/s pre-paid) and wireless margins (sub acquisition cost). These
however have already been built in to our estimates.
New Telecom Policy: Some positives begin to emerge – Media reports indicate
that the operators have found consensus across three key areas – 1) lowering of
uniform license fees to 6% (6-10% currently), 2) dilution of M&A norms to
encourage sector consolidation and 3) rejecting bringing towercos under the
licensing ambit. While dilution of M&A norms has been almost a certainty now, any
move to lower license fees should be a positive as it will help partially offset the
impact of the excess spectrum charges/license renewals on the incumbents.
Next week’s outlook – CBI much awaited charge-sheet filing for the 2G spectrum
probe could throw up some new information or unexpected surprises, which in turn
could impact price action. We expect RCOM to remain weak ahead of the filing.
Bharti Airtel
(BRTI.BO; Rs339.10; 1L)
Valuation
Our target price of Rs415 comprises: (i) Core business value of Rs332 based
on Mar-11E DCF; (ii) We estimate value accretion from Zain at Rs25/share; (iii)
We add the towerco value (100% Infratel + 42% of Indus) at Rs82; and (iv) We
reduce the potential cash outgo (Rs24) related to one-time excess spectrum
charges and license renewal fees. The DCF is based on a WACC of 11.2%, a
terminal growth rate of 3% and beta of 0.8. We prefer DCF as peak capex
burden is behind us and the company should start to generate significant free
cash flows. The domestic business DCF implies FY12E EV/EBITDA of 8.4x,
P/CEPS of 9.0x and P/E of 18.1x.
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 the Zain
acquisition. Downside risks that could impede the stock from reaching our
target price include: 1) business disruption through tariff pressures; 2) slower
turnaround at Zain; and 3) adverse regulations (low probability in our view).
IDEA Cellular
(IDEA.BO; Rs63.90; 1M)
Valuation
Our target price of Rs79 is based on (i) core business value at Rs81/share
based on Mar-11 DCF; plus (ii) the Indus stake valued at Rs15/share; minus (iii)
Rs17 cash outgo related to one-time spectrum charges and license renewals
from TRAI recommendations. The DCF is based on a WACC of 11.0%, a
terminal growth rate of 3% and beta of 1.1. We prefer DCF as peak capex
burden is behind us and the company should now start to generate free cash
flows. The DCF implies a FY12E EV/EBITDA value of 8.9x and P/CEPS of
7.5x.
Risks
We assign a Medium Risk rating to IDEA Cellular, as opposed to the Low Risk
assigned by our quant risk rating system as 1) Idea's already stretched balance
sheet is vulnerable to regulatory payments (high probability) and 2) smaller
scale and new launches mean it is more susceptible to business disruptions.
Downside risks that could impede the stock from reaching our target price
include: 1) Adverse regulations regulated to higher-than-expected regulatory
charges (license fee renewals and excess spectrum charges) are key risks
given relatively small B/S size; 2) Higher-than-expected competition would
impact Idea more than its peers given its smaller scale.
Reliance Communications
(RLCM.BO; Rs106.80; 1H)
Valuation
Our target price of Rs127 comprises (i) core business value of Rs110, based on
6.3x Mar-12E EV/EBITDA, at a 25% discount to Bharti's implied target multiple;
plus (ii) towerco value accretion of Rs25 based on long-term external tenancy
of 0.5x. We believe a 25% 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 Rs25 is based on the following assumptions:
1) Long-term tenancy of 2.15x with captive tenancy of 1.65x; 2) Capex recovery
of 12%, 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. We reduce Rs8/share from the on cash outgo based on a
50% probability of the Government charging the "market" value for the GSM
spectrum allotted in 2008 for Rs16.5bn (market value estimated at ~Rs49bn for
4.4MHz based on 3G spectrum thrice as efficient as 2G).
Risks
Our risk-rating system, which tracks 260-day share price volatility, assigns a
Medium Risk rating to RCOM. We however believe a High Risk is appropriate
given lackluster business momentum and possible penalties by the
Government on 2G spectrum especially in the context of its high leverage. Key
downside risks that could prevent the stock from reaching our target price
include: 1) Further deterioration in core business, 2) higher-than expected
penalties related to GSM spectrum allotted in 2008 and 3) inability to
deleverage through asset sale.
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