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India Connect
Extra Spectrum Charges to Help Government Narrow Deficit
Past week’s India telecom trading – The past week in Indian telcos was
influenced by the budget document which had additional revenue receipts to the
tune of Rs150bn, possibly factoring in the additional spectrum payments to be
made by the incumbents. Both Bharti and Idea underperformed (-5%/-1%) the
broader market during the week though Bharti’s underperformance was higher,
given its defensive nature in a strong market. RCOM on the other hand rose 7%
(+2% versus Sensex) on possible deleveraging with newsflow surrounding its
possible tower sale to American towers or an Indian towerco for US$5bn.
Union Budget accounts for spectrum payments – The budget released on 28
Feb has accounted for ~Rs150bn of revenue receipts from telecom operators
apart from the regular inflows from license fees and spectrum charges. This could
possibly be to account for the extra spectrum charges which the Government
plans to levy for spectrum beyond the contracted 6.2MHz.
Initial signs encouraging on 3G – Bharti disclosed that 500k subscribers have
started using 3G within a one month of launch across 7 cities, including Chennai
and Bangalore. It has rolled out 4,500 sites across the 7 cities and an additional
1,800 sites in Delhi. It expects to cover 40-45 cities by March end and plans to
cover 1,000 cities by the end of FY12. The operators are also mindful of the risk of
capacity crunch from high data uptake with Bharti having launched an unlimited
data plan but at Rs2,000/month.
Next week’s outlook – We expect both Bharti and Idea to recover some of the
underperformance given extra spectrum charges (key for the weakness) have
anyways been built by the street. Idea should recover more than Bharti given it
currently trades at only a 5% premium to Bharti. RCOM could sustain the past
week’s gains in case of any potential signs on deleveraging though heavy
newsflow around 2G spectrum issue could hurt stock performance.
Past week’s sector drivers (Continued)
MNP: Trend of incumbents benefitting is being reinforced – A total of 2m
subscribers have ported their numbers so far using MNP. Latest data confirms the
trend that the GSM incumbents (Bharti/Voda/Idea) continue to be net gainers.
Vodafone has gained as many as 190k subs followed by Idea at 150k and Bharti
at 148k. Vodafone continues to benefit from premium brand image while Idea is
gaining from the aggressive marketing push. Bharti on the other hand has been
the least aggressive amongst the incumbents but is now gaining traction. On the
CDMA front, there has been a large exodus with RCOM being the worst-hit,
followed by Tata Tele and BSNL.
Spectrum audit could cause more regulatory uncertainty – The Comptroller &
Auditor General of India (CAG) plans to undertake a comprehensive audit of the
total available spectrum, as well as its strategic and commercial use. This could
cause additional uncertainty given the backdrop of Government’s plan to make
incumbents pay for excess spectrum.
More trouble for Etisalat DB - The Supreme Court asked the Central Bureau of
Investigation to examine how Etisalat was allowed to invest in Swan Telecom after
the Home Ministry had expressed apprehensions on such FDI on the grounds of a
threat to national security.
Telecom minister and aides forged documents to favor few firms according
to the CBI - The CBI has claimed that A Raja colluded with two of his aides to
forge documents to make a select few telecom companies eligible for grant of
licenses. According to the agency, Swan Telecom was not eligible on the date of
application but records were subsequently manipulated to show that it was eligible
while many eligible companies were denied licenses. Tata Tele, for instance,
applied for spectrum on January 10, 2008, but the DoT officials manipulated
records to show that the department had not received the company's application.
Bharti Airtel
(BRTI.BO; Rs326.75; 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; Rs93.30; 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; Rs60.20; 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 Connect
Extra Spectrum Charges to Help Government Narrow Deficit
Past week’s India telecom trading – The past week in Indian telcos was
influenced by the budget document which had additional revenue receipts to the
tune of Rs150bn, possibly factoring in the additional spectrum payments to be
made by the incumbents. Both Bharti and Idea underperformed (-5%/-1%) the
broader market during the week though Bharti’s underperformance was higher,
given its defensive nature in a strong market. RCOM on the other hand rose 7%
(+2% versus Sensex) on possible deleveraging with newsflow surrounding its
possible tower sale to American towers or an Indian towerco for US$5bn.
Union Budget accounts for spectrum payments – The budget released on 28
Feb has accounted for ~Rs150bn of revenue receipts from telecom operators
apart from the regular inflows from license fees and spectrum charges. This could
possibly be to account for the extra spectrum charges which the Government
plans to levy for spectrum beyond the contracted 6.2MHz.
Initial signs encouraging on 3G – Bharti disclosed that 500k subscribers have
started using 3G within a one month of launch across 7 cities, including Chennai
and Bangalore. It has rolled out 4,500 sites across the 7 cities and an additional
1,800 sites in Delhi. It expects to cover 40-45 cities by March end and plans to
cover 1,000 cities by the end of FY12. The operators are also mindful of the risk of
capacity crunch from high data uptake with Bharti having launched an unlimited
data plan but at Rs2,000/month.
Next week’s outlook – We expect both Bharti and Idea to recover some of the
underperformance given extra spectrum charges (key for the weakness) have
anyways been built by the street. Idea should recover more than Bharti given it
currently trades at only a 5% premium to Bharti. RCOM could sustain the past
week’s gains in case of any potential signs on deleveraging though heavy
newsflow around 2G spectrum issue could hurt stock performance.
Past week’s sector drivers (Continued)
MNP: Trend of incumbents benefitting is being reinforced – A total of 2m
subscribers have ported their numbers so far using MNP. Latest data confirms the
trend that the GSM incumbents (Bharti/Voda/Idea) continue to be net gainers.
Vodafone has gained as many as 190k subs followed by Idea at 150k and Bharti
at 148k. Vodafone continues to benefit from premium brand image while Idea is
gaining from the aggressive marketing push. Bharti on the other hand has been
the least aggressive amongst the incumbents but is now gaining traction. On the
CDMA front, there has been a large exodus with RCOM being the worst-hit,
followed by Tata Tele and BSNL.
Spectrum audit could cause more regulatory uncertainty – The Comptroller &
Auditor General of India (CAG) plans to undertake a comprehensive audit of the
total available spectrum, as well as its strategic and commercial use. This could
cause additional uncertainty given the backdrop of Government’s plan to make
incumbents pay for excess spectrum.
More trouble for Etisalat DB - The Supreme Court asked the Central Bureau of
Investigation to examine how Etisalat was allowed to invest in Swan Telecom after
the Home Ministry had expressed apprehensions on such FDI on the grounds of a
threat to national security.
Telecom minister and aides forged documents to favor few firms according
to the CBI - The CBI has claimed that A Raja colluded with two of his aides to
forge documents to make a select few telecom companies eligible for grant of
licenses. According to the agency, Swan Telecom was not eligible on the date of
application but records were subsequently manipulated to show that it was eligible
while many eligible companies were denied licenses. Tata Tele, for instance,
applied for spectrum on January 10, 2008, but the DoT officials manipulated
records to show that the department had not received the company's application.
Bharti Airtel
(BRTI.BO; Rs326.75; 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; Rs93.30; 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; Rs60.20; 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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