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India Wireless
(3x2) Good Reasons to Buy
Sector re-rating round the corner — We think now is the time to buy the
sector much more aggressively, as re-rating looks imminent for the following 6
(3x2) reasons: 1) industry traffic growth should sustain - 18-20% CAGR over
next 2 years; 2) 3G provides upside but not factored in; 3) probability of industry
disruption is low; 4) near worst case is priced in on the regulations; 5) strong
cash flows should cushion further B/S strain; and 6) valuations are near bottom.
Our Top Pick is Bharti with a Rs415 TP, followed by Idea and then RCOM (both
upgraded to Buys from Sells), with TPs of Rs79 and Rs127, respectively.
Growing business momentum should sustain — With rev/min stabilizing,
the focus now shifts to traffic volume which will become key to growth. Our
analysis shows 1) maturing users’ ARPU has been rising (up 5-11% pa for adds
in the last 2 years) despite multi-SIMs/tariff cuts, and 2) volume of the mature
portfolio (more than 2 years) too has been growing, albeit at a slower pace. In
addition, benchmarking against China at similar penetration shows there is still
decent volume growth potential. With the proliferation of cheap smartphones,
mobile data should provide further 5-12% upside (not included in our TPs).
Asset-light model now done; B/S back in focus — The switch to an assetlight
model based on towerco and Chinese vendor credit is over. Though some
regulatory uncertainty remains, peak B/S pressure is behind us and strong cash
flows should begin to provide yield support to incumbents. In addition, new
entrants’ business deterioration and possibility of penalties could hasten
consolidation. Bharti looks best positioned on yield, RCOM on consolidation.
Regulations a swing factor but much reduced now — Stocks appear to be
pricing in almost the worst case on regulations. We expect the DoT to adopt a
middle path in new policy to avoid being seen as biased. Worst case, on our
estimates incremental value erosion would be Rs7/4 for Bharti/Idea.
How much can the sector re-rate? — Stocks are sharply off their peaks,
trading at 20% disc to 2-yr averages. As competition, B/S burden & regulatory
uncertainty unwind, they should at least trade back up to their 2-yr averages,
but further re-rating would be constrained by tepid growth. Bharti’s core DCF
imputes 8.4x 1yr FY12E EV/EBITDA; Idea is at a small premium, justified by
cleaner play/better growth; RCOM is at 25% disc given leverage/business risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Wireless
(3x2) Good Reasons to Buy
Sector re-rating round the corner — We think now is the time to buy the
sector much more aggressively, as re-rating looks imminent for the following 6
(3x2) reasons: 1) industry traffic growth should sustain - 18-20% CAGR over
next 2 years; 2) 3G provides upside but not factored in; 3) probability of industry
disruption is low; 4) near worst case is priced in on the regulations; 5) strong
cash flows should cushion further B/S strain; and 6) valuations are near bottom.
Our Top Pick is Bharti with a Rs415 TP, followed by Idea and then RCOM (both
upgraded to Buys from Sells), with TPs of Rs79 and Rs127, respectively.
Growing business momentum should sustain — With rev/min stabilizing,
the focus now shifts to traffic volume which will become key to growth. Our
analysis shows 1) maturing users’ ARPU has been rising (up 5-11% pa for adds
in the last 2 years) despite multi-SIMs/tariff cuts, and 2) volume of the mature
portfolio (more than 2 years) too has been growing, albeit at a slower pace. In
addition, benchmarking against China at similar penetration shows there is still
decent volume growth potential. With the proliferation of cheap smartphones,
mobile data should provide further 5-12% upside (not included in our TPs).
Asset-light model now done; B/S back in focus — The switch to an assetlight
model based on towerco and Chinese vendor credit is over. Though some
regulatory uncertainty remains, peak B/S pressure is behind us and strong cash
flows should begin to provide yield support to incumbents. In addition, new
entrants’ business deterioration and possibility of penalties could hasten
consolidation. Bharti looks best positioned on yield, RCOM on consolidation.
Regulations a swing factor but much reduced now — Stocks appear to be
pricing in almost the worst case on regulations. We expect the DoT to adopt a
middle path in new policy to avoid being seen as biased. Worst case, on our
estimates incremental value erosion would be Rs7/4 for Bharti/Idea.
How much can the sector re-rate? — Stocks are sharply off their peaks,
trading at 20% disc to 2-yr averages. As competition, B/S burden & regulatory
uncertainty unwind, they should at least trade back up to their 2-yr averages,
but further re-rating would be constrained by tepid growth. Bharti’s core DCF
imputes 8.4x 1yr FY12E EV/EBITDA; Idea is at a small premium, justified by
cleaner play/better growth; RCOM is at 25% disc given leverage/business risks.
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