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Indian Telecoms
Vodafone announces 3G tariffs, but voice needs to
support efforts on data
Vodafone announced their 3G plans in line with other
schemes; rational pricing continues, which is positive
3G EPS dilutive in medium term; needs support from voice
revenues; we see discounts on voice plans coming down
Bharti Airtel (OW rating, INR425 TP) remains our top pick in the
sector
Vodafone 3G begins with focus on high end. Vodafone announced their 3G plans with a
few of the schemes at a premium pricing to Bharti (OW; INR367.45; TP INR425) and Idea
Cellular (N(V); INR66.75; TP INR72). However the company is offering discounts on its
innovative six-month commitment plans, which allows subscribers to save up to c60%. We
believe its unique offerings are focussed on high-end subscribers, ramping up rapid network
utilization and cultivating higher data usage habits, apart from offering stickiness.
There are no signs of irrational pricing on 3G and plans are in line with global pricing
norms; this is positive. Voice calling rates on the 3G network are the same as that in 2G,
which supports our argument. We believe that as telcos are unlikely to use 3G platform
for discounting voice as such a move will extend the payback period of operators by
several years (note telcos made significant investments to obtain 3G spectrum).
Most of the 3G plans are standardised, with a 1GB plan priced at around INR600
(Figure 3), which is at a significant premium to the fixed-line broadband plans (Figure 4).
3G innovations are focused around offering bundled plans, time-based plans, sachet plans
and time commitment plans. Bundled plans are offered by almost all the operators; with
Tata DoCoMo offerings being the cheapest in this segment. The PSU’s are offering the
lowest tariffs in 3G as their early move advantage has not paid off. Idea Cellular offers an
innovative time-based 3G plan, which charges customers for the time of internet usage,
focussed on the low-end subscribers who would use 3G only for internet browsing.
Near to medium earnings will be driven by improvement in per minute realizations
on voice. We believe the 3G business case is EPS dilutive for at least next three years for
the overall sector and for every player. Our analysis suggests the industry requires c90m
subscribers to achieve breakeven on 3G. Given this there are very limited options for
telcos, other than to improve voice revenues. We believe change in competitive landscape
raise possibilities of improvement in voice tariffs. Bharti remains our top pick with best
potential return of all India large caps and FY12e earnings growth of c27%. We have an
OW rating on Bharti with a target price of INR425. Key downside risk for the stock
would be acceptance of TRAI recommendations in the current format.
Valuation and rating: Bharti Airtel
We have an Overweight rating on Bharti with a target price to INR425. We value Bharti using a blend of
SOTP-based DCF analysis and PE. Our valuation has two components: India and the African operations.
We don’t value the tower business separately and value this along with the India business. We value the
India business on a mix of PE and DCF, assigning equal weights to each. For our DCF analysis, we
assume a WACC of 12%, cost of equity of 12% (cost of debt 10.5%) to arrive at a value of INR476 per
share. Using PE we arrive at a value of INR435 per share using a 12-month forward PE of 15x applied to
FY13e earnings of INR29. Bharti stock has traded at an average of 15x PE over the past 24 months, and
average PE has been on par with the Sensex. We have adjusted our target price downward for the TRAI
recommendations to the extent of INR18. However, we note that we see very limited chance of these
recommendations being accepted in the present format. We remain cautious on Bharti’s Africa business
and value it at -INR33 per share.
For non-volatile Indian stocks, our Neutral rating band is 5 percentage points above and below a hurdle
rate of 11%, or 6-16% potential return. Our new target price of INR425 implies a potential return of
17.3%, thus, we have an Overweight rating on the stock
The catalysts for the shares to outperform would be progress toward sector consolidation and evidence of
ability to monetize tower assets. The main risk to the downside would be acceptance of the TRAI
recommendations in the current format.
Bharti target price computation
Business Assumptions Value per share (INR)
India business PE and DCF 476
Africa business DCF -33
Adjustment for TRAI recommendations -18
Target price 425
Source: HSBC estimates
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Telecoms
Vodafone announces 3G tariffs, but voice needs to
support efforts on data
Vodafone announced their 3G plans in line with other
schemes; rational pricing continues, which is positive
3G EPS dilutive in medium term; needs support from voice
revenues; we see discounts on voice plans coming down
Bharti Airtel (OW rating, INR425 TP) remains our top pick in the
sector
Vodafone 3G begins with focus on high end. Vodafone announced their 3G plans with a
few of the schemes at a premium pricing to Bharti (OW; INR367.45; TP INR425) and Idea
Cellular (N(V); INR66.75; TP INR72). However the company is offering discounts on its
innovative six-month commitment plans, which allows subscribers to save up to c60%. We
believe its unique offerings are focussed on high-end subscribers, ramping up rapid network
utilization and cultivating higher data usage habits, apart from offering stickiness.
There are no signs of irrational pricing on 3G and plans are in line with global pricing
norms; this is positive. Voice calling rates on the 3G network are the same as that in 2G,
which supports our argument. We believe that as telcos are unlikely to use 3G platform
for discounting voice as such a move will extend the payback period of operators by
several years (note telcos made significant investments to obtain 3G spectrum).
Most of the 3G plans are standardised, with a 1GB plan priced at around INR600
(Figure 3), which is at a significant premium to the fixed-line broadband plans (Figure 4).
3G innovations are focused around offering bundled plans, time-based plans, sachet plans
and time commitment plans. Bundled plans are offered by almost all the operators; with
Tata DoCoMo offerings being the cheapest in this segment. The PSU’s are offering the
lowest tariffs in 3G as their early move advantage has not paid off. Idea Cellular offers an
innovative time-based 3G plan, which charges customers for the time of internet usage,
focussed on the low-end subscribers who would use 3G only for internet browsing.
Near to medium earnings will be driven by improvement in per minute realizations
on voice. We believe the 3G business case is EPS dilutive for at least next three years for
the overall sector and for every player. Our analysis suggests the industry requires c90m
subscribers to achieve breakeven on 3G. Given this there are very limited options for
telcos, other than to improve voice revenues. We believe change in competitive landscape
raise possibilities of improvement in voice tariffs. Bharti remains our top pick with best
potential return of all India large caps and FY12e earnings growth of c27%. We have an
OW rating on Bharti with a target price of INR425. Key downside risk for the stock
would be acceptance of TRAI recommendations in the current format.
Valuation and rating: Bharti Airtel
We have an Overweight rating on Bharti with a target price to INR425. We value Bharti using a blend of
SOTP-based DCF analysis and PE. Our valuation has two components: India and the African operations.
We don’t value the tower business separately and value this along with the India business. We value the
India business on a mix of PE and DCF, assigning equal weights to each. For our DCF analysis, we
assume a WACC of 12%, cost of equity of 12% (cost of debt 10.5%) to arrive at a value of INR476 per
share. Using PE we arrive at a value of INR435 per share using a 12-month forward PE of 15x applied to
FY13e earnings of INR29. Bharti stock has traded at an average of 15x PE over the past 24 months, and
average PE has been on par with the Sensex. We have adjusted our target price downward for the TRAI
recommendations to the extent of INR18. However, we note that we see very limited chance of these
recommendations being accepted in the present format. We remain cautious on Bharti’s Africa business
and value it at -INR33 per share.
For non-volatile Indian stocks, our Neutral rating band is 5 percentage points above and below a hurdle
rate of 11%, or 6-16% potential return. Our new target price of INR425 implies a potential return of
17.3%, thus, we have an Overweight rating on the stock
The catalysts for the shares to outperform would be progress toward sector consolidation and evidence of
ability to monetize tower assets. The main risk to the downside would be acceptance of the TRAI
recommendations in the current format.
Bharti target price computation
Business Assumptions Value per share (INR)
India business PE and DCF 476
Africa business DCF -33
Adjustment for TRAI recommendations -18
Target price 425
Source: HSBC estimates
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