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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Over the last two weeks, we met/spoke to a number of investors
across Asia. Investors are largely comfortable with the competitive
scenario in India, with stable tariffs and challengers under strain.
● However, margin disappointment from Bharti in the recent quarter
raised concerns about margin trajectory. We believe the margin
decline was driven by short-term factors and continue to build
margin improvement in FY3/12 for the company.
● TRAI spectrum recommendations continue to prevent taking a
clear positive stance on the sector, especially in the case of Idea,
where the potential impact on fair value is significant. However,
investors largely expect the actual regulations to have a smaller
impact than TRAI proposals.
● Our recent thesis on data opportunity, especially the pace of
developments on the ground and takeaways from China, surprised
many. Handset prices and lack of local content are expected to be
hurdles to fast data uptake, in the minds of investors. With stable
competition and impending data revenue uptake, we remain positive
on the sector with OUTPERFORM rating on Bharti and Idea.
Comfort on India competitive environment Investors we met were largely comfortable with the stable competitive
scenario in India. There have hardly been any headline price cuts over
the past 18 months. Further, recent comments from new entrants (e.g.,
Uninor) indicate that funding from local banks for the sector has dried
up in the wake of the spectrum scam.
There were some concerns on the margin trajectory, especially with
Bharti mobile margins disappointing in the Mar-11 quarter (down 130
bp QoQ). While we agree that margin performance for Bharti has
been unexciting in the recent quarters, we believe the Mar-11 quarter
was impacted by a few one-offs (3G launch, MNP), which should not
recur beyond another quarter or two.
With stable pricing and strong volume growth, we continue to build in
margin improvements for Bharti in its mobile segment (~100 bp YoY in
FY3/12 excluding the 3G impact).
TRAI recommendations continue to cloud sector view
The implication of TRAI spectrum pricing recommendations remains
the biggest hurdle against a positive view on the sector in the minds of
the investors we met. The recommendations, if implemented as is,
could impact fair value of Bharti by Rs53 per share (14% of CMP) and
Idea by Rs36 per share (51% of CMP).
The telecom ministry is working on a new telecom policy (which will
address spectrum pricing in addition to other issues), which is
expected to be finalised by end-CY11. However, given the ongoing
policy standstill, as well as the fact that the outcomes of the 2G
spectrum case and Joint Parliamentary Committee have bearing on
the policy framework, we see little likelihood of the policy meeting the
year-end deadline. On the other hand, continued uncertainty could
play to incumbents’ (read Bharti/Idea) benefit.
Most investors believed that the eventual regulations will have a
smaller impact than those proposed by TRAI, given the significant
business/survival risks to the sector if the proposals were
implemented.
Sure of ‘big picture’ data potential, but unsure of
implementation
In our recently published report on India data (“Indian Telecom Sector:
Data … is here and now!” published 23 May 2011), we argued that the
India telecoms sector could be on the verge of a period of strong data
revenue growth and that we expected data to contribute to over half of
incremental revenue for the sector over the next three years.
While the long-term potential for data/Internet demand in India was
always known, investors were surprised to know about the rapid
developments on the ground over the past 12 months (which we have
highlighted in our report). Following are the key hurdles in the minds
of investors:
Handset prices: Unlike mature markets such as Singapore/HK where
handset subsidy helps bring down the entry barrier to acquire a mobile
data connection, cash subsidies are almost non-existent in India
(subsidy is only in the form of free minutes/MBs over a period of time).
Hence, the actual prices of the devices should come down to
affordable levels in order for 3G penetration to take off. In our view,
growing scale from India (all operators following single technology)
should help bring down unit handset prices. In our report, we have
highlighted comments from Indian handset vendors intending to
introduce low-price devices over the next 12 months.
Content: On the lines of our analysis in the report, some investors
were concerned about the lack of local content for Indians. While we
agree this is the case currently, we believe that as the overall data/3G
ecosystem develops we should see local content coming up. The lead
time on developing content is the least compared to other parts of the
data access supply chain, and experience from China (number of
local language websites grew 5x in three years) gives us comfort.
Africa remains a blackbox
A year after the acquisition of Zain’s Africa operations by Bharti,
investors still remain unclear about the long-term strategy here. This
feeling has strengthened after recent management comment that it
will take time to implement the ‘affordability model’ in Africa. In our 2-
Mar-11 report (“Fortune favours bold”), our analysis showed that the
company can reach management’s FY3/13 revenue target by growing
in line with market growth (and need not chase market share gains),
while most of margin targets can be met with internal cost controls.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Over the last two weeks, we met/spoke to a number of investors
across Asia. Investors are largely comfortable with the competitive
scenario in India, with stable tariffs and challengers under strain.
● However, margin disappointment from Bharti in the recent quarter
raised concerns about margin trajectory. We believe the margin
decline was driven by short-term factors and continue to build
margin improvement in FY3/12 for the company.
● TRAI spectrum recommendations continue to prevent taking a
clear positive stance on the sector, especially in the case of Idea,
where the potential impact on fair value is significant. However,
investors largely expect the actual regulations to have a smaller
impact than TRAI proposals.
● Our recent thesis on data opportunity, especially the pace of
developments on the ground and takeaways from China, surprised
many. Handset prices and lack of local content are expected to be
hurdles to fast data uptake, in the minds of investors. With stable
competition and impending data revenue uptake, we remain positive
on the sector with OUTPERFORM rating on Bharti and Idea.
Comfort on India competitive environment Investors we met were largely comfortable with the stable competitive
scenario in India. There have hardly been any headline price cuts over
the past 18 months. Further, recent comments from new entrants (e.g.,
Uninor) indicate that funding from local banks for the sector has dried
up in the wake of the spectrum scam.
There were some concerns on the margin trajectory, especially with
Bharti mobile margins disappointing in the Mar-11 quarter (down 130
bp QoQ). While we agree that margin performance for Bharti has
been unexciting in the recent quarters, we believe the Mar-11 quarter
was impacted by a few one-offs (3G launch, MNP), which should not
recur beyond another quarter or two.
With stable pricing and strong volume growth, we continue to build in
margin improvements for Bharti in its mobile segment (~100 bp YoY in
FY3/12 excluding the 3G impact).
TRAI recommendations continue to cloud sector view
The implication of TRAI spectrum pricing recommendations remains
the biggest hurdle against a positive view on the sector in the minds of
the investors we met. The recommendations, if implemented as is,
could impact fair value of Bharti by Rs53 per share (14% of CMP) and
Idea by Rs36 per share (51% of CMP).
The telecom ministry is working on a new telecom policy (which will
address spectrum pricing in addition to other issues), which is
expected to be finalised by end-CY11. However, given the ongoing
policy standstill, as well as the fact that the outcomes of the 2G
spectrum case and Joint Parliamentary Committee have bearing on
the policy framework, we see little likelihood of the policy meeting the
year-end deadline. On the other hand, continued uncertainty could
play to incumbents’ (read Bharti/Idea) benefit.
Most investors believed that the eventual regulations will have a
smaller impact than those proposed by TRAI, given the significant
business/survival risks to the sector if the proposals were
implemented.
Sure of ‘big picture’ data potential, but unsure of
implementation
In our recently published report on India data (“Indian Telecom Sector:
Data … is here and now!” published 23 May 2011), we argued that the
India telecoms sector could be on the verge of a period of strong data
revenue growth and that we expected data to contribute to over half of
incremental revenue for the sector over the next three years.
While the long-term potential for data/Internet demand in India was
always known, investors were surprised to know about the rapid
developments on the ground over the past 12 months (which we have
highlighted in our report). Following are the key hurdles in the minds
of investors:
Handset prices: Unlike mature markets such as Singapore/HK where
handset subsidy helps bring down the entry barrier to acquire a mobile
data connection, cash subsidies are almost non-existent in India
(subsidy is only in the form of free minutes/MBs over a period of time).
Hence, the actual prices of the devices should come down to
affordable levels in order for 3G penetration to take off. In our view,
growing scale from India (all operators following single technology)
should help bring down unit handset prices. In our report, we have
highlighted comments from Indian handset vendors intending to
introduce low-price devices over the next 12 months.
Content: On the lines of our analysis in the report, some investors
were concerned about the lack of local content for Indians. While we
agree this is the case currently, we believe that as the overall data/3G
ecosystem develops we should see local content coming up. The lead
time on developing content is the least compared to other parts of the
data access supply chain, and experience from China (number of
local language websites grew 5x in three years) gives us comfort.
Africa remains a blackbox
A year after the acquisition of Zain’s Africa operations by Bharti,
investors still remain unclear about the long-term strategy here. This
feeling has strengthened after recent management comment that it
will take time to implement the ‘affordability model’ in Africa. In our 2-
Mar-11 report (“Fortune favours bold”), our analysis showed that the
company can reach management’s FY3/13 revenue target by growing
in line with market growth (and need not chase market share gains),
while most of margin targets can be met with internal cost controls.
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