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Telecom (Reena Verma Bhasin, CFA)
Underweight
Key drivers of sector outlook
Valuation upside seems difficult: Indian telcos are at 45-75% premium versus
GEM wireless majors on both PE & EV/EBITDA. We believe this captures
stronger CY12E profit & EBITDA growth outlook for India (+17-25%) vs. for GEM
wireless majors (+4-11%).
Data uptake – slow recovery likely: Return on equity of Indian telecom
companies is much below GEM average and 3G data uptake will be the key to
RoE improvement. We expect strong YoY growth in data uptake but worry that
data contribution to revenue and profit will remain small unless data prices drop
sharply and spur usage elasticity.
LTE launches may add to competitive pressures by end-CY12: Our margin
forecasts assume that voice tariffs will peak in the next 2-3 quarters. Varying
exposure of telecom majors to rural growth and imminent launch of LTE services
by new and existing players may aggravate competition.
Regulatory risks linger: Policy deliberations of 2H CY11 present downside risk,
owing to the proposed abolition of domestic roaming charges, potential cut in
termination charges, likely payouts towards spectrum-buyout & license renewals.
Top Buy: None
Top stock pick: Bharti
Strong preparedness for Data: Bharti is likely to be an early winner from data
uptake as its 3G footprint has the highest revenue exposure to metro and
category A circles. The company is also preparing for LTE rollout.
Africa getting traction: In Africa, there is evidence of improving execution, both
in terms of steady topline momentum and cost control. We expect 250bp YoY
increase in Africa’s margin in FY13. However, mgt. guidance of US$2bn EBITDA
by Mar 2013 still looks difficult to meet.
Relatively stronger balance-sheet health: Bharti’s balance-sheet appears
better placed than peers to absorb a potential rise in regulatory payouts. We
expect Bharti to generate free-cash (on steady-state regulations) and forecast
net debt/EBITDA at about 1.8x FY13E.
Limited valuation upside: Bharti already trades at a 40-60% premium vs GEM
wireless majors on PE & EV/EBITDA. We see limited room for upside surprise.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom (Reena Verma Bhasin, CFA)
Underweight
Key drivers of sector outlook
Valuation upside seems difficult: Indian telcos are at 45-75% premium versus
GEM wireless majors on both PE & EV/EBITDA. We believe this captures
stronger CY12E profit & EBITDA growth outlook for India (+17-25%) vs. for GEM
wireless majors (+4-11%).
Data uptake – slow recovery likely: Return on equity of Indian telecom
companies is much below GEM average and 3G data uptake will be the key to
RoE improvement. We expect strong YoY growth in data uptake but worry that
data contribution to revenue and profit will remain small unless data prices drop
sharply and spur usage elasticity.
LTE launches may add to competitive pressures by end-CY12: Our margin
forecasts assume that voice tariffs will peak in the next 2-3 quarters. Varying
exposure of telecom majors to rural growth and imminent launch of LTE services
by new and existing players may aggravate competition.
Regulatory risks linger: Policy deliberations of 2H CY11 present downside risk,
owing to the proposed abolition of domestic roaming charges, potential cut in
termination charges, likely payouts towards spectrum-buyout & license renewals.
Top Buy: None
Top stock pick: Bharti
Strong preparedness for Data: Bharti is likely to be an early winner from data
uptake as its 3G footprint has the highest revenue exposure to metro and
category A circles. The company is also preparing for LTE rollout.
Africa getting traction: In Africa, there is evidence of improving execution, both
in terms of steady topline momentum and cost control. We expect 250bp YoY
increase in Africa’s margin in FY13. However, mgt. guidance of US$2bn EBITDA
by Mar 2013 still looks difficult to meet.
Relatively stronger balance-sheet health: Bharti’s balance-sheet appears
better placed than peers to absorb a potential rise in regulatory payouts. We
expect Bharti to generate free-cash (on steady-state regulations) and forecast
net debt/EBITDA at about 1.8x FY13E.
Limited valuation upside: Bharti already trades at a 40-60% premium vs GEM
wireless majors on PE & EV/EBITDA. We see limited room for upside surprise.
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