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Telecom
India
Realigning estimates and target prices. We incorporate our economists’ revised
Re/US$ assumptions and also partially build in the impact of potential regulatory
headwinds into our estimates. We retain ADD rating on Bharti and Idea, REDUCE on
TCOM, and SELL on MTNL and RCOM. Our revised target prices stand at Rs405 for
Bharti (Rs445 earlier), Rs95 for Idea (Rs115 earlier), Rs60 for RCOM (Rs80 earlier), and
Rs215 for TCOM (Rs200 earlier). We suspend our rating and TP for MTNL.
Incorporating revised currency assumptions and regulatory headwinds
�� Bharti – we reduce our end-FY2013E DCF-based target price on Bharti to Rs405/share from
Rs445 earlier. Our revised TP builds in the impact of (1) Re depreciation – this gets reflected in
higher net debt as the present Re value of US$-denominated debt goes up on our revised
currency assumptions, and (2) partial impact of potential regulatory headwinds – we build in
Rs21/share negative impact in our target price; this is based on our assessment of probability
and extent of potential regulatory developments. In essence, the Rs40/share cut in our TP
breaks into Rs20/share from revised currency assumptions and Rs21/share impact built in for
potential regulatory negatives. Revised Re assumptions also drive cuts in our EPS estimates.
Exhibit 1 details our TP derivation while Exhibit 2 specifies the changes to the earnings model.
�� Idea – we reduce our end-FY2013E DCF-based target price on Idea to Rs95/share from Rs115
earlier. Our revised TP builds in the impact of (1) Re depreciation – this gets reflected in the
higher net debt as the present Re value of US$-denominated debt goes up on our revised
currency assumptions, and (2) partial impact of potential regulatory headwinds – we build in
Rs17/share negative impact in our target price; this is based on our assessment of probability
and extent of potential regulatory developments. Exhibit 3 details our TP derivation while
Exhibit 4 specifies the changes to the earnings model.
�� RCOM – we reduce our TP on RCOM to Rs60/share from Rs80 earlier. We now build in
Rs10/share potential positive impact from the proposed towerco sale. In effect, we have cut our
earlier fair value target by Rs30/share – Rs11/share coming from revised currency assumptions
(78% of RCOM’s end-Sep 2011 gross debt of Rs337 bn is FC-denominated, mostly US$ in our
view) and the balance Rs19/share to build in potential regulatory negatives. Contrary to popular
perception, challengers including RCOM will also get impacted if the proposed regulatory
changes go through. Exhibit 5 details our TP derivation while Exhibit 6 specifies the changes to
the earnings model.
�� TCOM – we increase our SOTP target price on the stock to Rs215/share from Rs200 earlier. The
TP increase is on account of (1) increased EBITDA estimates for the core business (flow-through
of Re depreciation benefits in the company’s international business), (2) reduced discount to
market value for surplus land assets to reflect recent positive news flow, and (3) reduction in
the value of TTSL stake – we have reduced our EV estimate for TTSL to reflect the company’s
subdued operational performance in the past few months and to build in the impact of
potential regulatory negatives. Exhibit 7 details our SOTP-based TP derivation while Exhibit 8
specifies the changes to the earnings model.
�� MTNL – we suspend our rating and target price on MTNL. Saddled with deteriorating
operational performance (declining revenue base, little control on employee expenses,
negative EBITDA), the company’s net debt continues to increase. There is a big question
mark on MTNL’s ability to raise further debt to sustain its OCF-negative operations given
the sustained P&L deterioration. It is difficult to value the stock unless there is a dramatic
turnaround in the operational performance, which does not seem likely.
Asset-based valuation approach could yield some equity value; however, there are
practical considerations (primarily the company’s massive unionized employee base –
MTNL’s employee base is nearly 3X Bharti’s in India) that could impede an asset sale.
Essentially, our rating/TP suspension reflects our view that a turnaround in company’s
financial position appears implausible. We also note that the NPV hit from just two
potential negative regulatory developments, i.e. excess spectrum charge and spectrum
renewal charge, sums up to Rs59/share for MTNL.
Sector view – Neutral; remain constructive on Bharti and Idea
Concerns on potential negative regulatory developments have kept the wireless stocks under
pressure in recent weeks. Success in recent tariff hike experiments could aid the industry,
especially the incumbents, in neutralizing the impact of regulatory developments through
further price hikes. Eventual outcome would depend on the competitive response from
challengers (relatively better-off on regulatory front). We believe the incumbents are in a
sweet spot on pricing (notwithstanding RCOM’s recently launched bucket plans), and
remain positive on Bharti and Idea.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Telecom
India
Realigning estimates and target prices. We incorporate our economists’ revised
Re/US$ assumptions and also partially build in the impact of potential regulatory
headwinds into our estimates. We retain ADD rating on Bharti and Idea, REDUCE on
TCOM, and SELL on MTNL and RCOM. Our revised target prices stand at Rs405 for
Bharti (Rs445 earlier), Rs95 for Idea (Rs115 earlier), Rs60 for RCOM (Rs80 earlier), and
Rs215 for TCOM (Rs200 earlier). We suspend our rating and TP for MTNL.
Incorporating revised currency assumptions and regulatory headwinds
�� Bharti – we reduce our end-FY2013E DCF-based target price on Bharti to Rs405/share from
Rs445 earlier. Our revised TP builds in the impact of (1) Re depreciation – this gets reflected in
higher net debt as the present Re value of US$-denominated debt goes up on our revised
currency assumptions, and (2) partial impact of potential regulatory headwinds – we build in
Rs21/share negative impact in our target price; this is based on our assessment of probability
and extent of potential regulatory developments. In essence, the Rs40/share cut in our TP
breaks into Rs20/share from revised currency assumptions and Rs21/share impact built in for
potential regulatory negatives. Revised Re assumptions also drive cuts in our EPS estimates.
Exhibit 1 details our TP derivation while Exhibit 2 specifies the changes to the earnings model.
�� Idea – we reduce our end-FY2013E DCF-based target price on Idea to Rs95/share from Rs115
earlier. Our revised TP builds in the impact of (1) Re depreciation – this gets reflected in the
higher net debt as the present Re value of US$-denominated debt goes up on our revised
currency assumptions, and (2) partial impact of potential regulatory headwinds – we build in
Rs17/share negative impact in our target price; this is based on our assessment of probability
and extent of potential regulatory developments. Exhibit 3 details our TP derivation while
Exhibit 4 specifies the changes to the earnings model.
�� RCOM – we reduce our TP on RCOM to Rs60/share from Rs80 earlier. We now build in
Rs10/share potential positive impact from the proposed towerco sale. In effect, we have cut our
earlier fair value target by Rs30/share – Rs11/share coming from revised currency assumptions
(78% of RCOM’s end-Sep 2011 gross debt of Rs337 bn is FC-denominated, mostly US$ in our
view) and the balance Rs19/share to build in potential regulatory negatives. Contrary to popular
perception, challengers including RCOM will also get impacted if the proposed regulatory
changes go through. Exhibit 5 details our TP derivation while Exhibit 6 specifies the changes to
the earnings model.
�� TCOM – we increase our SOTP target price on the stock to Rs215/share from Rs200 earlier. The
TP increase is on account of (1) increased EBITDA estimates for the core business (flow-through
of Re depreciation benefits in the company’s international business), (2) reduced discount to
market value for surplus land assets to reflect recent positive news flow, and (3) reduction in
the value of TTSL stake – we have reduced our EV estimate for TTSL to reflect the company’s
subdued operational performance in the past few months and to build in the impact of
potential regulatory negatives. Exhibit 7 details our SOTP-based TP derivation while Exhibit 8
specifies the changes to the earnings model.
�� MTNL – we suspend our rating and target price on MTNL. Saddled with deteriorating
operational performance (declining revenue base, little control on employee expenses,
negative EBITDA), the company’s net debt continues to increase. There is a big question
mark on MTNL’s ability to raise further debt to sustain its OCF-negative operations given
the sustained P&L deterioration. It is difficult to value the stock unless there is a dramatic
turnaround in the operational performance, which does not seem likely.
Asset-based valuation approach could yield some equity value; however, there are
practical considerations (primarily the company’s massive unionized employee base –
MTNL’s employee base is nearly 3X Bharti’s in India) that could impede an asset sale.
Essentially, our rating/TP suspension reflects our view that a turnaround in company’s
financial position appears implausible. We also note that the NPV hit from just two
potential negative regulatory developments, i.e. excess spectrum charge and spectrum
renewal charge, sums up to Rs59/share for MTNL.
Sector view – Neutral; remain constructive on Bharti and Idea
Concerns on potential negative regulatory developments have kept the wireless stocks under
pressure in recent weeks. Success in recent tariff hike experiments could aid the industry,
especially the incumbents, in neutralizing the impact of regulatory developments through
further price hikes. Eventual outcome would depend on the competitive response from
challengers (relatively better-off on regulatory front). We believe the incumbents are in a
sweet spot on pricing (notwithstanding RCOM’s recently launched bucket plans), and
remain positive on Bharti and Idea.
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