Telecom: Management meet: Competition to remain benign, expect fall in spectrum prices ::Credit Suisse

● In our recent meeting, Bharti Airtel's management indicated that
the competitive environment continues to improve. There is
significant upside to tariffs based on industry economics, and the
limiting factor, if any, would be customer behaviour. So far, this
factor has been quite accommodative.
● It is possible that momentum on tariff increases takes a breather in
the seasonally weak Sep-quarter, but the upward trajectory should
resume from the Dec-quarter. Management explained that 50%+ of
the near-term USD/INR mismatch is hedged, while the USD debt
repayments start only after 18 months (average tenure 4.5 years).
● Bharti Infratel has no plans to acquire Airtel's African tower assets.
Acquisitions, if any, will likely be domestic or from other foreign
operators/towercos. In the current economy, this seems unlikely.
Hence, the company could be open to increasing dividend payout
as a possible use of surplus cash.
● After attending TRAI's OHD on spectrum auction, we believe a
significant cut to reserve price is likely. This should be positive for
incumbents. Reiterate OUTPERFORM on Bharti/Idea.

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We recently met with management of Bharti Airtel/Infratel and
attended the open house discussion of TRAI on spectrum auctions.
Bharti Airtel: Competitive environment benign
Bharti Airtel's management explained that the competitive
environment continues to improve. Currently, the actual realised call
rates are at a 33% discount to headline rack rates, due to the
presence of promotional vouchers/minutes. The general direction will
be for this gap to reduce with continued withdrawal of discounts (as
was seen in the Jun-13 quarter). However, with the Sep-quarter
usually being seasonally weak on volumes, operators may not
intervene significantly on discounts in the current quarter, but action
should resume from the Dec-13 quarter onwards. Management does
not expect any disruptive action on tariffs by any competitors in the
next few quarters (i.e., there is a general consensus in the industry
that tariffs have to go up). In this context, the only risk to tariff increase
would be customer elasticity—a factor which has not shown up
negatively so far.
The company is comfortable with market share movements (we have
highlighted that Bharti has been gaining market share over the last
few quarters). While revenue market share will remain an important
objective, the focus will be on improving profitability while keeping
healthy market share growth.
On risks from a falling rupee, management explained that of the
US$7.5 bn debt, there is no repayment due in the next 12-18 months,
with an average tenure of 4.5 years. The company as a policy
normally hedges 50%+ of net USD payables from INR (i.e., 50%+ of
12M currency mismatch is hedged). Management reiterated that it is
well within all debt covenants for the past 12 months. Moreover, the
African operations are already self-sufficient on cash flow, and
management expects Africa to take care of even the acquisition
interest in a few quarters.
Bharti Infratel: No Africa acquisition on cards; upside to
dividend
Management clarified that there are no plans for Bharti Infratel to
acquire African tower assets (either immediate or long term). While the
company had earlier indicated inorganic expansion as a possible use of
cash, acquisitions would be limited to acquiring tower assets from other
operators (in India or abroad). In any case, given the fall in the rupee,
reduced valuations of Infratel vs global peers and limited opportunities in
India, it is unlikely that any acquisition would take place soon.
In this context, it is possible that Infratel steps up dividend payout:
either as a one-time interim payout or a change to its policy (current
policy is 30-50% payout). As per CS estimates, an increase in
dividend payout to 75% (in line with FY13) would lead to a 3.5-4%
dividend yield on the current stock price.
TRAI discussions: Likely cut to spectrum reserve price
TRAI recently held a well-attended open house discussion on the
issue of spectrum auctions (valuation and reserve price), along with
other related issues. Our key takeaways:
● Despite minor opposition from some quarters (primarily CDMA
operators and consumer groups), we believe TRAI is inclined
towards a significant reduction in reserve price. TRAI chairman
repeatedly referred to the precarious economic situation as a
context to set realistic reserve prices, and also explained that
small (10-20%) reductions in reserve price in multiple steps will do
more harm than good.
● TRAI is likely to continue to support refarming of 900MHz. But in
our opinion, this is no longer relevant since all spectrum will need
to be bought at market price by incumbents (i.e., refarming is
being replaced by repricing).
● A gradual move towards uniform spectrum usage charges is likely,
though the Chairman warned against any 'sudden disruptive
changes in this environment'. This would be positive for the
industry.
● TRAI seems to be in favour of allowing spectrum trading, which
will further improve the overall financial situation for the sector. We
suspect implementation will take a while.
● TRAI suo moto came up with issues on 'refarming' a portion of the
800MHz CDMA spectrum into GSM. This could be positive for
GSM operators if implemented (more spectrum supply).