Morgan Stanley Research, India Telecommunications Analysing the impact of FX movement on Bharti and Idea

India
Telecommunications
Analysing the impact of FX
movement on Bharti and Idea
The macro environment is getting tougher with INR
depreciation over 25% since early May and
expectations of lower GDP growth. We reiterate our
bullish stance on Indian telcos with better earnings
growth visibility, improving tariffs and margins. Idea
remains our top pick, followed by Bharti.
INR has depreciated by over 25% vs. US$ since
early May and ~15% since the close of F1Q14: We
have now revised our average INR/US$ assumptions
from Rs58/US$ to Rs62/US$ for F2014, and from
Rs60/US$ to Rs67/US$ for F2015. For balance sheet
impact, we have assumed a closing rate of Rs68/US$
for F2014E as compared to Rs59.7/US$.
Bharti is the most affected: However, the forex loss is
largely negated by the higher African EBITDA in Indian
currency in the P&L in F2014E. The balance sheet
impact is Rs73bn or ~Rs18/share, which brings down
our price target. In our bear case, assuming a closing FX
rate of Rs80/US$ for F2014E, the balance sheet impact
is Rs179bn or Rs45/share.
Idea is least affected: We estimate P&L impact at only
~2% and balance sheet impact at We remain bullish on Indian telcos: 1) Competitive
intensity has eased; voice tariffs should inch up. 2)
Traffic growth continues for incumbents. 3) Data
volumes are picking up. 4) Incremental revenues are at
higher margins, implying margin upside. 5) Capex is
under control, aiding FCF.
Prefer Idea, then Bharti: Idea is likely to have the highest
revenue growth and margin improvement via earnings
sensitivity to ARPMs. For Bharti, despite slowdown in
Africa and lower INR, at close to an all-time low valuation
(6.7x F2014E EV/EBITDA), much is priced in.
Key risks remain: Regulations, RIL’s Jio Infocomm entry

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