Telecom - 4G Under Incubation; Near Term Favourable; Sector Update :: Edelweiss PDF link

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The optimist in us is justifiably enthused by the ensuing improvement in the sector’s fundamentals triggered by ebbing competitive intensity and improving realisations. However, investors continue to be jittery, perceiving the anticipated launch by Reliance Jio (RJIO) as disruptive. In our view, this apprehension is unfounded as absence of relevant ecosystem for 4G technology renders any big bang disruption untenable. In fact, we are confident that in the near to medium term, the sector will be buoyed by tailwinds riding better-than-expected realisations and higher volume surge (voice and data) rather than headwinds from either the regulator or competitors. Exponential data surge and waning promotions & offers will aid players improve cash flows and thereby pare debt. While we like both Bharti Airtel (Bharti) and Idea Cellular (Idea), we prefer the former due to its proportionately lower dependency on circles up for renewal (~30% revenue versus Idea’s 70%), thereby capping auction related out flow. Any Africa operations related corporate development will be further upside risk to our target price. We maintain our positive view on the sector with ‘BUY’ on Bharti and Idea.

RJIO: Potent, but distant threat

Without doubt, RJIO will be a scale player given the technology investments further bolstered by balance sheet might and robust execution record of the parent company. However, we believe, it will gain scale gradually post launch (expected by August 2015). Even in a best case scenario RJIO is unlikely to make profits till FY19 (refer table 1). Also, more established players like Bharti and Idea are in no way resource constrained and are fighting fit to counter any unrealistic offerings.

Limited competition, price discipline to ring in benefits

Post 2012 auctions, the competitive landscape has narrowed dramatically with only ~5 operators per circle versus ~11 earlier. This proved a boon for the industry, enabling operators regain their pricing mojo. Further, in order to help the sector stand on its feet the new government is likely to adopt a more accommodative stance. Moreover, we expect the industry to adopt a disciplined approach, unlike the earlier price hike regime wherein discounts and promotions had wreaked havoc. Thus, higher tariffs will boost cash flows and reduce net debt of companies. In case of Bharti and Idea we estimate cash flows of INR647bn and INR167bn, respectively, over FY15-20.

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