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India: Telecom Services
Equity Research
Analyzing risk-reward after factoring tariff hikes; Buy Bharti/Idea
Updating forecasts to capture 20% tariff hikes in select circles
We adjust our forecasts to model in 20% headline tariff hikes by Bharti/Idea
for their new subs on per sec billing promotions in 11/6 circles (these
circles contribute to 63%/62% of cellular revenues for Bharti/Idea). We
assume a majority of existing subs of Bharti/Idea on per-sec-billing to
renew there packages to 1.2 p/sec as they come to expiry given no viable
alternative cheaper tariffs by these operators. We therefore estimate c.60%
of these prepaid subs to migrate to these higher tariffs by mid FY2013.
We model MOU decline and do not factor material margin increase
We also assume a negative impact of c.10% on MOU/sub led by 20% hikes
on the select subs base. As a result our FY12/FY13 revenues increase by
0.9%/1.9% for Bharti and 3.7%/7.2% for Idea. While we assume some scale
benefits due to better revenue growth now, we do not assume any material
EBITDA margin improvement due to tariff hikes (we await data point before
giving any credit). Our FY13/FY14 EPS for Bharti change by -0.4%/+2.4%
and for Idea it changes by 5.5%/10.4% (decline in FY12 EPS is due to higher
than estimated 3G related D&A/int. expense).
Switch preference to Idea due to better valuations and upside
Our 12-m SOTP based PTs for Bharti/Idea increase by 8%/28% to Rs
470/Rs110 (due to increase in core business values) as we factor in tariff
hikes. We now see more upside to our Idea PT and find Idea valuations
more attractive than Bharti (FY12 EV/EBITDA of 7.7X/9.2X for Idea/Bharti
and FY11-14E EBITDA CAGR of 26%/20% for Idea/Bharti). We therefore
switch preference to Idea from Bharti as our top pick in Indian telcos. With
further potential tariff hikes expected, we now see risk-reward turning
more favorable for Idea given better financial/operating leverage and given
that it is pure wireless operator.
Indonesia case-study: Tariff hike impact on elasticity and margins
Around Mar-Jun 09, Indonesian operators increased their headline tariffs (after
a fierce price war initiated by the number 3 operator). Coming out of pricewars, operators saw a sharp (around 15%) increase in RPM in just one quarter
(also seen in subsequent quarters). However there was no high correlation
between MOU/sub decline and EBITDA margin despite sharp tariff hikes –
making us slightly cautious on margin improvement for Indian telcos.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Telecom Services
Equity Research
Analyzing risk-reward after factoring tariff hikes; Buy Bharti/Idea
Updating forecasts to capture 20% tariff hikes in select circles
We adjust our forecasts to model in 20% headline tariff hikes by Bharti/Idea
for their new subs on per sec billing promotions in 11/6 circles (these
circles contribute to 63%/62% of cellular revenues for Bharti/Idea). We
assume a majority of existing subs of Bharti/Idea on per-sec-billing to
renew there packages to 1.2 p/sec as they come to expiry given no viable
alternative cheaper tariffs by these operators. We therefore estimate c.60%
of these prepaid subs to migrate to these higher tariffs by mid FY2013.
We model MOU decline and do not factor material margin increase
We also assume a negative impact of c.10% on MOU/sub led by 20% hikes
on the select subs base. As a result our FY12/FY13 revenues increase by
0.9%/1.9% for Bharti and 3.7%/7.2% for Idea. While we assume some scale
benefits due to better revenue growth now, we do not assume any material
EBITDA margin improvement due to tariff hikes (we await data point before
giving any credit). Our FY13/FY14 EPS for Bharti change by -0.4%/+2.4%
and for Idea it changes by 5.5%/10.4% (decline in FY12 EPS is due to higher
than estimated 3G related D&A/int. expense).
Switch preference to Idea due to better valuations and upside
Our 12-m SOTP based PTs for Bharti/Idea increase by 8%/28% to Rs
470/Rs110 (due to increase in core business values) as we factor in tariff
hikes. We now see more upside to our Idea PT and find Idea valuations
more attractive than Bharti (FY12 EV/EBITDA of 7.7X/9.2X for Idea/Bharti
and FY11-14E EBITDA CAGR of 26%/20% for Idea/Bharti). We therefore
switch preference to Idea from Bharti as our top pick in Indian telcos. With
further potential tariff hikes expected, we now see risk-reward turning
more favorable for Idea given better financial/operating leverage and given
that it is pure wireless operator.
Indonesia case-study: Tariff hike impact on elasticity and margins
Around Mar-Jun 09, Indonesian operators increased their headline tariffs (after
a fierce price war initiated by the number 3 operator). Coming out of pricewars, operators saw a sharp (around 15%) increase in RPM in just one quarter
(also seen in subsequent quarters). However there was no high correlation
between MOU/sub decline and EBITDA margin despite sharp tariff hikes –
making us slightly cautious on margin improvement for Indian telcos.
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