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UBS Investment Research
India Mobile Sector
E mergence of pricing power
Event - Incumbents are increasing tariffs
Over the past few days, Bharti, Idea and Vodafone have raised base tariffs in
various service areas. We believe that price increase marks a turning point in the
competitive dynamics of the sector. Emergence of pricing power over the next few
quarters is likely to lead to better financial performance and further re-rating of the
sector. Idea is likely to emerge as the key beneficiary. While Indian mobile stocks
have already re-rated recently, we think there is further upside to them.
Impact - Rev/min realizations can improve close to 9%
Our detailed analysis of higher tariffs leads us to believe that rev/min have scope to
improve by 9% over the next 12 months as more and more users transition out of
the promotional tariffs towards higher tariffs. Given Indian operators have focused
on trimming costs, there is big operating leverage in the India mobile business. For
instance spread/min for Idea can improve by 10% over the next few quarters.
Action - Expect consensus upward revisions
We believe that consensus estimates and price targets are likely to meaningfully be
revised up. Idea has the highest leverage to mobile tariffs being a pure play
operator. We have increased our PT on Idea by 25% to Rs125/share, Bharti by 6%
to Rs530/share and RCom by 3% to Rs200/share.
Valuation - Reiterate positive view on the sector
We remain positive on the outlook of the sector given improving pricing
environment and regulatory outlook. We expect new telecom policy to 1) resolve
spectrum allocation and pricing issues and 2) facilitate consolidation in the sector
UBS View
Based on TRAI numbers, Bharti will need to pay a one time charge of
Rs37bn (Rs10/share) for spectrum beyond 2x6.2 MHz, while Idea will need
to pay Rs15bn (Rs4.5/share).
Further using inflation adjusted TRAI 2G prices for determining amount
payable during renewal, we estimate that the impact on our Bharti and Idea
PT will be Rs25 and Rs21 respectively
If 2G licenses given to new operators are cancelled then auction may be
carried out in future to determine 2G spectrum prices which may be more
rational
Uniform license fees
TRAI in May 2010 recommended a uniform license fee of 6% across all service
areas. It suggested that license fee be brought down in a phased manner.
Currently license fees vary across service areas (see table 14). However, recent
news flows indicate that telecom commission has approved a uniform license
fee of 8.5%.
UBS View
We believe uniform license fee of 6% would result in reduction of 200bps on
average license fee rate. Based on our analysis, the savings is likely to be
cRs20/share for Bharti and Rs12/share for Idea, all else equal.
However, a uniform license fee of 8.5% will result in minimal savings for
Bharti and Idea.
We believe uniform license fees and 2G spectrum pricing should be viewed
in conjunction. In our view, DoT is likely to compensate higher 2G spectrum
price with lower uniform license fee and vice versa.
We are incorporating TRAI recommendations on 2G spectrum pricing and
uniform license fee of 8.5% for deriving our price targets. We believe this is
being quite conservative.
M&A guidelines
Indian telecom minister has stated many a times that M&A guidelines will be
revised in NTP 2011 in order to facilitate consolidation in the sector. He
believes that current scenario of 10-12 pan-India service providers is not
sustainable. Further, there have been news flows that DoT may provide exit
option to new licensees in NTP 2011.
TRAI in its May 2010 recommendations removed the 3 year lock-in requirement
and allowed M&A in the sector subject to the following restrictions
— The total number of operators in any service area can not fall below 6 (as
compared to 4 operators currently).
— The market share of the merged entity should not exceed 30% (as
compared to 40% currently)
— The merged entity can not hold spectrum beyond 14.4MHz (as compared
to 12.5MHz currently)
UBS View
We believe TRAI restriction on market share makes it nearly impossible for
any meaningful consolidation to happen in the sector. Though, smaller
players can engage in M&A among themselves.
However, we believe that competitive intensity is likely to ease going ahead
even with out much change in M&A guidelines as
— The ongoing investigation in 2G scam may automatically result in
cancellation of licenses of new operators.
— DoT may cancel some of the licenses for not fulfilling roll out obligations
— We believe new operators may opt for an exit option if DoT provides the
same in NTP-2011 given they are not currently expanding their network
aggressively
Re-farming of 900MHz spectrum
In May 2010, TRAI recommended that spectrum in 900MHz frequency, which
the incumbents currently hold, should be replaced by 1800MHz frequency
spectrum at the time of renewal
UBS View
We believe re-farming of 900MHz is unlikely to get implemented as third party
rights get created on the spectrum. Also, in our view, the implementation is
likely to result in severe litigation that could extend for several years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Mobile Sector
E mergence of pricing power
Event - Incumbents are increasing tariffs
Over the past few days, Bharti, Idea and Vodafone have raised base tariffs in
various service areas. We believe that price increase marks a turning point in the
competitive dynamics of the sector. Emergence of pricing power over the next few
quarters is likely to lead to better financial performance and further re-rating of the
sector. Idea is likely to emerge as the key beneficiary. While Indian mobile stocks
have already re-rated recently, we think there is further upside to them.
Impact - Rev/min realizations can improve close to 9%
Our detailed analysis of higher tariffs leads us to believe that rev/min have scope to
improve by 9% over the next 12 months as more and more users transition out of
the promotional tariffs towards higher tariffs. Given Indian operators have focused
on trimming costs, there is big operating leverage in the India mobile business. For
instance spread/min for Idea can improve by 10% over the next few quarters.
Action - Expect consensus upward revisions
We believe that consensus estimates and price targets are likely to meaningfully be
revised up. Idea has the highest leverage to mobile tariffs being a pure play
operator. We have increased our PT on Idea by 25% to Rs125/share, Bharti by 6%
to Rs530/share and RCom by 3% to Rs200/share.
Valuation - Reiterate positive view on the sector
We remain positive on the outlook of the sector given improving pricing
environment and regulatory outlook. We expect new telecom policy to 1) resolve
spectrum allocation and pricing issues and 2) facilitate consolidation in the sector
UBS View
Based on TRAI numbers, Bharti will need to pay a one time charge of
Rs37bn (Rs10/share) for spectrum beyond 2x6.2 MHz, while Idea will need
to pay Rs15bn (Rs4.5/share).
Further using inflation adjusted TRAI 2G prices for determining amount
payable during renewal, we estimate that the impact on our Bharti and Idea
PT will be Rs25 and Rs21 respectively
If 2G licenses given to new operators are cancelled then auction may be
carried out in future to determine 2G spectrum prices which may be more
rational
Uniform license fees
TRAI in May 2010 recommended a uniform license fee of 6% across all service
areas. It suggested that license fee be brought down in a phased manner.
Currently license fees vary across service areas (see table 14). However, recent
news flows indicate that telecom commission has approved a uniform license
fee of 8.5%.
UBS View
We believe uniform license fee of 6% would result in reduction of 200bps on
average license fee rate. Based on our analysis, the savings is likely to be
cRs20/share for Bharti and Rs12/share for Idea, all else equal.
However, a uniform license fee of 8.5% will result in minimal savings for
Bharti and Idea.
We believe uniform license fees and 2G spectrum pricing should be viewed
in conjunction. In our view, DoT is likely to compensate higher 2G spectrum
price with lower uniform license fee and vice versa.
We are incorporating TRAI recommendations on 2G spectrum pricing and
uniform license fee of 8.5% for deriving our price targets. We believe this is
being quite conservative.
M&A guidelines
Indian telecom minister has stated many a times that M&A guidelines will be
revised in NTP 2011 in order to facilitate consolidation in the sector. He
believes that current scenario of 10-12 pan-India service providers is not
sustainable. Further, there have been news flows that DoT may provide exit
option to new licensees in NTP 2011.
TRAI in its May 2010 recommendations removed the 3 year lock-in requirement
and allowed M&A in the sector subject to the following restrictions
— The total number of operators in any service area can not fall below 6 (as
compared to 4 operators currently).
— The market share of the merged entity should not exceed 30% (as
compared to 40% currently)
— The merged entity can not hold spectrum beyond 14.4MHz (as compared
to 12.5MHz currently)
UBS View
We believe TRAI restriction on market share makes it nearly impossible for
any meaningful consolidation to happen in the sector. Though, smaller
players can engage in M&A among themselves.
However, we believe that competitive intensity is likely to ease going ahead
even with out much change in M&A guidelines as
— The ongoing investigation in 2G scam may automatically result in
cancellation of licenses of new operators.
— DoT may cancel some of the licenses for not fulfilling roll out obligations
— We believe new operators may opt for an exit option if DoT provides the
same in NTP-2011 given they are not currently expanding their network
aggressively
Re-farming of 900MHz spectrum
In May 2010, TRAI recommended that spectrum in 900MHz frequency, which
the incumbents currently hold, should be replaced by 1800MHz frequency
spectrum at the time of renewal
UBS View
We believe re-farming of 900MHz is unlikely to get implemented as third party
rights get created on the spectrum. Also, in our view, the implementation is
likely to result in severe litigation that could extend for several years.
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