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The telecom industry is coming out of the intense competition phase
highlighted in declining net adds, withdrawal of unviable customer
acquisition offers, emerging regulatory stability, price hikes by
incumbents and upward tick in ARPMs. We believe this is a good time to
buy into telecom stocks with a selective approach as companies are set
for a rapid jump in profitability over the next two years, led by growth in
revenue yielding traffic. Also, all telcos will witness declining capex
intensity, debt repayment and reduced interest costs. With more clarity
on NTP expected in a few months, the regulatory scenario seems to be
more stable now than what it seemed about a year ago. Airtel would
benefit from huge FCF to comfortably repay majority of its debt and
improving margins in the African business. It remains our top pick in the
sector with a target price of | 450. We expect Idea’s EBITDA to grow 1.9x
by FY14E led by increasing revenue share and lower network operating
costs. However, spectrum pricing may remain an overhang on the stock.
We reiterate HOLD with a target price of | 99. We r a t e RCom a s S E L L
due to huge debt levels. However, our view may change if some of the
several positive developments like higher external tenancy, monetisation
of tower assets and possible listing of undersea cable business fructify.
Slowing net adds; stabilising ARPM coupled with steady increase in MoU
Net adds have fallen significantly in the past months as new operators cut
down on capacity expansion. Incumbents would continue to witness
steady growth in subscribers and traffic. Idea, with increasing penetration
in new circles would witness fastest CAGR of 17.7% over FY11-14 to 591
billion minutes while Airtel (already the widest coverage) would be slower
at CAGR of 7.9% to 995 billion minutes. RCom (to lose out on minutes
share due to curtailed capex) would register minutes CAGR of 5.9% over
FY11-14E to 445 billion minutes. Going forward, we expect the ARPM to
rise marginally and stabilise at those levels in the near term.
Peak capex cycle over, debt to reduce
All the telcos are past their peak capex cycle with Bharti Airtel, Idea
Cellular and RCom guiding for capex of about | 10000 crore, | 4000 crore
and | 1500 crore, respectively, in FY12E. We believe all three telcos would
be generating free cash flow, going forward, to start repaying debt. This
would result in a significant reduction in interest costs. However,
significantly lower capex for RCom may impact network quality.
NTP – Overhang still remains but seems to be priced in…
Trai has come out with a New Telecom Policy, which has positives for
both incumbents and subscribers. We expect implementation of a
watered down version of the policy, which would impact industry players
relatively less. Nonetheless, Idea is most sensitive to current policy
recommendations. Per share impact for Airtel, Idea & RCom would be
about | 46.7 (10.4% of TP), | 32.9 (33.2%) & | 19.6 (23.3%), respectively.
New telecom policy
Trai has come up with a New Telecom Policy (NTP), which has something
for both incumbents as well as subscribers to cheer about. While NTP has
addressed the need for enhanced broadband penetration, increasing rural
teledensity and the need for additional spectrum, it lacks clarity on the
timeline for implementation of the same. Also, some of the issues like
spectrum refarming, which could have a huge impact on incumbents as
well as the government due to the huge cash outgo have a lot of
ambiguity related to process and timeline of implementation.
Although some of the guidelines of the draft of the NTP (like one-time
spectrum fees, spectrum renewal charges and higher spectrum usage
charges) could hurt the profitability of the incumbents in the near future,
provisions like liberal M&A norms and spectrum sharing will have a
positive impact on the incumbents. Though there is still lack of clarity in
the policy implementation, NTP would provide much needed stability to
the sector. We expect a watered down version of the policy to be
implemented, which would have relatively lesser outgo for the telcos.
One-time spectrum fees
Trai has recommended that no extra charges be levied upon the
incumbents who have spectrum up to 6.2 MHz in 1800 MHz band and up
to 5 MHz for CDMA as long as their existing licenses are valid. However,
for spectrum held in any circle beyond 6.2 MHz for GSM and 5 MHz for
CDMA, the company will have to pay excess spectrum charges.
The companies that plan to exit the industry and surrender spectrum in
1800 MHz will be allowed to do so. The spectrum surrendered will be
auctioned and the price would become the current price of the spectrum
and will be used for any transactions on the spectrum. However, if no
spectrum is surrendered then the spectrum in the 1800 MHz band will be
charged as per the table given by Trai. The spectrum in 900 MHz will be
1.5x that of 1800 MHz.
Exhibit 20: One time spectrum fees – according to Feb 2011 recommendations (| Crore)
Service Area Upto 6.2 MHz Beyond 6.2 MHz
Delhi 149.78 249.73
Mumbai 101.11 157.34
Kolkata 49.48 47.6
Maharashtra 117.14 374.47
Gujarat 149.87 355.37
Andhra Pradesh 153.77 431.95
Karnataka 136.16 345.92
Tamil Nadu including Chennai 187.38 426.05
Kerala 73.98 232.16
Punjab 72.86 180.56
Haryana 14.5 107.9
U.P (West) 60.11 252.55
U.P (East) 151.76 318.76
Rajasthan 106.03 278.84
M.P 87.71 254.45
West Bengal 44.79 216.96
Himachal Pradesh 9.34 28.12
Bihar 51.04 153.69
Orissa 24.33 73.26
Assam 10.4 31.33
North East 10.61 31.95
J&K 7.6 22.89
Total 1769.75 4571.85
Source: TRAI, ICICIdirect.com Research
Spectrum renewal fees
Trai has recommended that the original holders of licenses pay two
components of charges. One is a renewal fee, which will be | 2 crore for
Metro, | 1 crore for B circle and | 0.5 crore for C circles and the other, the
value of the spectrum as determined by market prices. Trai has also
recommended that the period of the renewed license be 10 years.
Bharti, Vodafone and Idea will be the most impacted as they have above
6.2 MHz in most of the circles where they have spectrum and they are up
for renewal as early as 2015. Bharti and Idea each have five circles up for
renewal by December 2015 leading to a cash outgo of | 1116.7 crore and
| 8564.1 crore, respectively.
The present value of the outgo in the future for spectrum renewal as and
when they are due for Bharti, is | 13312.8 crore or a per share value of |
35.1, for Idea it is | 9097.1 crore or per share value of | 27.5 and for RCom
it is | 3941.7 crore or a per share value of | 19.1.
One nation – one license
Trai has recommended de-linking awarding of spectrum in future with
licenses. All the original holders of licenses upon renewal will be free to
apply for a unified license. The guidelines for such a license will be
recommended by Trai after a consultation process with all the
stakeholders before the end of December 2011. Such a move would
mean the end of roaming charges. This will negatively affect all the
telecom operators as revenues earned form roaming charges will be done
away with, impacting the EBITDA by ~4-6%. Idea would be the most
impacted. However, this could be compensated by increase in headline
tariffs and increase in tariff.
Spectrum usage charges
Trai has also recommended revising the spectrum usage charges. The
spectrum usage charges were meant to be revised every two years and
were last revised in February 2010, which came into effect from April 1,
2010. However, the matter is sub judice now. Once the matter is solved
by the court, Trai’s recommendations will be examined.
Spectrum usage charges, as per TRAI recommendations, both for GSM
and CDMA spectrum, will be at the rate of 0.5% for every MHz up to the
contracted spectrum (6.2 MHz for GSM and 5.0 MHz for CDMA) at the rate
of 1% for every MHz with respect to spectrum beyond the contracted
quantity, subject to a limit of 10% in respect of GSM and 7% in respect of
CDMA. Such a structure of spectrum usage charges will cost a higher
percentage of AGR for Bharti, followed by Idea while RCom will have a
minimum percentage of AGR charged.
Liberal M&A norms
Trai has found the consolidation of spectrum to be the need of the hour.
As on Q1FY12, the seven major players in the telecom sector had a
revenue market share of 93.8% while the six new players had a market
share of just 6.2%.
Previously, the norms said that the market share of the merged entity
cannot be grater than 40% in a particular circle. DoT had wanted it to be
reduced to 35% to prevent any kind of monopoly happening in the
market. However, Trai has recommended that when the market share of
the merged entity is below 35% of the subscriber base as well as AGR,
the merger can happen. However, if it is above 35% and below 60%, then
the case will be looked upon by the government after recommendations
from Trai. Cases where the market share of the merged entity goes
beyond 60% will not be entertained. The total spectrum held by the
resultant entity also cannot exceed 25% of the spectrum assigned in that
circle.
These M&A norms, if implemented, will certainly help consolidation in the
industry. The cap recommended by Trai for service providers is 10 MHz
for Delhi and Mumbai and 8 MHz in all other areas. The only way a service
provider can have more than the above-mentioned spectrum is in the
open market either by M&A or through auction of spectrum.
Trai may also recommend an exit policy for the licensees who want to
exit from the provisioning of telecom services under a license after
consultations with the stakeholders. In such a case the spectrum held by
the licensee will be surrendered and auctioned by the government in the
open market.
These norms will enable the small operators to either get merged or
acquired or quit the industry by taking the exit policy. In any case, the
industry is set for consolidation with small operators leaving the industry.
The return of pricing power to incumbents will also help the pace of
consolidation.
Bharti Airtel (Buy); Target Price: | 450/ share
The stock has been de-rated due to the dual impact of regulatory
overhang and hyper-intensive competition in the domestic market. We
expect Airtel’s valuation multiples to expand on account of reducing
regulatory uncertainty, improving key metrics and profitability. We expect
a higher EPS CAGR of 17.3% over FY11-14E against revenue CAGR of
14.5% over the same period primarily due to repayment of debt.
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate our
BUY rating on Bharti Airtel.
Key risks to our target price are unfavourable regulatory outcomes and
slower than expected improvement in African operations.
Idea Cellular (Hold); Target Price: | 99/ share
The company is the fastest growing player in the domestic industry. Idea
has gained maximum revenue share in the past few years. With reducing
network rollout intensity and 3G uptake, margins are expected to go
northwards for the company. However, Trai recommendations related to
spectrum pricing, if implemented in their current from, would have a
greater impact on Idea Cellular. This remains a near term overhang on the
stock.
Using the DCF methodology and assuming revenue CAGR of 12.6% over
FY11–20E and terminal growth of 3% thereon, we have arrived at a target
price of | 80/ share for the core business. We have valued the Indus
contribution at | 19/ share to arrive at a target price of | 99/ share. We
maintain HOLD rating the stock.
Reliance Communication (Sell); Target Price: | 84/ share
RCom has been struggling with its KPIs with a lesser proportion of active
subscribers in its subscriber base as compared to its peers and declining
traffic growth. To add to its woes, a huge debt remains a concern. This
has caused its capex guidance to be just | 1500 crore, which is way lower
than industry standards. However, if the company is able to strike a tower
deal, it will help address the huge debt concern.
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The telecom industry is coming out of the intense competition phase
highlighted in declining net adds, withdrawal of unviable customer
acquisition offers, emerging regulatory stability, price hikes by
incumbents and upward tick in ARPMs. We believe this is a good time to
buy into telecom stocks with a selective approach as companies are set
for a rapid jump in profitability over the next two years, led by growth in
revenue yielding traffic. Also, all telcos will witness declining capex
intensity, debt repayment and reduced interest costs. With more clarity
on NTP expected in a few months, the regulatory scenario seems to be
more stable now than what it seemed about a year ago. Airtel would
benefit from huge FCF to comfortably repay majority of its debt and
improving margins in the African business. It remains our top pick in the
sector with a target price of | 450. We expect Idea’s EBITDA to grow 1.9x
by FY14E led by increasing revenue share and lower network operating
costs. However, spectrum pricing may remain an overhang on the stock.
We reiterate HOLD with a target price of | 99. We r a t e RCom a s S E L L
due to huge debt levels. However, our view may change if some of the
several positive developments like higher external tenancy, monetisation
of tower assets and possible listing of undersea cable business fructify.
Slowing net adds; stabilising ARPM coupled with steady increase in MoU
Net adds have fallen significantly in the past months as new operators cut
down on capacity expansion. Incumbents would continue to witness
steady growth in subscribers and traffic. Idea, with increasing penetration
in new circles would witness fastest CAGR of 17.7% over FY11-14 to 591
billion minutes while Airtel (already the widest coverage) would be slower
at CAGR of 7.9% to 995 billion minutes. RCom (to lose out on minutes
share due to curtailed capex) would register minutes CAGR of 5.9% over
FY11-14E to 445 billion minutes. Going forward, we expect the ARPM to
rise marginally and stabilise at those levels in the near term.
Peak capex cycle over, debt to reduce
All the telcos are past their peak capex cycle with Bharti Airtel, Idea
Cellular and RCom guiding for capex of about | 10000 crore, | 4000 crore
and | 1500 crore, respectively, in FY12E. We believe all three telcos would
be generating free cash flow, going forward, to start repaying debt. This
would result in a significant reduction in interest costs. However,
significantly lower capex for RCom may impact network quality.
NTP – Overhang still remains but seems to be priced in…
Trai has come out with a New Telecom Policy, which has positives for
both incumbents and subscribers. We expect implementation of a
watered down version of the policy, which would impact industry players
relatively less. Nonetheless, Idea is most sensitive to current policy
recommendations. Per share impact for Airtel, Idea & RCom would be
about | 46.7 (10.4% of TP), | 32.9 (33.2%) & | 19.6 (23.3%), respectively.
New telecom policy
Trai has come up with a New Telecom Policy (NTP), which has something
for both incumbents as well as subscribers to cheer about. While NTP has
addressed the need for enhanced broadband penetration, increasing rural
teledensity and the need for additional spectrum, it lacks clarity on the
timeline for implementation of the same. Also, some of the issues like
spectrum refarming, which could have a huge impact on incumbents as
well as the government due to the huge cash outgo have a lot of
ambiguity related to process and timeline of implementation.
Although some of the guidelines of the draft of the NTP (like one-time
spectrum fees, spectrum renewal charges and higher spectrum usage
charges) could hurt the profitability of the incumbents in the near future,
provisions like liberal M&A norms and spectrum sharing will have a
positive impact on the incumbents. Though there is still lack of clarity in
the policy implementation, NTP would provide much needed stability to
the sector. We expect a watered down version of the policy to be
implemented, which would have relatively lesser outgo for the telcos.
One-time spectrum fees
Trai has recommended that no extra charges be levied upon the
incumbents who have spectrum up to 6.2 MHz in 1800 MHz band and up
to 5 MHz for CDMA as long as their existing licenses are valid. However,
for spectrum held in any circle beyond 6.2 MHz for GSM and 5 MHz for
CDMA, the company will have to pay excess spectrum charges.
The companies that plan to exit the industry and surrender spectrum in
1800 MHz will be allowed to do so. The spectrum surrendered will be
auctioned and the price would become the current price of the spectrum
and will be used for any transactions on the spectrum. However, if no
spectrum is surrendered then the spectrum in the 1800 MHz band will be
charged as per the table given by Trai. The spectrum in 900 MHz will be
1.5x that of 1800 MHz.
Exhibit 20: One time spectrum fees – according to Feb 2011 recommendations (| Crore)
Service Area Upto 6.2 MHz Beyond 6.2 MHz
Delhi 149.78 249.73
Mumbai 101.11 157.34
Kolkata 49.48 47.6
Maharashtra 117.14 374.47
Gujarat 149.87 355.37
Andhra Pradesh 153.77 431.95
Karnataka 136.16 345.92
Tamil Nadu including Chennai 187.38 426.05
Kerala 73.98 232.16
Punjab 72.86 180.56
Haryana 14.5 107.9
U.P (West) 60.11 252.55
U.P (East) 151.76 318.76
Rajasthan 106.03 278.84
M.P 87.71 254.45
West Bengal 44.79 216.96
Himachal Pradesh 9.34 28.12
Bihar 51.04 153.69
Orissa 24.33 73.26
Assam 10.4 31.33
North East 10.61 31.95
J&K 7.6 22.89
Total 1769.75 4571.85
Source: TRAI, ICICIdirect.com Research
Spectrum renewal fees
Trai has recommended that the original holders of licenses pay two
components of charges. One is a renewal fee, which will be | 2 crore for
Metro, | 1 crore for B circle and | 0.5 crore for C circles and the other, the
value of the spectrum as determined by market prices. Trai has also
recommended that the period of the renewed license be 10 years.
Bharti, Vodafone and Idea will be the most impacted as they have above
6.2 MHz in most of the circles where they have spectrum and they are up
for renewal as early as 2015. Bharti and Idea each have five circles up for
renewal by December 2015 leading to a cash outgo of | 1116.7 crore and
| 8564.1 crore, respectively.
The present value of the outgo in the future for spectrum renewal as and
when they are due for Bharti, is | 13312.8 crore or a per share value of |
35.1, for Idea it is | 9097.1 crore or per share value of | 27.5 and for RCom
it is | 3941.7 crore or a per share value of | 19.1.
One nation – one license
Trai has recommended de-linking awarding of spectrum in future with
licenses. All the original holders of licenses upon renewal will be free to
apply for a unified license. The guidelines for such a license will be
recommended by Trai after a consultation process with all the
stakeholders before the end of December 2011. Such a move would
mean the end of roaming charges. This will negatively affect all the
telecom operators as revenues earned form roaming charges will be done
away with, impacting the EBITDA by ~4-6%. Idea would be the most
impacted. However, this could be compensated by increase in headline
tariffs and increase in tariff.
Spectrum usage charges
Trai has also recommended revising the spectrum usage charges. The
spectrum usage charges were meant to be revised every two years and
were last revised in February 2010, which came into effect from April 1,
2010. However, the matter is sub judice now. Once the matter is solved
by the court, Trai’s recommendations will be examined.
Spectrum usage charges, as per TRAI recommendations, both for GSM
and CDMA spectrum, will be at the rate of 0.5% for every MHz up to the
contracted spectrum (6.2 MHz for GSM and 5.0 MHz for CDMA) at the rate
of 1% for every MHz with respect to spectrum beyond the contracted
quantity, subject to a limit of 10% in respect of GSM and 7% in respect of
CDMA. Such a structure of spectrum usage charges will cost a higher
percentage of AGR for Bharti, followed by Idea while RCom will have a
minimum percentage of AGR charged.
Liberal M&A norms
Trai has found the consolidation of spectrum to be the need of the hour.
As on Q1FY12, the seven major players in the telecom sector had a
revenue market share of 93.8% while the six new players had a market
share of just 6.2%.
Previously, the norms said that the market share of the merged entity
cannot be grater than 40% in a particular circle. DoT had wanted it to be
reduced to 35% to prevent any kind of monopoly happening in the
market. However, Trai has recommended that when the market share of
the merged entity is below 35% of the subscriber base as well as AGR,
the merger can happen. However, if it is above 35% and below 60%, then
the case will be looked upon by the government after recommendations
from Trai. Cases where the market share of the merged entity goes
beyond 60% will not be entertained. The total spectrum held by the
resultant entity also cannot exceed 25% of the spectrum assigned in that
circle.
These M&A norms, if implemented, will certainly help consolidation in the
industry. The cap recommended by Trai for service providers is 10 MHz
for Delhi and Mumbai and 8 MHz in all other areas. The only way a service
provider can have more than the above-mentioned spectrum is in the
open market either by M&A or through auction of spectrum.
Trai may also recommend an exit policy for the licensees who want to
exit from the provisioning of telecom services under a license after
consultations with the stakeholders. In such a case the spectrum held by
the licensee will be surrendered and auctioned by the government in the
open market.
These norms will enable the small operators to either get merged or
acquired or quit the industry by taking the exit policy. In any case, the
industry is set for consolidation with small operators leaving the industry.
The return of pricing power to incumbents will also help the pace of
consolidation.
Bharti Airtel (Buy); Target Price: | 450/ share
The stock has been de-rated due to the dual impact of regulatory
overhang and hyper-intensive competition in the domestic market. We
expect Airtel’s valuation multiples to expand on account of reducing
regulatory uncertainty, improving key metrics and profitability. We expect
a higher EPS CAGR of 17.3% over FY11-14E against revenue CAGR of
14.5% over the same period primarily due to repayment of debt.
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate our
BUY rating on Bharti Airtel.
Key risks to our target price are unfavourable regulatory outcomes and
slower than expected improvement in African operations.
Idea Cellular (Hold); Target Price: | 99/ share
The company is the fastest growing player in the domestic industry. Idea
has gained maximum revenue share in the past few years. With reducing
network rollout intensity and 3G uptake, margins are expected to go
northwards for the company. However, Trai recommendations related to
spectrum pricing, if implemented in their current from, would have a
greater impact on Idea Cellular. This remains a near term overhang on the
stock.
Using the DCF methodology and assuming revenue CAGR of 12.6% over
FY11–20E and terminal growth of 3% thereon, we have arrived at a target
price of | 80/ share for the core business. We have valued the Indus
contribution at | 19/ share to arrive at a target price of | 99/ share. We
maintain HOLD rating the stock.
Reliance Communication (Sell); Target Price: | 84/ share
RCom has been struggling with its KPIs with a lesser proportion of active
subscribers in its subscriber base as compared to its peers and declining
traffic growth. To add to its woes, a huge debt remains a concern. This
has caused its capex guidance to be just | 1500 crore, which is way lower
than industry standards. However, if the company is able to strike a tower
deal, it will help address the huge debt concern.
At the CMP of | 95, the stock is trading at 26.5x FY12E EPS of | 3.6 and
25.8x FY13E EPS of | 3.7. We have valued the stock using the DCF
methodology and arrived at a target price of | 84/share, assuming 4.8%
CAGR in revenue over FY11-FY20E and terminal growth rate of 3%. We
maintain our SELL rating on the stock.
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