Telecom -Competitive/regulatory headwinds persist; Industry taking corrective measures:: Motilal Oswal

We hosted Bharti Airtel, Idea Cellular, and Reliance Communications at the Motilal Oswal 8th Annual Global Investor Conference
2012. Mr Akhil Gupta of Bharti Airtel and Mr Himanshu Kapania of Idea Cellular also presented at the CEO Track. Key highlights:
 The industry is taking corrective measures to contain channel commissions; sustenance remains key.
 Driving revenue growth could be challenging in the current environment.
 Spectrum pricing issue to be addressed once 2G auction concludes.
 Placing Neutral rating on Bharti; maintain Buy on Idea, Neutral on RCom.

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Industry taking corrective measures to contain
channel commissions; sustenance remains key
 GSM incumbents have reduced the channel
commissions paid for subscriber acquisitions from
August 2012 which should drive reduction in cost of
customer acquisition (COCA).
 We understand that the operators would be
refraining from 'negative landing' so as to rationalize
the incentive structure and discourage mis-selling
by the channel.
 If sustained, this initiative should alleviate margin
pressure by controlling 'rotational churn' but would
also impact subscriber additions/traffic/revenue in
the near-term.
 Given the mixed success of prior corrective actions
like tariff increases undertaken in July 2011, we
believe sustenance of these measures in the current
hypercompetitive environment would be the key.
Driving revenue growth could be challenging
 We expect monthly subscriber additions and 2Q
traffic/revenue growth to remain muted given
industry initiatives to control sales and distribution
expenses. Our channel checks confirm sluggish
traffic trends in 2QFY13 due to seasonality and
corrective measures taken on the COCA front.
 While reduced channel commissions should support
margins (our calculations suggest potential cost
savings of ~100bp), it will likely be offset by negative
operating leverage from muted revenue growth in
the near-term.
Spectrum pricing issue to be addressed once 2G
auction concludes
 The industry expects uncertainty on spectrum pricing
to be conclusively resolved post the 2G spectrum

auctions scheduled in November 2012.
 Most operators are expected to follow a circle wise
strategy in the auction.
 Apart from the final auction price, we believe the
key factors to watch out for are: (1) Approach of major
incumbents towards auction participation (given
their stance that reserve price is exorbitant), and (2)
Potential participation of Reliance Industries.
Placing Neutral rating on Bharti; Maintain Buy on
Idea, Neutral on RCom
 Neutral on Bharti: We are placing a Neutral rating on
Bharti (Under Review post 1QFY13 results) as
valuations (6.7x FY13 EV/EBITDA) are fair given
sluggish revenue growth outlook/regulatory
concerns in India and macro issues/margin pressure
in the Africa business. Our FY13 estimates of 3%
EBITDA growth and third consecutive year of PAT
decline reflect continued headwinds.
We believe that any meaningful recovery in the
Indian wireless business would now be possible only
from 4QFY13/FY14 led by potential industry
consolidation post the 2G spectrum auction. Our
target price of INR265 for Bharti is based on 7x FY14
EV/EBITDA for India & SA, 5x FY14 EV/EBITDA for
Africa, and INR142b potential spectrum liability.
 Maintain Buy on Idea (trades at 6x FY13 EV/EBITDA)
as it remains better placed to negotiate industry
headwinds given relatively strong balance sheet and
continued above industry growth driving market
share gains.
 Maintain Neutral on RCom (trades at 6.7x FY13 EV/
EBITDA).