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Valuations rich, Street expectations a bit misplaced; downgrade to SELL. We continue to find fresh data tenancy euphoria misplaced and the valuations, driven by this euphoria, rich. Our operating earnings estimates are broadly unchanged post a broadly in-line 3QFY15. DCF rollover to December 2016 (from March 2016) does drive an increase in our target price on the stock to `310 (from `270). However, the recent sharp run-up drives a downgrade to SELL from REDUCE.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
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Fresh data tenancies from incumbents – our take on potential and timing We have a fundamental disconnect with a majority of the Street on the potential and timing of fresh 3G/4G tenancies from incumbents. Wireless data has hit the J-curve in India with the incumbents reporting nearly 100% data volume growth yoy. Data adoption driving data capex driving data tenancies driving accelerated revenue growth for tower companies is a natural and appealing narrative, we appreciate. However, as always, the devil is in the details. The extent of revenue growth kicker from data tenancies (of incumbents; R-Jio tenancies will be a growth kicker as their tenancies are all fresh; our focus is on incumbent operators here) will depend on what proportion of the data tenancies from incumbents are in the form of loading and what proportion are fresh – fresh tenancies (on existing towers) are a lot more value-accretive than loading tenancies. Now, we (in contrast to the consensus) believe that a bulk of data tenancies for the next few years will be in the form of loading tenancies. We do not dispute the theory that a 2100 (3G spectrum band in India) MHz network would need more tenancies for coverage than an 1800 or a 900 one (2G GSM bands in India). However, this is purely on coverage; what matters is the density of on-the-ground 2G networks of the incumbents – this density includes coverage and capacity both. We illustrate with an example (and would request you to make the effort we are asking you to) – please take a look at Idea’s cell site network map in Mumbai at http://www.ideacellular.com/wps/wcm/connect/6c6f40b7-b247-467f-9a44- e78a3c77e818/MU_coverage.pdf?MOD=AJPERES&CACHEID=6c6f40b7-b247-467f-9a44- e78a3c77e818,. Idea runs a 2G-only 1800 MHz network in Mumbai. TRAI data suggests that Idea had 3,271 cell sites in Mumbai at end-Sep 2014 (Vodafone, which runs a 900 MHz 2G network, had 4,395 and Bharti, on 1800, had 3,865). Point we are making is this – pick any area on the map and a quick glance of the map with Google maps open on the side will tell you how close these cell sites really are. Coverage requirements do not need the cell sites to be this close; such density is capacity-led. Pure coverage math of 2100 versus 900/1800 or 1800 versus 900, the key driver of ‘fresh 3G/4G tenancy’ argument, is not valid, in our view. Bottom-line: the dense 2G network does not leave much physical space for fresh 3G/4G sites (without risking interference issues) in cities – a point Idea management also alluded to, in the 3QFY15 earnings call. Our analysis, we believe, would hold valid for most Tier-I/II cities in India (if valid for Mumbai!).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
Valuations rich, Street expectations a bit misplaced; downgrade to SELL. We continue to find fresh data tenancy euphoria misplaced and the valuations, driven by this euphoria, rich. Our operating earnings estimates are broadly unchanged post a broadly in-line 3QFY15. DCF rollover to December 2016 (from March 2016) does drive an increase in our target price on the stock to `310 (from `270). However, the recent sharp run-up drives a downgrade to SELL from REDUCE.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Fresh data tenancies from incumbents – our take on potential and timing We have a fundamental disconnect with a majority of the Street on the potential and timing of fresh 3G/4G tenancies from incumbents. Wireless data has hit the J-curve in India with the incumbents reporting nearly 100% data volume growth yoy. Data adoption driving data capex driving data tenancies driving accelerated revenue growth for tower companies is a natural and appealing narrative, we appreciate. However, as always, the devil is in the details. The extent of revenue growth kicker from data tenancies (of incumbents; R-Jio tenancies will be a growth kicker as their tenancies are all fresh; our focus is on incumbent operators here) will depend on what proportion of the data tenancies from incumbents are in the form of loading and what proportion are fresh – fresh tenancies (on existing towers) are a lot more value-accretive than loading tenancies. Now, we (in contrast to the consensus) believe that a bulk of data tenancies for the next few years will be in the form of loading tenancies. We do not dispute the theory that a 2100 (3G spectrum band in India) MHz network would need more tenancies for coverage than an 1800 or a 900 one (2G GSM bands in India). However, this is purely on coverage; what matters is the density of on-the-ground 2G networks of the incumbents – this density includes coverage and capacity both. We illustrate with an example (and would request you to make the effort we are asking you to) – please take a look at Idea’s cell site network map in Mumbai at http://www.ideacellular.com/wps/wcm/connect/6c6f40b7-b247-467f-9a44- e78a3c77e818/MU_coverage.pdf?MOD=AJPERES&CACHEID=6c6f40b7-b247-467f-9a44- e78a3c77e818,. Idea runs a 2G-only 1800 MHz network in Mumbai. TRAI data suggests that Idea had 3,271 cell sites in Mumbai at end-Sep 2014 (Vodafone, which runs a 900 MHz 2G network, had 4,395 and Bharti, on 1800, had 3,865). Point we are making is this – pick any area on the map and a quick glance of the map with Google maps open on the side will tell you how close these cell sites really are. Coverage requirements do not need the cell sites to be this close; such density is capacity-led. Pure coverage math of 2100 versus 900/1800 or 1800 versus 900, the key driver of ‘fresh 3G/4G tenancy’ argument, is not valid, in our view. Bottom-line: the dense 2G network does not leave much physical space for fresh 3G/4G sites (without risking interference issues) in cities – a point Idea management also alluded to, in the 3QFY15 earnings call. Our analysis, we believe, would hold valid for most Tier-I/II cities in India (if valid for Mumbai!).
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05022015pu.pdf
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