>India Telecoms (HSBC)

All spectrum is not created equal....

• Lower spectrum (900 Mhz) is better than higher spectrum (1800 Mhz) – larger cover area-fewer base stations

• Bharti’s greater access to 900 MHz drives longer-term margin benefits of c12-20% and allows for higher market share in rural India

• We are cautious on the sector given the competitive environment, with Bharti as our only OW(V)

Spectrum is the critical issue for the long-term success-failure of Indian telecom operators. Spectrum constraints are a structural impediment to industry growth, but there are significant differences in both the quantity and quality of spectrum by operator. This report analyzes how differences in the quality of spectrum will impact subscriber growth, profitability, and industry structure.

We argue 900 MHz GSM spectrum is the most attractive mobile wireless spectrum in India given the combination of larger coverage area and lower base station requirement. Our analysis indicates that 900 MHz operators have 12-20% higher EBITDA margins than 1,800 MHz operators. The structural spectrum advantages also result in lower capex and better balance sheets.

Bharti is the best positioned wireless operator in India vis-a- vis this spectrum advantage, with 900 MHz spectrum in 13 service areas vs. RCOM with 8. This spectrum advantage will be
particularly important in rural India, given low population densities and incomes. Roughly 70% India’s population is rural and rural subs growth is the primary, near to medium term growth driver of Indian telco earnings.

We are cautious on the Indian telcos sector given the damage caused by RCOM’s aggressive GSM roll-out and high level of regulatory uncertainty. We believe spectrum, coverage and balance sheet constraints will drive industry consolidation on a 2-4 year view. Bharti retains significant structural advantages, but the price war and rupee depreciation will impact Q4 earnings. We retain our Neutral (V) rating on RCOM, given our scepticism on its GSM strategy, tower roll-out and capex guidance. We also retain our Neutral (V) on Idea Cellular, MTNL and Underweight (V) on Tata Tele Maharashtra.

To see full report: INDIA TELECOMS