>Telecom Sector (ICICI SECURITIES)

Rural, the reigning flavour

* Rural offers vast growth opportunity
* Tower – Shaky foundation with low sharing and likely overbuild
* New entrants – Short-term disruption, long-term consolidation
* BUY on Bharti Airtel; HOLD on Reliance Communications & Idea Cellular

The Indian Telecom sector is at a critical point as net adds approach peak and competition intensifies. We expect a tussle between incumbents & new entrants, GSM & CDMA services and for 3G licences. Amidst all this, rural India offers telcos a new leg of growth as they extend coverage to hinterlands. We expect that by FY15E, rural net adds will contribute ~45% to total net adds. Though tower sharing is in the spotlight, we expect modest value creation from tower companies as incumbents will likely use captive tower companies, leading to overbuild and low sharing ratio for the industry. We are bearish on new entrants and expect consolidation in due course.

We initiate coverage on Telecom with a Neutral stance as net adds slow down and competition rises, though growth opportunities abound in rural India. We recommend cherry picking among telcos as individual company dynamics outweigh sector dynamics. We initiate coverage on Bharti Airtel (BAL) with BUY and on Reliance Communications (RCom) and Idea Cellular (Idea) with HOLD.

* Mobile subscriber growth – Running out of steam. Mobile subscriber additions in India are likely to slowdown FY10 onwards as urban penetration has become high and mobile operators try to maintain momentum by expanding into rural areas. We estimate the Indian mobile penetration to rise to 64% by FY15E. Growth, going forward, is likely to depend on the pace at which telcos extend coverage to low density rural areas.

* Rural India – Small part of a large number is still large. Rural India offers unbridled growth potential, accounting for 70% population, 56% income and 64% expenditure. We expect 33% teledensity in rural India by FY15E, driven by coverage and rising affordability. However, difficulty in expanding network coverage to rural areas will pose a challenge to achieving high rural penetration.

* Tower sharing – Shaky foundation. We expect the tower sharing ratio in India to be a modest 2.3x by FY15E as tower companies will essentially cater to in-house demand. The tower sector is progressing towards an overbuild, though the ongoing credit crunch might reduce the likelihood.

* Valuations – BUY BAL; HOLD RCom & Idea. We recommend a selective approach for investing in telecom. BAL offers unhindered growth as the company shifts focus to rural India. We believe RCom’s dual network approach has long-term revenue potential though on high costs. Idea offers limited returns as it is bearing the costs of expansion into new circles.

To see full report: TELECOM SECTOR