>INDIAN TELECOMMUNICATIONS (MORGAN STANLEY)

Tariff Wars Not as Fierce as Expected; Upgrade to In-Line

Upgrade sector to In-Line: We are raising our estimates of India’s average revenue per minute (ARPM) by 5/7% for F2010/F2011 and becoming more constructive on the sector. We still expect drops of 15% pa in average revenue per unit (ARPU) and 9.9% in ARPM for the industry as a whole in that period.

3G is a F2010 phenomenon: We believe each operator will invest US$1bn for a pan-India footprint; producing US$5 billion income for the government. Higher industry capex is likely to lower return on capital employed. The bright side would be a wider spectrum.

F1Q10 results to be dampened by lower incoming interconnect, despite 9% growth in subscribers: However we expect margins to improve due to higher on-net calls and a balanced incoming to outgoing traffic.

Reiterate Overweight on Bharti: We increase both our EBITDA and net profit estimates by 1% for F2010 and 3% for F2011 and expect 17% CAGR for F2009-11E EPS; MTN overhang is major short-term risk.

Upgrade RCOM to Equal weight: RCOM has underperformed the market by 15% YTD, 40% in 12 months, and we believe most risks are now factored in. We lower our estimate of cost of capital and raise our target price to Rs305/share. RCOM is seeking approval from shareholders to issue equity shares to qualified institutional buyers, to fund part of its 3G capex.

Still Underweight Idea but raise EBITDA estimates by 6% for F2010 and 4% for F2011 on the back of higher margins. Also increase our target price to Rs63. Idea is the costliest Indian telco stock at 17.5x F2011e earnings; hence our Underweight call.

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