>TATA TELESERVICES (CITI)

Sell: 1Q Trend In-Line With Peers; Lower Rev/Min & MoU, Margins Up

■ Target price upgrade on potential GSM upside and lower risk premium — We raise FY10E-11E EBITDA forecasts by 1%-11% giving TTML the benefit of: 1) increasing sub/rev share from GSM launch, and 2) better usage versus CDMA. Our new target price of Rs26 (from Rs12) is based on revised EBITDA forecasts and a WACC reduction. We maintain a Sell rating on TTML given high valuations (imputed target multiple of 12x FY10E is at a 20-30% premium to larger peers) and execution risks in its dual network strategy.

■ High funding but manageable — Capex guidance stays at Rs10bn (only the active portion), resulting in FY10E net debt/EBITDA of 5.4x. However, we believe that high leverage is no longer a big concern given NTT DoCoMo’s strategic interest in TTML. It also reduces constraint on expansion plans and 3G.

■ GSM launch in 2Q — Management indicated GSM launch in August 2009. However, the spurt of launches in the past 1-2 quarters and expected launches by other entrants during FY10 raises questions on the NPV accretion, especially given the high penetration in Mumbai circle.

■ 1Q EBITDA in-line — 1Q EBITDA at Rs1.5bn was in-line as a sharp fall in MoU and the expected Rev/min decline (4p, o/w 2p was due to termination cut) was offset by the sharp margin expansion. EBITDA margins expanded 440bps, mainly from decline in SG&A besides the termination cut (100bps). MoUs continue to fall as a result of: 1) economic slowdown, and 2) impact of dual SIM usage especially in Mumbai. The net profit loss in 1QFY10 was Rs343m.
Meanwhile capex recovery at ~6% for the towerco appears lower than peers.

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