>Indian Telecom Sector: Waves of destruction Strictly (ANTIQUE)

■ The competitive telecom space has seen intense tariff war, however, an unseen underlying trend is reshaping the business structure ranging from customer segmentation, distribution, product design. The sector would witness bouts of wars on different flanks and this would have a chain effect impacting Bharti’s leadership and increasing vulnerability of Idea and RCOM.

■ The government’s twin objective of revenue maximisation with lowest possible tariff levels increases the discomfort for investment thesis.

■ Sectoral strategy: We recommend SELL on this sector moving our focus from long term to near term.

• Bharti (TPINR278): Bharti, being the sector leader and having high PAT margin base, would be best suited for the long drawn war. But, the competitive intensity and no earnings growth visibility would warrant EV/EBITDA multiple in line with global peers 5x FY11 EV/EBITDA.

• Idea (TPINR48): Idea’s vulnerability is highest to ARPM and Spice yet to turnaround has very volatile earnings trajectory. Owing to revenue growth in new circles, higher support from tower business valuation and significant leverage to recovery, we value it at 6.5xEV/EBITDA.

• RCOM (TPINR145): RCOM faces significant pressure on existing GSM business, whereas GSM expansion is facing competition from new entrants and incumbents. The global business and tower valuations provide the key support, and thereby, we value the stock at INR145.

To read the full report: TELECOM SECTOR