Friday, March 26, 2010

>TELECOM SECTOR: More stability now, but risks remain (NOMURA)

■ Little noise on competition, but worst may not be over yet
From our recent meetings with operators, regulators and investors in India last week, we believe the operating environment and sentiment are relatively more upbeat. There have been no recent launches and no one player is leading on price. A new issue is that the Department of Telecommunications is requiring approval on all equipment purchases, forcing some new players to delay circle launches.

Rising optimism on 3G auctions
3G auctions are scheduled for early April, and the consensus seems to be “it will happen this time”. Prices are uncertain, but we expect most carriers will bid – even the new operators may bid selectively. There is expectation it could lead to another round of price wars or carriers moving to “bucket-plan” models given the excess capacity generated. We expect limited incremental data growth in the near term.

Amendments to M&A norms likely
We understand from discussions with TRAI that some amendment to the M&A norm could be announced this month. Various criteria are being reviewed –– a 40% limit to market share and a 15Mhz cap on spectrum per circle could remain. Amendments will likely be perceived positively, but any near-term consolidation is unlikely. Our talks with various carriers suggest there are now more buyers than sellers. New operators like Uninor are bullish on their growth prospects. Besides,
we believe their valuations are debatable given the lack of unique subscribers.

IDEA a relative play
We begin coverage on IDEA today with a BUY and it is our preferred pick (see our report, A timely IDEA, for more details). It appears to be executing consistently, its financials are improving, and there is an element of M&A surprise. For Bharti, Zain is still a bit unknown and the deal seems likely to go ahead, which, in our view, will squeeze earnings in the near term. We think RCOM’s execution remains questionable. 3G auction prices can be expected to stretch balance sheets for all carriers.

To read the full report: TELECOM SECTOR