>INDIA TELECOMS: Deleveraging Is Key

• 3G and broadband auction stretches balance sheets short-term: We estimate average net debt to EBITDA for Bharti, RCOM and Idea at 3x in F2011, up from 1.5x currently. After that we expect all to be FCF-positive and lower their debt burden in two years to 1.8x.

• Unlocking value of towers could alleviate debt concerns: We estimate that the value of towers is equivalent to 31%, 54% of market cap for Bharti, Idea respectively and 59% of RCOM’s EV.

• Tariff wars are subsiding: No tariff cut in more than 2 quarters

• Overweight Bharti : Bharti has the strongest balance sheet among our coverage companies, its peak net debt/EBITDA of 2.8x should halve in two years.

• Overweight Idea: Idea’s future capex could be less than the industry average due to higher spectrum per sub; the worst quarter in terms of peak losses is behind us.

• Underweight RCOM: Lower ARPU estimates and forex losses lead to earnings cut of over 25% for F2011/12E. RCOM will likely remain costliest Indian telco even after demerger of towers to Global Tele Infra Ltd. (GTIL)

• Key Risks: 1) Entry of Reliance Industries in Broadband Wireless; 2) TRAI recommendations on excess spectrum charges, etc. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

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