>INDIAN TELECOM SECTOR: Policy is the key risk for Indian telcos

Cashflow cake in sight, but government demands a bigger slice


Indian telcos are forced to contend with significant policy flux in an improving competitive environment. We expect mobile revenues to grow at 15-16% YoY, aided by 3-4% growth in revenue/minute and 12-13% YoY growth in minutes. Higher tariffs should drive 200-400bps margin expansion by FY14E. However, we assume negative impact of policy shifts on incumbents as our base case. Based on strength of balance sheet, cash flows and relative impact of likely regulatory costs, our ladder of preference is Bharti, Idea and RCOM.


■ Bharti – Strong FCF and African operations would temper policy risk
Our Buy rating on Bharti reflects its strong competitive position and relative resilience to global factors. We highlight its improving business momentum in India, driven by tariff increases and 3G rollout, and solid progress in African operations. Our FY12E/13E/14E EPS estimates are Rs14.8/25/34.4. Key metrics to watch: India revenue growth (est: 15% YoY), FCF in African operations (est: $-500m). We maintain Buy (target price Rs420).


■ Idea – Robust performance but burden of regulatory costs could be onerous
Idea’s operating performance has been the strongest among incumbents. It has increased its revenue share and improved its cost position relative to sector leader Bharti. The two concerns on Idea are that compared to its peers it has: a) relatively higher impact of likely regulatory costs and b) a weaker FCF profile over the next three years. Our FY12E/13E/14E EPS estimates are Rs1.5/3.9/5.4. We maintain Hold (target price Rs105).


■ RCOM – Stabilising operations but debt burden constrains valuations
RCOM’s operations have stabilised, but it has been forced to constrain capex to generate cash. It is due to repay around $1.2bn in FCCBs in March 2012. While it is favourably placed with respect to policy issues, RCOM’s key challenge is to build momentum in its wireless business, where its EBITDA has been stagnant for the last seven quarters. Maintaining Hold (target price Rs80).


■ Three key policy issues for the incumbents (Bharti, Idea, Vodafone)
The cost of ‘excess spectrum’ and licence extension and a government decision on intra-circle data roaming are key focus areas. The estimated cost of excess spectrum/licence extension is Rs43/57bn for Bharti and Rs19/46bn for Idea. We factored excess spectrum cost in the EPS estimates but the cost of the licence extension will impact FY15E/16E cashflows. The policy decision on intra-circle roaming will effect the 3G investment case for the incumbents.


■ Incumbents likely to be left out of sector consolidation
It is increasingly clear that the incumbents would not be able to meaningfully participate in an industry consolidation. Rather, consolidation would provide additional strategic options for well-funded players such as Reliance Industries (RIL) to enter the telecom market in a more significant manner. The proposed guidelines on spectrum trading, refarming and auction of new spectrum bands (700Mhz) are also unfavourable to incumbents.


To read the full report: TELECOM SECTOR
RISH TRADER