>INDIA TELECOMMUNICATIONS: 3G Auctions Done; Bharti Is Our Key Pick for Four Reasons

We upgrade our view on the India telecom industry to In-Line for three reasons: 1) The 3G auction is behind us; 2) tariff wars seem to have subsided; and 3) the F4Q10 results surprised us as they show revenue growth driven by higher minutes of usage (MOU).

The 3G auction concluded at the end of day 34 of the bidding and 183 rounds. The overall license fee stands at Rs168bn (US$3.6bn), up 379% from the reserve price of Rs35bn (US$755mn). Bharti, Aircel, and RCOM won 3G bids in 13 circles each, Idea won in 11 circles, and Vodafone and Tata won in 9 circles each. We estimate the government could raise ~Rs921bn
(US$20bn) from the 3G and BWA auctions or 1.2% of the country’s GDP.

Tariff wars behind us: In the five months since the launch of “per-second billing” by Tata and the “Simply Reliance” plan by Reliance Communications (which lowered all tariffs by 30%), we have not seen any further reductions in tariffs in new launches. Most of the players now have similar tariff packages. Hence, there is not much differentiation for a consumer to choose one operator over the other, barring nationwide footprint and service. However, post-paid tariffs are still costlier than pre-paid tariffs, and we expect them to fall in the next quarter.

Higher MOUs drive F4Q10: The group posted revenue growth of 1.7% QoQ; and absolute EBITDA stopped falling. The growth was driven by overall minutes, which rose 11% sequentially and over 30% YoY. Capex fell to 15-20% of sales; down from over 30% YoY.

To read the full report: INDIA TELECOMMUNICATIONS

>REC (INDIA INFOLINE)

■ Loan assets were up 30% yoy; exposure towards private sector entities has increased to 6.5%.

■ Sanctions grew at a modest 11% yoy rate; disbursements, however, remained healthy at 23% yoy.

■ Margins improved on account of lower cost of funds. Higher pricing power and increasing private sector exposure would enable maintain margins at current levels.

■ Net interest income was up 48% yoy, net profit too reported a sturdy 45% yoy growth.

■ Infra-financing nomenclature to enable increase exposure limits. Maintain BUY.

To read the full report: REC

>How inflation can destroy shareholder value? (MCKINSEY)

If inflation rises again, companies will have to do more than just match it to keep up—they’ll have to beat it.

Whatever role low interest rates and high government spending may have played in helping
economies to stabilize during the recent global recession, they now have companies, investors, and policy makers alike on the lookout for inflation to come roaring back. Some economists are already warning of a return to the levels of the 1970s, when inflation in the developed countries
of Europe and North America hovered at around 10 percent. That’s not uncommon in Latin America and Asia, where emerging economies have seen double-digit inflation for many years.

At first glance, the effects of inflation on a company’s ability to create value might seem negligible. After all, as long as managers can pass increased costs on to the customer, they can keep inflation from eroding shareholder value. Most managers believe that to achieve this goal, they need only ensure that earnings grow at the rate of inflation.

Yet a closer analysis reveals that to fend off inflation’s value-destroying effects, earnings must
grow much faster than inflation—a target that companies typically don’t hit, as history shows. In
the mid-1970s to the 1980s, for instance, US companies managed to increase their earnings per
share at a rate roughly equal to that of inflation, around 10 percent. But to preserve shareholder
value, our analysis finds, they would actually have had to increase their earnings growth by
around 20 percent. This shortfall was one of the main reasons for poor stock market returns
in those years.

Not just a rising tide
Inflation makes it harder to create value for several reasons, especially when its annual growth rate exceeds long-term average levels—2 to 3 percent— and becomes unpredictable for managers and investors. When that happens, it can push up the cost of capital in real terms1 and lead to losses on net asset positions that are fixed in nominal terms. But inflation’s biggest threat to shareholder value lies in the inability of most companies to pass on cost increases to their customers fully without losing sales volumes. When they don’t pass on all of their rising costs, they fail to maintain their cash flows in real terms.

To read the full report: INFLATION

>Enabling Growth in Promising Indian Companies (KPMG)

Background: India has a very vibrant Venture Capital (VC) / Private Equity (PE) industry with USD 32.5 billion invested across more than 1500 VC/PE deals from January 2006 till date.
It is estimated that currently there are over 137 domestic and 135 foreign PE fund managers in India.

Over the last three years, VC/PE investments were the equivalent of 33 percent to 72 percent of the total equity raised from primary markets.

Importance of VC/PE investments for Indian companies
Economists estimate that India needs about USD 1.3 trillion dollars of investment over the next three years to sustain a GDP growth of 7-9 percent. This translates to USD 60-100 billion of VC/PE investments requirement over three years, against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31, 2010.

A study conducted in 2009 by Venture Intelligence on the impact of PE in India assessed how PE-funded companies have performed vis-à-vis non-PE funded companies in the same industry over eight years from 2000-2008. The study found that PE boosts the Indian economy by creating value for corporate India. This is through higher growth in sales and profitability of PE-funded companies; higher R&D spends which fuels greater innovation, and higher wage payment as compared to non PE funded companies.

To read the full report: INDIAN COMPANIES