Friday, October 9, 2009


Downgrade to UW(V): RCOM gets defensive
  • RCOM has cut its outgoing call tariffs by c35%, a move driven by recent sector-wide tariff cuts
  • We do not expect the price cut to be offset by elasticity and subscriber growth: we reduce FY11e EPS by c5%
  • Downgrade to UW(V) from N(V); cut TP to INR227 (INR280)
Event: RCOM’s move to cut tariffs by c35% is significantly negative; we view it as an acknowledgement of the risk of CDMA market share loss. We believe the move is not in isolation, but rather a response to meet internal growth targets and reflects rapidly deteriorating industry pricing dynamics. The read-across for Bharti Airtel and Vodafone is negative, in our view, as they may have to respond with cuts in roaming rates to retain their high-end subscriber and revenue market shares. We think the tariff war will continue across the sector, and expect headline rates to stabilise at c10% lower (ie, local call tariff: INR0.4; STD: INR0.5) over the next six months.

Impact: After assuming a part-offset from usage elasticity and a higher rate of subscriber additions, we have cut our FY11e EPS estimates by c5%. Our numbers do not capture the shift to a per-second billing regime, which would imply c12% exposure to FY11e revenues and 20% exposure to FY11e earnings. Given its new entrant status in the GSM space and structural constraints with spectrum in the 1800 MHz band, we believe RCOM had little choice after the recent price cuts by new entrants and market share gains by Tata-DoCoMo. Besides, upsides are limited for RCOM, as these rates are likely to be matched by the new entrants soon.

RCOM needs higher capex:
We maintain that RCOM’s ability to capture subscriber growth from rural and semi-urban centres will be constrained by its low tower base (currently 50,000). Thus, we do not believe RCOM is best placed to cut capex and generate growth. We do not think RCOM is well placed to weather the increasing competitive intensity, given its stretched balance sheet, thin tower base and sub-optimal 1800 MHz spectrum in 15 new GSM markets.

Downgrade to UW(V): We cut our target price to INR227, which implies 11.3x FY11e PE (c50% discount to Sensex) and 6.7x EV/EBITDA. We downgrade our rating, given the pricing pressure and structural limitations to weather the competitive intensity.