Wednesday, July 14, 2010

>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.

To read the full report: INDIA TELECOM