Friday, April 9, 2010

>India Wireless: 3G Auctions(MACQUARIE RESEARCH)

The auctions for 3G and the Broadband Wireless Access (BWA) spectrum are set to start on 9 April 2010 (Detailed time table of auctions in Figure 5). We look at implications for Indian telcos and the likely bidding behaviour. We maintain our view that prices discovered from the auctions will likely surprise on the upside.

Prices likely to surprise on the upside given tremendous interest. We believe likely cash outflow for pan-India 3G and BWA spectrum to be ~US$2bn and ~US$750m-1bn, respectively. We expect fierce bidding given only 3 slots are available for 3G and 2 slots for BWA in most circles. We expect incumbents Bharti, RCOM and Vodafone to bid aggressively for pan-India 3G, Idea to bid aggressively in about 12-15 circles and Aircel to bid most aggressively in existing 2G strongholds numbering about 5-6 circles. Tata Teleservices (Not listed) is also likely to bid aggressively for 3G spectrum in about 15-16 circles, where they have already established a 2G GSM presence.

Auction guidelines validate our negative investment thesis on MTNL as it outlines that MTNL needs to match the highest bid price in both Delhi and Mumbai (We expect a US$750m combined outgo for the two cities). For the 3G slot reserved in each of the 22 circles, state-owned operators, MTNL and BSNL, would need to match the price discovered through the
auction process and are subject to the same payment terms as private telcos.

Bharti balance sheet will be stretched post Zain acquisition. We note Bharti’s balance sheet will be the most stretched in the sector (FY11E Net Debt/Equity of 1.4x and Net debt/EBITDA of 2.8x) post 3G auctions, assuming the Zain Africa acquisition goes through post regulatory approvals. (See Figure 1).

Commercial launch of 3G only in Dec 2010 or later. Even though auctions are being held in April, spectrum will likely not be made available for network rollouts before September 2010, and rollouts will take another 3-6 months.

Spectrum will be allocated through a simultaneous ascending e-auction comprising two stages. The ‘Clock Stage’ will establish the final winning bidders and a common winning prize for all lots of spectrum bands in a service area. The ‘Frequency Identification stage’ will be a random identification of frequencies performed automatically by Electronic Auction.

3G spectrum comes with stringent rollout obligations for winners. If the 3G winner does not achieve its rollout obligations (detailed on page 5), it shall be allowed a further period of one year to do so. On failure to do so, even within the extended period, the spectrum assignment shall be withdrawn by Govt.

Reiterate Underweight on India Telcos on bleak growth outlook and premium valuations. Expect wireless KPIs for listed telcos to continue to deteriorate for next two quarters; we see downside risks to consensus estimates for FY3/11E. Indian telcos trade at a significant premium to the region on EV/EBITDA with comparable growth and lower dividend yields - Bharti at 7x, Idea 5.8x, and RCOM 5.9x FY3/11E vs the Asia telcos average of 4.3x. We expect this premium to narrow as India’s growth premium subsides.

To read the full report: INDIA WIRELESS


Crude power. Cairn’s stock price has rallied strongly over the past four weeks driven by (1) the surge in global crude prices and (2) higher resources in its main Rajasthan block. We highlight that the current stock price is discounting US$93/bbl in perpetuity, which makes the risk-reward balance unfavorable, in our view. We maintain our SELL rating given potential downside of 19% to our 12-month DCF-based target price of Rs250. Key upside risk stems from the continued surge in crude price.

Current crude price not material for valuation; we assume long-term crude price of US$80/bbl
The recent rally in stock price (+17% since March 1, 2010) has been led by (1) a sharp rise in crude prices which have increased by US$9/bbl (+12%) over the same period and (2) higher resource base. We note that Cairn stock has very high correlation to crude oil prices, particularly since it is the only available play on crude oil prices in India currently. However, we would highlight that near-term crude oil prices do not have a material impact on Cairn’s valuation. We already factor long-term crude price (FY2013E and beyond) at US$80/bbl.

SELL, noting 19% potential downside to one-year fair valuation of Rs250
We find it very hard to justify Cairn’s current prices without assuming very high crude oil prices in perpetuity. We have given up trying to make sense of crude oil prices since there appears to be no links between fundamentals and prices. However, we highlight that Cairn’s current stock price is discounting US$93/bbl in perpetuity based on (1) recoverable reserves of about 1.4 bn bbls in its key Rajasthan block and (2) exchange rate of Rs45.3/US$ in the long term (from FY2013E). Exhibit 2 gives the crude price discounted at various levels of stock price.

A stronger rupee offsets the impact of higher crude prices to some extent
We expect revenues and earnings of Cairn India to be negatively impacted by an appreciation in
the value of the rupee versus the US dollar as it would lead to lower crude price in rupee terms. A Re1/US$ change will impact Cairn’s earnings by about 3-3.5% and would result in FY2011E and FY2012E EPS at Rs19.6 and Rs36.7 versus our base-case EPS estimate of Rs20.3 and Rs37.9.

Earnings revision due to stronger rupee
We have revised our FY2010-12E EPS to Rs6, Rs20.3 and Rs37.9 from Rs5.3, Rs21 and Rs38.7 to reflect (1) stronger rupee and (2) fine-tuned volumes. We have revised our rupee-dollar exchange rates for FY2011-12E to Rs45/US$ and Rs45.25/US$ versus Rs46/US$ and Rs46/US$ previously. We have revised our rupee-dollar exchange rates for FY2013E and beyond to Rs45.25/US$ versus Rs46/US$ previously.

To read the full report: CAIRN INDIA


Demand-supply economics favourable in India
World Travel & Tourism Council (WTTC) expects travel and tourism (T&T) demand in India to grow at 8.2% annually till 2019, the highest growth after China in the big countries league. Owing to various supply bottlenecks, the 13% CAGR growth till FY12E in demand of premium category rooms is expected to outpace the 10% CAGR growth in supply; HVS estimates ongoing construction work on only 60% of the 1,00,000 announced rooms. Demand is expected to remain robust as the Indian economy gathers pace and with many sporting events lined up in the next 12-18 months.

ARRs to rise and ORs to stay firm till FY12
Owing to the increasing demand across many categories/locations, we expect occupancy rates (ORs) to firm up to 65% and further to 70% in FY11E and FY12E, respectively. After a difficult H1FY10, when average room rates (ARRs) declined as much as 35-40% in many locations, marked improvement witnessed by hotel companies in Q3FY10 instills confidence to estimate an increase of 10% each in FY11E and FY12E. By 2012, we estimate addition of 9,000-10,000 rooms in the five star and above category. We expect above 85% of the incremental capacity to be utilised due to better demand.

■ International hotel chains eye Indian hospitality
According to WTTC, India’s T&T market is expected to grow more than 100% by 2018 to USD 61 bn against USD 28 bn in 2008. To tap this opportunity, ~25 major international hotel companies like Accor, Marriott, Claridges, Shangri-la, and Carlson Hospitality are looking to enter India, either independently or in collaboration with a local party. Also, GoI’s conscious efforts towards promoting India as a leading leisure destination are likely to increase the country’s share in the foreign tourist arrivals (FTAs).

Outlook: Good long-term opportunity
Considering that the US offers 40x and China 10x hotel rooms as compared to the 110,000 hotel rooms in India, the Indian hospitality industry has huge potential to grow structurally. However, high land prices, low FSI, plethora of taxes, and low incentive from government are some key hurdles for hotel companies in India. In this report, we have discussed listed hospitality companies. We initiate coverage on Cox & Kings and EIH with ‘HOLD’ recommendations, and on Hotel Leela with ‘SELL’ recommendation. Also featured in this report are Indian Hotels (BUY), Mahindra Holidays & Resorts India (SELL), Asian Hotels (NOT RATED), and TAJ GVK (NOT

To read the full report: HOTELS & TOURISM

>India Financial Sector: Entering a strong loan-growth cycle (DAIWA)

Credit likely to see a strong pick-up in FY11: High inflation has historically been followed by a strong pick-up in loan growth. The announcement of fresh investment projects totalling Rs3.8tn (US$88bn) during the December quarter was the highest for a quarter over the past two years. We project credit growth to touch 22% YoY for FY11 and remain positive on the sector.

Underperformance of the public-sector banks (PSBs) appears overdone: We believe that the underperformance of the PSBs against the private banks over the past couple of months is overdone, as we expect the worst of the asset-quality deterioration to be over by June 2010, and believe that the 10-year government-bond (G-Sec) yield may peak at 8-8.2%, after rising by almost 100bps over the past year. The 10-year G-Sec yield seems to be already discounting at least a 25bps interest-rate/cash-reserve-ratio (CRR) hike in April 2010. We have upgraded our rating for State Bank of India (SBI) to 1 (Buy), as we believe NPL and MTM concerns have been overdone.

We expect private banks to continue to outperform: HDFC Bank, Housing Development Finance (HDFC) and Axis Bank remain our top picks among the private players. We are bullish on Power Finance Corp (PFC) and Rural Electrification (REC), as we expect their loan growth to surprise on the upside, and offset the potential compression in interest spreads in FY11.

To read the full report: FINANCIAL SECTOR