Sector update | 10 May 2012

Telecom
COAI presentation to Government
Claims TRAI recos imply 30p/min increase in outgoing tariffs v/s TRAI's calculation of 3.6p/min

The GSM industry association, COAI (Cellular Operators Association of India) has released its presentation made to the Communications Minister, Mr Kapil Sibal, on 8 May 2012. According to COAI, TRAIs recent recommendations on spectrum auction will lead to an increase in outgoing tariffs by 30p/minute almost 8x TRAIs calculation of 3.6p/minute. An additional 30p/outgoing minute outlay would reflect an increase of ~40% on the current estimated revenue per outgoing minute of 70-75p for GSM incumbents (RPM of 42-44p). COAI has cited several fallacies in TRAIs calculations, including the following: (1) TRAIs MOU assumptions include incoming minutes, which are nonchargeable at the customer-end, (2) lower spectrum assumed by TRAI v/s assigned quantity, (3) no provision for further spectrum requirement to support assumed MOU growth, (4) spectrum requirement for future data traffic not considered, (5) ignoring the impact of revenue sharing license fee and service tax, and (6) no impact of price elasticity built into TRAI calculations. COAI estimates that proposed re-farming would result in ~INR1,250b incremental capex and ~INR250b asset write-off for the industry (mainly Bharti, Idea, BSNL/ MTNL, Vodafone, and Aircel). We continue to believe that TRAI recommendations are impractical and would face stiff resistance from the industry. The government is expected to arrive at a conclusion on spectrum auction soon, given the Supreme Court deadline of 31 August to complete 2G auction. We do not rule out a prolonged legal battle, given significant divergence in the stance of the industry and the government/regulator. While the regulatory environment remains challenging, our target price for Bharti/Idea already incorporates regulatory risk outlay of INR142b (INR37/share) for Bharti and INR121b (INR37/share) for Idea. Over FY12-14, we expect 18/26% EBITDA CAGR for Bharti/Idea, led by 10/14% traffic CAGR and 2/2% RPM CAGR in the India wireless business. Reiterate Buy on Bharti, with a target price of INR390, and Idea, with a target price of INR100. Maintain Neutral on RCom.

Comparative valuations
CMP (INR) 310 79 68 Rating TP Upside EV (INR) (%) (USDb) Buy 390 25.8 22.2 Buy 100 26.0 4.9 Neutral 85 24.6 2.6 FY11 19.5 29.0 9.4 P/E (x) FY12E 27.6 36.1 18.1 FY13E 17.0 16.0 12.2 EV/EBITDA (x) FY11 FY12E FY13E 9.0 7.9 6.4 9.7 7.7 5.6 7.0 7.8 6.1 EV/Sales (x) FY11 FY12E FY13E 3.1 2.7 2.3 2.4 2.0 1.6 2.2 2.5 2.1 Source: Company/MOSL

Bharti* Idea RCom

Shobhit Khare (Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428

Telecom

COAI calculations to ascertain true tariff impact @ TRAI reserve price (p)
Tariff Impact as per TRAI - A 3.6 Add back non-voice component not included - B 0.8 Tariff impact as per TRAI including non-voice - C = A + B 4.4 Total industry outlay used by TRAI (576MHz) INR937b Actual outlay required considering current spectrum in use (1167MHz incl 437MHz in 900 band) INR2,849b Impact vs TRAI reco (x) - D 3.0 Corrrection required to consider only outgoing MOU vs all MOU (x) - E 2 Total impact on tariff post these corrections - F= C*D*E 26.5 Estimated savings to account for lowering of spectrum charge to 1% -2.1 Impact post spectrum charge savings 24.3 Impact of regulatory levies like service tax (12%), licence fee (8%), spectrum charge (1%) 5.1 Total tariff impact after adjusting TRAI assumption for anamolies ~30 Source: COAI/MOSL

COAI methodology to assess impact of TRAI reserve price

TRAIs calculation TRAI had arrived at 3.6p/minute cost impact for the industry in the first year based on EMI chargeable (@15% cost of capital) over a 20-year period. TRAIs assumed aggregate outlay of INR937b was based on its reserve price of INR36.2b applied to total unallocated spectrum of 576MHz. The 20-year EMI based on these assumptions would be INR148b. Assuming total traffic of 3,402b minutes in FY13 (~15% growth), this would result in a tariff/cost impact of 4.4p/minute on total revenue and 3.6p/minute on voice revenue, as per TRAI. Adjustment #1: Non-voice component (Add 0.8p) TRAI has considered only voice component despite the increase in spectrum cost for non-voice revenue component as well, which will also use the same network. Adjusting for this, the cost burden increases to 4.4p/minute. Adjustment #2: Considering total allocated spectrum (Multiply by ~3) TRAI has considered only unallocated spectrum (576MHz in 1800 band) to calculate the impact while using the entire industry traffic in the denominator, which uses the currently allocated spectrum in 900 as well as 1800 bands. Total allocated GSM spectrum currently stands at 1,348Mhz, including 180.4Mhz to new entrants and 437Mhz in the 900 band allocated to incumbents. Applying the TRAI reserve price to entire allocated GSM spectrum, the total outlay for the industry increases to INR2.9t, almost 3x TRAI estimates. Adjustment #3: Consider only outgoing minutes (Multiply by ~2) TRAI has used all minutes (outgoing and incoming) to assess the impact. While this would be true to ascertain the impact of RPM (which is also reported on aggregate basis), outgoing tariff impact should be calculated only on the outgoing minutes. This would increase the overall impact by 100%.

10 May 2012

Telecom

Adjustment #4: (Subtract 2.1p) The positive impact of proposed reduction in spectrum charges from current 5-6% of AGR for GSM incumbents to 1% of AGR would lead to a cost reduction of ~2.1p/ minute. Adjustment #5: (Multiply by ~1.2x) Regulatory levies like service tax, revenue sharing license fee and spectrum charges are variable costs linked to revenue. Cumulative adjustment for these would be ~21%. Re-farming to impact in several ways Impact of re-farming would be manifold given (1) increased tariffs due to additional cost of network and spectrum, (2) lower quality and coverage of the mobile network, and (3) higher energy requirement, as cell-site base will have to be increased. COAI has estimated an incremental capex of INR1,250b required by GSM incumbents in case re-farming takes place.
ARPU-adjusted price comparison for spectrum

Source: COAI/MOSL

10 May 2012

Telecom

Impact of re-farming as per COAI

Source: COAI/MOSL

Circle wise details of GSM spectrum

Operator Allocated Spectrum Total Cancelled as Not to be Allocated per SC order auctioned Delhi 54 4 49 Mumbai 72 13 59 Tamil Nadu (Incl Chennai) 54 22 32 Kolkata 60 18 43 Maharashtra 69 22 47 Gujarat 60 18 43 A.P. 69 22 47 Karnataka 69 22 47 Kerala 61 18 44 Punjab 63 18 46 Haryana 64 22 42 U.P.(W) 61 18 44 U.P.(E) 62 18 45 Rajasthan 64 18 46 M.P. 63 18 45 W.B. & A&N 53 18 35 H.P. 58 18 40 Bihar 67 22 45 Orissa 59 22 37 Assam 55 22 33 N.E. 53 22 31 J&K 49 22 27 Sum 1342 414 928 Average 61 19 42 Unallocated spectrum 12 5 25 23 6 4 15 12 28 1 4 8 0 3 18 4 6 0 18 4 7 6 211 10 Spectrum available post liecence cancellations 16 18 47 41 28 22 37 34 46 19 26 26 18 21 36 22 24 22 40 26 29 28 625 28 Source: TRAI/MOSL

10 May 2012

Telecom

Operator wise spectrum allocation details in 900mHz band (MHz)

Circle Delhi Mumbai Kolkata Maharashtra Gujarat A.P. Karnataka T.N. (incl. Chennai) Kerala Punjab Haryana U.P.(W) U.P.(E) Rajasthan M.P. W.B. & A&N H.P. Bihar Orissa Assam N.E. Jammu & Kashmir Aggregate Bharti 8.0 6.2 7.8 6.2 6.2 6.2 6.2 7.8 6.2 6.2 6.2 6.2 4.4 Idea Vodafone 8.0 8.0 7.8 6.2 7.8 RCOM Aircel Loop MTNL/BSNL 6.2 8.0 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 6.2 8.0 8.0 138.2 Source: TRAI/MOSL

7.8 7.8 6.2 7.8 6.2 6.2 6.2 4.4 6.2 6.2 6.2 4.4 4.4 6.2 100.4

7.2 6.2 6.2 6.2 6.2 4.4 6.2 6.2 6.2 6.2 4.4 39.8

7.8

65.2

68.0

4.4 4.4 4.4 21.0

Comparative valuations
CMP (INR) 310 79 68 Rating TP Upside EV (INR) (%) (USDb) Buy 390 25.8 22.2 Buy 100 26.0 4.9 Neutral 85 24.6 2.6 FY11 19.5 29.0 9.4 P/E (x) FY12E 27.6 36.1 18.1 FY13E 17.0 16.0 12.2 EV/EBITDA (x) FY11 FY12E FY13E 9.0 7.9 6.4 9.7 7.7 5.6 7.0 7.8 6.1 Net Debt/EBITDA (x) FY11 FY12E FY13E 3.0 2.7 2.5 2.8 2.6 1.7 4.9 5.6 4.3 EPS (INR) FY12E FY13E 11.2 18.3 2.2 4.9 3.8 5.6 EV/Sales (x) FY11 FY12E FY13E 3.1 2.7 2.3 2.4 2.0 1.6 2.2 2.5 2.1 Net Debt/Equity (x) FY11 FY12E FY13E 1.2 1.2 1.0 0.9 1.0 0.8 0.9 1.0 0.9 EPS Gr. (%) FY11 FY12E FY13E -32.6 -29.6 62.6 -11.6 -19.6 126.1 -69.4 -48.0 48.1 Source: Company/MOSL

Bharti* Idea RCom

Bharti Idea RCom

FY11 9.8 6.1 4.0

RoIC (%) FY12E FY13E 6.1 8.6 5.8 8.8 3.1 4.0

FY11 12.6 7.6 3.9

RoE (%) FY12E FY13E 8.1 12.3 5.7 11.8 2.1 3.2

EBITDA Margin (%) FY11 FY12E FY13E 33.6 33.2 35.0 24.5 26.1 29.1 31.9 32.0 34.4 EBITDA Gr. (%) FY11 FY12E FY13E 19.1 18.8 19.4 11.3 34.3 33.2 -16.9 -1.5 18.9

Capex/Sales (%) Sales Gr. (%) FY11 FY12E FY13E FY11 FY12E FY13E Bharti 24.2 19.6 20.9 42.1 20.2 13.3 Idea 57.0 19.8 14.7 24.5 26.0 19.2 RCom 62.6 7.0 8.6 -7.6 -2.0 10.6 * Proportionate EV/EBITDA and EV/sales

FY11 15.9 2.7 7.2

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Bharti: Key Assumptions and other data

FY10 Mobile segment Mobile - India Subs (m) YoY (%) Average subs (m) YoY (%) Netadds per month (m) YoY (%) Total mobile traffic (b min) YoY (%) ARPU (INR/month) YoY (%) MOU YoY (%) Mobile RPM (INR) YoY (%) Mobile EBITDA margin (%) Mobile Capex (INR b) Mobile Capex/sales (%) Mobile - Africa Subs (m) YoY (%) Netadds per month (m) ARPU (USD/month) YoY (%) Capex (USD b) Capex/Sales (%) EBITDA margin (%) Passive Infrastructure Indus Towers Towers (000s) Cellsites (000s) Tenancy ratio (x) Sharing rev. per operator/month (INR000s) EBITDA margin (%) Bharti Infratel Towers (000s) Cellsites (000s) Tenancy ratio (x) Sharing rev. per operator/month (INR000s) EBITDA margin (%) FY11 FY12E FY13E FY14E

128 36 111 42 2.8 6 610 28 243 -25 459 -10 0.53 -17 38.7 34 10

162 27 145 31 2.9 3 792 30 201 -17 455 -1 0.44 -17 34.7 59 16 44 5 0.2 7.3 0.85 24 25

181 12 172 19 1.6 -45 889 12 188 -6 431 -5 0.44 -1 33.9 32 8 53 20 0.7 7.1 -2 1.51 37 27

200 10 190 11 1.5 -4 994 12 191 2 435 1 0.44 1 34.9 73 16 66 24 1.1 6.7 -6 1.05 22 30

212 6 206 8 1.0 -34 1,068 7 195 2 433 0 0.45 3 35.3 41 8 84 27 1.5 6.0 -10 1.36 25 34

103 176 1.71

109 201 1.85 29.5 26.6 33 58 1.76 37.0 48.1

109 214 1.96 31.3 28.5 33 60 1.81 37.3 47.8

113 249 2.20 28.7 30.0 35 74 2.10 36.5

117 281 2.40 27.8 31.9 37 86 2.30 35.2

31 50 1.62 37.2 46.2

49.5 51.4 Source: Company/MOSL

10 May 2012

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Bharti: Business Mix

FY10 Revenue (INR b) Mobile Telemedia Enterprise Passive Infrastructure Others Africa Total revenue Eliminations and others Consolidated revenue YoY% EBITDA (INR b) Mobile Telemedia Enterprise Passive Infrastructure Others Total India & SA Africa Total revenue Eliminations and others Consolidated EBITDA YoY% Capex (INR b) Mobile Telemedia Enterprise Others Passive infrastructure Africa Consolidated capex YoY% Capex/Sales (%) 331 34 45 71 6 0 487 -68 418 13 128 15 13 25 -10 168 0 170 -2 168 11 34 10 12 16 12 0 83 -41 20 363 36 41 86 10 131 667 -72 595 42 126 16 10 32 -10 171 29 202 -3 200 19 59 8 4 14 23 36 143 71 24 403 37 45 95 16 198 794 -80 715 20 137 16 8 36 -9 184 53 240 -3 237 19 32 8 2 9 14 76 140 -2 20 453 37 45 101 19 240 895 -86 809 13 158 15 9 40 -8 211 72 287 -4 283 19 499 38 45 111 22 260 976 -94 882 9 176 17 10 46 -4 241 88 333 -4 329 16 FY11 FY12 FY13E FY14E

73 41 6 6 4 3 5 5 12 12 53 65 153 133 9 -13 19 15 Source: Company/MOSL

10 May 2012

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Idea: Key Assumptions and other data

Subs (m) YoY (%) Average subs (m) YoY (%) Netadds per month ex acquisition (m) YoY (%) Total mobile traffic (b min) YoY (%) Average Rev Per User (INR/month) YoY (%) Minutes of Use/Sub/Month YoY (%) Mobile RPM (INR) YoY (%) Mobile EBITDA/min. (INR) YoY (%) Capex (Rsb) Capex / Sales (%) Consolidated revenue break-up (INR b) 13 established service areas 9 new service areas Idea standalone (ex-3G) Proportionate revenue - Indus Incremental 3G revenue Eliminations Consolidated revenue YoY growth (%) Consolidated EBITDA break-up (INR b) 13 established service areas 9 new service areas Idea standalone (ex-3G) Proportionate EBITDA - Indus Incremental 3G EBITDA Consolidated EBITDA Consolidated EBITDA margin (%) YoY growth (%) Revenue mix 13 established service areas 9 new service areas Incremental 3G revenue Proportionate revenue - Indus EBITDA mix 13 established service areas 9 new service areas Incremental 3G EBITDA Proportionate revenue - Indus 104 -12 0 8 102 -14 0 12 101 -13 1 11 96 -8 3 90 -3 4 87 6 0 6 85 9 0 7 83 10 1 6 81 11 2 6 79 13 3 6 34 27 20 35 -4 31 3 39 -5 33 5 0 38 24 11 51 -6 45 6 0 51 26 34 65 -6 59 7 2 68 29 33 74 -3 71 8 3 82 31 21 -11 124 22 118 8 126 8 142 15 156 11 0 -12 155 25 174 21 195 13 1 -14 195 26 202 28 230 15 4 -16 233 19 222 36 258 17 7 -18 264 13 FY10 64 48 53 70 1.7 40 225 46 207 -21 388 -5 0.53 -18 0.15 -19 33 27 FY11 90 40 77 44 2.1 23 363 45 165 -20 394 2 0.42 -21 0.10 -30 88 57 FY12E 113 26 101 32 1.9 -10 453 25 158 -5 372 -6 0.42 1 0.11 8 39 20 FY13E 131 16 122 20 1.5 -22 527 16 156 -1 361 -3 0.43 2 0.13 14 34 15 FY14E 144 10 137 13 1.1 -27 588 12 157 0 357 -1 0.44 1 0.14 8 26 10

10 9 Source: Company/MOSL

10 May 2012

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Bharti Airtel: Financials and Valuations

10 May 2012

Telecom

Idea Cellular: Financials and Valuations

10 May 2012

10

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