16 DEC 2013

Sector Update

UPCOMING AUCTION TO SHAPE COMPETITIVE LANDSCAPE

TELECOM
The Department of Telecom (DoT) has issued Notice Inviting Applications (NIA), the first step towards conduct of spectrum auction, scheduled to start from 23rd January 2014. This will be a key auction which will determine the competitive landscape of the Indian Telecom industry over the medium term. Given that there has been significant reduction in spectrum price (50% for 1800 MHz and 70% for 900 MHz, compared to peak reserve price announced in April 2012), we specifically watch for: (a) Reliance Jios strategy (bidding, if any, in 900 MHz or 1800 MHz bands); (b) Seriousness of new operators (e.g. footprint expansion by Uninor, currently restricted to just 6 circles); and (c) Renewal in 900 MHz band (Bharti, Vodafone and Loop may get significantly impacted if they are unable to successfully bid and retain their 900 MHz holding).

Price performance
260
220 180 140 100 60 Oct-12 Bharti Idea

Jan-13

Apr-13

Jul-13

Oct-13

Source: TRAI, DoT

900 MHz, the key band in January auction

We believe auction of 900 MHz spectrum will be keenly watched as failure by any operator to retain their 900 MHz holding will force them to re-farm their network to 1800 MHz band. Note, unlike 1800 MHz auction where the supply of spectrum is ample, supply of spectrum in 900 MHz is equivalent to only that of impending renewals. To avoid re farming, we believe Bharti (Delhi, Kolkata) and Vodafone (Delhi, Kolkata and Mumbai) will be aggressive in retaining their 900 MHz holding. However, aggression by Loop (8 MHz of 900 MHz spectrum in Mumbai) is suspect (has only ~6% revenue market share in Mumbai, and declining). We believe Bharti and Idea may target 900 MHz spectrum in Mumbai.

1800 MHz auction may increase industry competition

Lower pricing (down 35% from the previous auction) and ample supply of spectrum (average 18 MHz spectrum/ circle being put up for auction) may prod new players such as Uninor to increase operational footprint (currently operates in only 6 circles). Further, we also note that 1800 MHz band internationally has a well-developed FD-LTE ecosystem, which could potentially make this a target band for Reliance Jio. There could also be instances of old operators topping up 1800MHz spectrum in circles where their networks are currently stretched. In any case, unlike 900 MHz band, we do not expect the prices of 1800 MHz band to deviate from reserve price due to higher supply. We currently have BUY on Bharti with TP of Rs 417 (30% upside from CMP of Rs 321) and BUY on Idea with TP of Rs 206 (20% upside from CMP of Rs 171).

Sector summary
C o s. Bharti Idea Bharti Infratel Onmobile Pric e M k t c ap P/E (x) (R s) (US D mn) F Y14 E F Y15E 321 171 173 26 21,247 9,119 5,567 49 31.6 29.6 24.6 13.9 16.8 19.4 20.0 5.3 EV/EBIT DA (x) F Y14 E F Y15E 6.5 8.1 7.4 0.9 5.1 6.4 6.5 0.4 R o C E (% ) F Y14 E F Y15E 8.9 12.5 8.6 3.9 11.6 16.3 9.4 8.2 R o E (% ) TP % F Y14 E F Y15E (R s) up side 7.2 11.9 7.5 2.5 11.5 8.9 6.3 417 195 40 14.5 206 R ating

30% BUY 20% BUY 13% BUY 50% BUY

Source: Company, Axis Capital

Note: Prices as on Dec 13, 2013

Note: The report has not been edited in the interest of timeliness
Priya Rohira Executive Director - IT & Telecom
priya.rohira@axiscap.in 91 22 4325 1104

Nivedan Reddy AVP - Telecom

nivedan.reddy@axiscap.in 91 22 4325 1128 01

Axis Capital is available on Bloomberg (AXCP<GO>), Reuters.com, Firstcall.com and Factset.com

16 DEC 2013

Sector Update

TELECOM
Exhibit 1: Auction timetable
Particulars
Issue of Notice Inviting Applications (NIA) Prebid Conference Last date for seeking clarifications on NIA Clarifications to NIA Last date for submission of Applications Publication of ownership details of Applicants Bidder Ownership Compliance Certificate Prequalification of Bidders Final List of bidders Mock Auction Start of the Auction
Source: DoT

Date
12-Dec-13 20-Dec-13 24-Dec-13 28-Dec-13 4-Jan-14 7-Jan-14 10-Jan-14 14-Jan-14 16-Jan-14 21 & 22-Jan-2014 23-Jan-14

Key date to watch will be 7 January, when the shareholding details of prospective bidders will be published

Exhibit 2: List of renewal licensees

Operator
Delhi Bharti Airtel Vodafone India Mumbai Loop Mobile Vodafone India Kolkata Bharti Airtel Vodafone India
Source: DoT, Axis Capital

Current spectrum holding (MHz) 900 MHz

8.0 8.0

1800 MHz
2.0 2.0

Vodafone has the highest liability, having to renew its 900 MHz spectrum in all the three metros

8.0 8.0

2.0 2.0

6.2 7.8

1.8 2.0

Exhibit 3: Renewal liability

Operator
Bharti Airtel Bharti Airtel Total - Bharti Loop Mobile Total - Loop Vodafone India Vodafone India Vodafone India Total - Vodafone 1800 MHz Delhi Mumbai Kolkata 8.0 8.0 7.8 2.0 2.0 2.0 Mumbai 8.0 2.0

Circle
Delhi Kolkata

Current spectrum holding (MHz) 900 MHz

8.0 6.2

Total outgo
(Rs bn) 33.2 9.1 42.2 30.4 30.4 33.2 30.4 11.2 74.8

FY14E payout * (R sbn)

8.6 2.4 11.0 7.9 7.9 8.6 7.9 2.9 19.5

1800 MHz
2.0 1.8

Bharti will likely use the deferred payment option, hence renewal liability will not impact leverage materially Loop may not be aggressive in renewing its 900 MHz holding in Mumbai, as it has just 6% market share in Mumbai (and declining). Bharti and Idea may eye this spectrum

Source: DoT, Axis Capital, * Based on 25% upfront payment for 900 MHz and 33% upfront payment for

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16 DEC 2013

Sector Update

TELECOM

Exhibit 4: Spectrum to be auctioned

Circle
1800 MHz Delhi Mumbai Kolkata Metros Maharashtra Gujarat Andhra Pradesh Karnataka Tamil Nadu Circle - A Kerala Punjab Haryana Uttar Pradesh (West) Uttar Pradesh (East) Rajasthan Madhya Pradesh West Bengal Circle - B Himachal Pradesh Bihar Orissa Assam North East Jammu & Kashmir Circle - C Total (1800 MHz) 900 MHz Delhi Mumbai Kolkata Total Metros
Source: DoT, Axis Capital

Spectrum put to auction (MHz)

22.8 25.2 26.8 74.8 14.0 12.0 22.6 24.6 30.2 103.4 28.0 18.4 16.4 2.4 9.8 20.8 19.2 13.0 128.0 20.4 4.2 28.0 11.4 26.8 6.2 97.0 403.2 16.0 16.0 14.0 46.0

Number of blocks (nos)

114 126 134 374 70 60 113 123 151 517 140 92 82 12 49 104 96 65 640 102 21 140 57 134 31 485 2,016 16 16 14 46

Reserve price (Rs bn/ MHz)

2.2 2.1 0.7 5.0 1.7 1.4 1.6 1.6 2.1 8.4 0.5 0.5 0.3 0.6 0.6 0.3 0.4 0.2 3.5 0.1 0.4 0.2 0.1 0.1 0.1 0.8 17.7 3.6 3.3 1.3 8.1

Ample spectrum being auctioned in 1800 MHz band (average of 18 MHz/ circle). Hence, we do not see much deviation from reserve prices

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16 DEC 2013

Sector Update

TELECOM
Exhibit 5: Spectrum caps (unpaired)
(MHz)
Delhi Mumbai Kolkata Metros Maharashtra Gujarat Andhra Pradesh Karnataka Tamil Nadu Circle - A Kerala Punjab Haryana Uttar Pradesh (West) Uttar Pradesh (East) Rajasthan Madhya Pradesh West Bengal Circle - B Himachal Pradesh Bihar Orissa Assam North East Jammu & Kashmir Circle - C Total
Source: DoT

Overall cap
64.5 68.8 67.3 201 63.8 63.7 67.5 67.9 72.6 335 68.9 65.8 62.2 61.1 62.9 65.4 65.2 62.3 514 62.1 63.9 65.8 54.1 60.3 50.6 357 1,407

1800 MHz cap

20.9 27.1 25.3 73 23.7 22.3 27.4 25.9 30.6 130 27.1 21.7 23.6 20.0 23.6 24.2 25.9 18.9 185 21.5 22.1 27.2 17.3 23.1 11.3 122 510

900 MHz cap

11.1 11.1 10.1 32 0.0 0.0 0.0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0.0 0.0 0.0 0.0 0.0 0.0 0 32

Spectrum cap pegged at 50% of the spectrum in any band; and 25% of the overall spectrum allocated in that circle In any case, these caps will not affect the spectrum holdings of any operator

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16 DEC 2013

Sector Update

TELECOM

Appendix
Exhibit 6: Block sizes
Existing licensees
1800 MHz 900 MHZ
Source: DoT

New licensees
0.2 MHz 1 MHz

0.2 MHz 1 MHz

Exhibit 7: Minimum bids

Existing licensees
1800 MHz 900 MHZ
Source: DoT

New licensees
5 MHz 5 MHz

0.6 MHz 5 MHz

Exhibit 8: Existing spectrum usage charges

GSM (900/1800 MHz)
Up Up Up Up Up Up to to to to to to 4.4 MHz 6.2 MHz 8.2 MHz 10.2 MHz 12.2 MHz 15.2 MHz *AGR: Adjusted Gross Revenue

CDMA (800 MHz)

Up to 5 MHz Up to 6.25 MHz Up to 7.5 MHz Up to 10 MHz Up to 12.5 MHz Up to 15 MHz

Annual spectrum charges (as a percentage of AGR*)

3 4 5 6 7 8

Spectrum usage charge unchanged (based on slab system currently) despite TRAIs proposal of pegging it at a uniform 3% of AGR

Source: TRAI

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16 DEC 2013

Sector Update

TELECOM

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