Telecom - Competitive intensity likely to ease after 2012; priced in - Avendus

The auction of the 1,800 MHz band spectrum scheduled to begin in Nov12 is likely to soften the competitive intensity. High cash requirements set over the medium term may shift focus from RMS gains to cash profit generation. Under the worst case scenario, BHARTI is likely to post earnings CAGR of 19% and IDEA of 18% during FY13f-FY15f. Compared to consensus forecasts, under the worst case scenario, BHARTI's EPS CAGR may contract 3% and IDEA's EPS CAGR by 30%. However, even under the worst case scenario, there exists a potential upside of up to 45%. After revisions to forecasts and rollover of the TP to Sep13, we maintain Buy on BHARTI (TP of INR337), and Hold on IDEA (INR78) and RCOM (INR47).

Auctions may trigger easing of competitive intensity

An upcoming 1,800 MHz band auction is likely to set high cash requirements during FY13f-FY17f, which are likely to be in the range of 1.5x-2.7x of the cash outgo during 3G and BWA auctions. High cash requirements over the medium term may shift focus from RMS gains to cash profit generation. Similar to 3G auctions, high cash requirements due to auctions may ease competition. With the 1,800 MHz band auction scheduled to commence in Nov12, competitive intensity may remain high for two more quarters. However, unlike the competition phase of Jan09-Mar10, pressure on pricing may be less. However, EBITDA margins may suffer due to a rise in S&M expenses.

In worst case, 18% FY13f-FY15f EPS CAGR despite 30% contraction

Under the worst case scenario, BHARTI may post earnings CAGR of 19% and IDEA of 18% during FY13f-FY15f. Compared to consensus forecasts, in the worst case, BHARTI's EPS CAGR may contract 3% and IDEA's EPS CAGR by 30%. Despite a significant price erosion of telecom stocks, valuations have sustained over the last three years. Assuming valuations to sustain in the future, the potential upside is likely to be up to 45% from current levels.

Benefits of rise in RMS may accrue on pricing revival

Combined revenue market share (RMS) of BHARTI, IDEA and Vodafone (India) has increased 131-bp during Jul11-Jun12. A rise in RMS among incumbents is likely to imply a larger share of minutes on the network of respective TSPs. An INR0.01 improvement in pricing during FY14f, which is a c2% y-o-y increase in the ARPM, is likely to improve our FY14f earnings forecasts by 4% for BHARTI and 12% for IDEA.

Maintain Buy on BHARTI; Hold on RCOM, IDEA

We continue to prefer BHARTI with a 34% upside from current levels. Our rorecasts for BHARTI were downgraded by up to 41%, IDEA by up to 57% and RCOM by up to 50%. After the rollover to Sep13, the TP for BHARTI is INR337, IDEA is INR78 and RCOM is INR47. We maintain a Buy rating on BHARTI, and Hold rating on IDEA and RCOM.

Source : Equity Bulls

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