June 2013

India Telecom

Consolidation

calling…

Shobhit Khare (Shobhit.Khare@MotilalOswal.com); Tel: + 91 22 3982 5428 | +91 98196 07034

Investors are advised to refer through disclosures made at the end of the Research Report.

Sector: Telecom

Index

Investment summary

….……………………………………………………………………………………………………………………………………….…3

Indian Wireless: Voice business maturing

……………………………………………………………………………………………………………..6

Rationality returning

…………………………………………………………...……………………………………………….…………………………….…9

Incumbents well-placed to benefit as consolidation process accelerates

………………………………….…………..…………….14

RPM Analysis: Significant upside even @ current headline tariffs………………………………………………………….…………..…18

Data: the next growth driver; contribution increasing for wireless operators

………………………………..……………….…..19

Key Challenges/Risk Factors

…………………………………………………………………..……………………………………..………………………20

Industry scenario analysis and sensitivity: Significant room for performance improvement

……………………………….24

Intra-incumbent trends and positioning: Idea/Vodafone might continue to outperform

…………………………………….28

Valuation dichotomy: Expensive on PE but attractive on EV/EBITDA and FCF yield

……………………………………………..31

Company section

Bharti Airtel

……..………….…………………………………………………………………………………………………….…………..……………36

Idea Cellular

….…..……………………………….………………………………………………………………….…………..……………………….47

Reliance Communications

….…..………………………………………………….………………………………………………….…………….57

NOTE:

All prices and indices as on 20th June, 2013

2

Sector: Telecom

INDIA TELECOM: Consolidation calling...

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Indian wireless: Voice business maturing



India wireless traffic growth decelerated to ~9% in FY13 vs ~15% in FY12 and ~26% in FY11



Growth impacted by 1) Higher active subs penetration (>50%), 2) Lack of demand stimulation (Stable RPM

vs 16% pa decline over FY09-11), and 3) Heightened regulatory/balance-sheet stress for challengers



Expect FY13-16E industry traffic CAGR of 8%, RPM (excl 3G) CAGR of 1% and RPM (incl 3G) CAGR of 2.5%

Rationality returning as focus shifts from ‘chasing subscribers’ to ‘RPM/profitability improvement’



Initiatives:

Reduction in channel commissions; Tariff rationalization; Footprint reduction by challengers



Indicators:

Highest ever top-3 operator revenue market share at 69%; Multi-year low churn (3-4% in

4QFY13 vs 9-10% in 2QFY13); Declining benchmark spectrum price (INR120b vs INR180b initial TRAI reco);

Expanding EBITDA per minute

Incumbents well-placed to benefit as consolidation process accelerates



Bharti, Vodafone and Idea together account for ~60% of active subs/traffic, 69% of revenue and ~90% of

EBITDA but constitute only ~40% of industry net debt. Incumbent net debt/EBITDA is relatively much

comfortable at <3.5x vs ~6x net debt/EBITDA or negative EBITDA for others



Incumbents have >15% revenue market share in 70-100% of their revenue footprint driving significant

scale advantage. In contrast, all challengers (except Aircel) have less than 15% revenue market share in

more than 80% of their revenue footprint

RPM analysis: Significant upside even @ headline tariff; Idea has higher RPM sensitivity vs Bharti



Our analysis suggests ~7p potential RPM improvement if all pre-paid subs were to migrate to flagship

discount tariff per second plans



Idea’s fair value increases by ~7% for every 1p RPM increase vs ~5% for Bharti

Data: the next growth driver



Significant head room given low broadband penetration (~1%) and data contribution (6.5% of revenue)



3G to contribute 1.5-2% to overall industry revenue CAGR of ~11% over FY13-16E

Key challenges: Spectrum pricing/liability; 3G intra-circle roaming; and Reliance JIO launch

3

Sector: Telecom

INDIA TELECOM: Consolidation calling...

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Industry scenario analysis and sensitivity: Significant room for performance improvement



“Steady recovery scenario”:

11%/14% revenue/EBITDA CAGR led by CAGR of ~8% for voice traffic, 2.5%

for RPM (1% ex-3G) and ~200bp EBITDA margin expansion over FY13-16 assuming 25% base margin



“Accelerated recovery scenario”:

13%/21% revenue/EBITDA CAGR led by CAGR of ~8% for voice traffic, 5%

for RPM (3.5% ex-3G) and ~500bp EBITDA margin expansion over FY13-16 assuming 25% base margin

Intra-incumbent trends and positioning: Idea/Vodafone might continue to outperform



Convergent RPM trends but divergent volume growth have driven gains for Vodafone/Idea



Bharti stemmed three years of consecutive revenue market share loss in FY13 but at a significant margin

sacrifice (down ~320bp YoY)



Expect 6/8/12% traffic CAGR for Bharti/Industry/Idea vs 10/15% YoY growth for Bharti/Idea in 4QFY13

Valuation dichotomy: Expensive on P/E but attractive on EV/EBITDA and FCF yield



Valuation at 26-32x FY14 P/E appears expensive as FY14 would be the first year of earnings recovery



However valuation attractive at 4-8% FCF yield and 6.7-7.8x EV/EBITDA on FY14 basis given strong growth

prospects for Bharti/Idea

Sector and stock views: Sector outlook positive; Buy Bharti and Idea



Bharti Airtel:

12%/49% EBITDA/PAT CAGR over FY13-16E led by 6% India wireless traffic CAGR, 2.5% RPM

CAGR and margin expansion of ~210bp for India mobile/consolidated.

Buy

with price target of INR390

based on target FY15 EV/EBITDA of 8x for India & SA business (excl towers), Bharti Infratel stake at ~15%

discount to TP, 6x FY15 EV/EBITDA for Africa business, and INR188b towards potential spectrum outlay



Idea Cellular:

20%/53% EBITDA/PAT CAGR led by 12% traffic CAGR, 2.5% RPM CAGR and 370bp EBITDA

margin expansion.

Buy

with price target of INR175 (INR150 earlier) based on 9x FY15 EV/EBITDA for core

business, 20% discount to Indus stake fair value, and INR129b towards potential spectrum outlay



Reliance Comm:

13% EBITDA CAGR led by 5%/5% traffic/RPM CAGR and 460bp margin expansion.

Neutral

4

Sector: Telecom

Recommendation Summary

Please paste snapshots of 1) telecom sector update released in Jan-2013, 2) Idea company update released

March -2013 and 3) Idea corner office released May-2013

Refer Jan-13 Sector Report

Refer Mar-13 Idea Report

Refer May-13 Idea Meeting Update

5

Sector: Telecom

Indian Wireless

Voice business maturing

6

Sector: Telecom

FY13 revenue up 8%; growth to recover on RPM inflection

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Indian wireless revenue growth decelerated to ~8% YoY in FY13 (vs 15% in FY12) to INR ~1.5 trillion

Revenue decline was largely on account of lower voice traffic growth (~9% YoY vs 15% in FY12 and 26% in

FY11) which was led by 1) Higher active subs penetration (>50%), 2) Lack of demand stimulation (RPM

largely stable in FY12 and FY13 vs 16% per year decline over FY09-11), and 3) Heightened

regulatory/balance-sheet stress for challengers

After 11-22% per year declines during FY09/10/11, industry wireless RPM has been largely stable over the

past two years. Industry level wireless RPM is estimated to have declined by only ~1% YoY during FY12 as

well as FY13

We expect 11% industry revenue CAGR over FY13-16E led by ~8% voice traffic CAGR and 2.5% RPM CAGR

(1% CAGR ex-3G)

4QFY13 gross revenue for Indian wireless sector was ~INR382b, up 8% YoY. There has been a slow but

steady recovery in revenue growth during 2HFY13. Also, the aggregate trend masks stronger performance

from GSM incumbents which grew revenue by 8-12% YoY in 4QFY13

Quarterly gross revenue (INR b)

YoY Revenue growth (%)

7

Sector: Telecom

Decline in reported subs; VLR growth tapering

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Reported subscriber base declined for eight

consecutive months till Feb 2013 due to 1)

reduced channel commissions and competition

and 2) tightened subscriber acquisition norms

introduced by the regulator

Increased active subscriber (Visitor Location

Register or VLR) based penetration (now ~60%) is

also a factor responsible for the slowdown

Monthly VLR subscriber additions declined to 3m

in FY13 vs 9m in FY12. YoY VLR subscriber growth

has been consistently declining and reached 6%

YoY in March -13

Monthly wireless industry reported net adds (m)

Monthly VLR subscribers (m)

YoY Growth in VLR subs down to 6% (%)

8

Sector: Telecom

Rationality returning as focus shifts

from ‘chasing subscribers’ to

‘RPM/profitability improvement’

9

Sector: Telecom

Challengers rationalising footprint

Over the past six months, many challengers have announced plans to reduce footprint and exited several sub-scale operations



The move was precipitated by implementation of the February 2012 Supreme Court verdict which cancelled 122 licenses and

forced many challengers to re-bid for their spectrum holdings



Telenor/Sistema reduced their footprint due to high spectrum price post cancellation of their licenses



However, Aircel/Tata Tele announced scale-down or exit from 5/3 circles despite having spectrum, likely to stem the cash-burn



Gross revenue share map below represents the circle-operator grid. Every telecom circle except UP (W) has witnessed scale-

down/exit of at least one operator resulting in market consolidation



GSM incumbents, especially Idea and Vodafone, appear to be the key beneficiaries of the consolidation process

4QFY13 circle wise gross revenue share map: footprint reduction across the board



Note:

Dark Blue

represents scale-down/exit;

Grey

represents QoQ mkt share gain;

Violet

represents QoQ mkt share loss

10

Sector: Telecom

RPM trends stable; significant decline in churn

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RPM for wireless majors has been largely stable during FY13. Based on reported RPM, RCom has the

highest RPM in the industry at ~44p followed by Bharti/Vodafone at ~42p and Idea at ~41p. For

comparison, Vodafone RPM has been adjusted for the difference in treatment of the on-net traffic

Industry has been rationalizing tariffs since 4QFY13 by lowering discounts and promotions offered.

We expect these hikes to contribute positively to the voice RPM

GSM incumbents reported significant decline in the monthly churn rate during 2HFY13. Sharp fall in

churn rate is attributed to withdrawal of aggressive/irrational subscriber acquisition schemes. Decline

in the churn rate is a key indicator of abating competitive intensity

Lower churn implies reduced gross addition requirement for adding same number of subscribers on

the network and is accretive to operator margins

GSM incumbents’ monthly churn rate has been declining (%)

Operator wise RPM trend (p)

11

Sector: Telecom

Revenue market share: ~70% with top-3

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The combined revenue market share of top-3 wireless operators (Bharti, Idea, Vodafone) increased from

66% in 2QFY13 to 69% in 4QFY13. This is the highest ever aggregate revenue market share for the top-3

operators

Over the past five years, the combined revenue market has been steadily inching up largely on gains

registered by Vodafone and Idea who have been ramping-up their operations in several circles

On a circle-wise basis, the market share is even more concentrated. The individual leaders (top-3) in each

circle account for 67-83% of gross revenue market share

Mumbai is the most competitive wireless market in the country with top-3 operators accounting for 67% of

the revenue market share while Jammu & Kashmir is the least competitive with top-3 operators accounting

for 83% share

Combined revenue share of circle wise top-3 (%)

Combined revenue market share of top-3 (%)

12

Sector: Telecom

Benchmark spectrum price declining

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Recent two spectrum auctions have been

largely unsuccessful

While there was muted bidding in the first

auction, there were no bidders in the

subsequent auction for four circles despite a

reduction in the reserve price

Benchmark price for pan-India 5MHz slot in

the 1,800MHz band has declined from

INR180b (recommended by TRAI) to INR140b

(reserve price in first auction) and then to

INR120b (reserve price in the second auction)

Operators believe that ‘auction discovered

price' from the first round auction also cannot

be treated as 'market price’ since operators

like Idea, Telenor and Videocon were

compelled to bid despite high reserve prices

in order to protect their investments. In all

circles except one (Bihar), demand for

spectrum slots lagged available supply, and

hence, this might not be a correct benchmark

for future pricing of spectrum

While we await final pricing/auction schedule

from the government, we see potential for

further downside to benchmark spectrum

price as bidding interest remains muted

Circle wise 2G spectrum price benchmark

13

Sector: Telecom

Incumbents well-placed to benefit as

consolidation process accelerates

14

Sector: Telecom

Incumbents better placed...

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Post the hyper-competition phase, Bharti, Vodafone, and Idea

(incumbents) have emerged relatively stronger. Incumbents control

62% of active subscribers/wireless traffic, 69% of wireless revenue,

and ~90% of wireless EBITDA, but constitute only ~40% of the

estimated industry net debt. Incumbents have net debt/EBITDA <3.5

Bharti has dominant position in 12 circles (~65% of GR) with > 30%

revenue market share. Dominant/well-entrenched circles for Idea

and Vodafone contribute ~90% and ~70% to their revenue

respectively reflecting their significant scale advantage

In contrast, for RCom, Tata Tele, BSNL/MTNL and Telenor, 85-100% of

revenue is contributed by circles where they have <15% market

share. Beyond the top-3 operators, Aircel has the lowest contribution

from challenger circles at ~50%

Subs (inner) VS GR share (outer)

Net DEBT/EBITDA (X)

Incumbents: 90% of EBITDA BUT 40% of Net Debt

Operator-wise revenue footprint in various circles

* Estimate

15

Sector: Telecom

Bharti, Vodafone, Idea have strong competitive position

Bharti: ~65% revenue from dominant circles

Idea: ~70% revenue from non challenger circles

Vodafone: Challenger in only 11% of footprint

Aircel: Well entrenched in ~50% of footprint

16

Sector: Telecom

Challengers impacted by lack of scale across circles

RCOM: <15% mkt share in ~85% of revenue footprint

Tata Tele: <15% mkt share in the entire revenue footprint

BSNL/MTNL: <15% mkt share in 95% of revenue footprint

Telenor: Best mkt share performance at 7% (UP)

17

Sector: Telecom

RPM Analysis: Significant upside even @ current headline tariffs

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We

estimate

~7p

potential

improvement in RPM if all pre-paid

subscribers were to migrate to the

flagship discount tariff per second plans

The tariffs applicable for these plans

(1.2p/s for local and 1.5p/s for NLD) are

generally considered to be “head-line”

tariffs. There are various “rate cutters”

also available for specific requirements

which can reduce the tariffs further

Assuming no elasticity, every 1p

improvement in India mobile RPM

improves fair value for Bharti by ~5%

and Idea/RCom by ~7%. This analysis

assumes no tariff elasticity, 70%

incremental EBITDA margin, and 8x

EV/EBITDA valuation multiple

While sensitivity to RPM improvement

is similar for both Idea and RCom,

higher sensitivity for Idea is driven by

higher exposure to Indian wireless and

relatively lower margin while that for

RCom is led by high leverage

Bharti Airtel: Estimated call pattern-wise RPM break-down and potential

improvement

18

Sector: Telecom

Data: The next growth driver; contribution increasing for wireless

operators

penetration in India is only ~2%

Data contribution to wireless revenue (%)



Fixed internet

while broadband penetration is ~1%. This is

an opportunity for wireless operators

(2G/3G/4G).

Almost

430m

wireless

subscribers (~50% of total) are currently

capable of subscribing to data services

Over the past four years non-voice revenue

contribution has been rising steadily and is

now 15-17% of wireless revenue vs ~9% in

FY09. Data revenue contribution is growing

for Bharti/Idea led by increased 3G/2G data

usage and currently contributes 6.5% of their

wireless revenue

Mobile ideally placed to tap opportunity



Broadband and internet penetration in India (%)

19

Sector: Telecom

Key Challenges/Risk Factors

20

Sector: Telecom

Excess spectrum and renewal payments

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‘Excess spectrum’ and ‘renewal’ payments constitute key risk for incumbents. Given the strategic

advantage of 900MHz spectrum, we believe that incumbents will opt for renewal in the existing band

itself

Based on current spectrum benchmark price of INR120b, Bharti has aggregate liability of ~INR350b of

which ~INR250b is payable over the next 4 years including prospective and retrospective demand for

“excess spectrum”

Similarly, Idea has an aggregate liability of ~INR230b of which ~INR170b is payable over next 4 years

including prospective and retrospective demand for “excess spectrum”

Benchmark/reserve price has declined by ~33% since TRAI’s initial recommendations (~INR180b) and

could decline further given current spectrum over supply situation

Our target prices incorporate 75% of the liability payable over the next four years for

Bharti/Idea/RCom. This implies a “benchmark price” of INR90b for pan-India 5MHz spectrum in the

1,800 band

Idea: Spectrum renewal liability (INR b)

Bharti: Spectrum renewal liability (INR b)

21

Sector: Telecom

Intra-circle 3G roaming pacts

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DoT has sent legal notices to Bharti, Idea and Vodafone for violation of license conditions by entering into 3G

roaming pacts. The companies are taking legal recourse. The Court has barred these companies from adding

3G subs in the circles where they do not own the 3G spectrum and are operating through roaming pacts

3G subscribers constitute 3.4% of the subscriber base for Bharti and 4.2% for Idea. We estimate 3G data

revenue at 2-3% of wireless revenue for Bharti/Idea

We expect limited financial impact on GSM incumbents even if 3G roaming were to be stopped. Current 3G

spectrum of Bharti/Vodafone/Idea already covers 68-83% of their revenue footprint

3G Spectrum revenue coverage (%)

83

73

68

3G Spectrum and winning price (INR b)

Idea

Bharti

Vodafone

22

Sector: Telecom

Reliance JIO’s potential voice entry

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Reliance JIO Infocomm (subsidiary of Reliance Industries) has entered deals for supply of network equipment,

towers and fiber network for its 4G network

Reliance Industries (RIL) recently announced that it is set to increase its telecom business employee strength

from 3,000 (v/s 700 a year back) to 10,000

Reliance JIO might also be allowed to offer voice services on its 4G network after paying INR16.5b fee

However RIL’s unpaired 2.3GHz spectrum is not considered suitable for ubiquitous voice coverage

While high frequency band implies serious coverage disadvantage, in-building penetration would be the key

challenge in the high density metro areas

Sites required to cover 1,000 sq km dense urban area

1804

1572

BWA Circle wise winning price (INR b)

914

777

485

GSM 900

GSM 1800

HSPA 2100

LTE 2300

LTE 2600

23

Sector: Telecom

Industry scenario analysis and sensitivity:

Significant room for performance improvement

24

Sector: Telecom

Scenario analysis

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Industry traffic growth assumed at 8% CAGR over

FY13-16E in both scenarios based on increased

penetration levels and lack of demand elasticity

Steady recovery:

Competitive pressure abates as

challengers cede footprint and address balance

sheet issues; incumbents utilize pricing power

judiciously to drive profitable growth. This is our

base case scenario and builds in 2.5% RPM CAGR

over FY13-16E incl. 3G and 1% CAGR excl. 3G

Accelerated recovery:

Large challenger implodes

leading to significant increase in pricing power.

This scenario builds-in 5% RPM CAGR over FY13-

16E incl. 3G and 3.5% CAGR excl. 3G

FY13-16E

Traffic CAGR

RPM CAGR

Revenue CAGR

EBITDA margin

EBITDA CAGR*

Steady

recovery

8%

2.5%

11%

+200 bp

14%

Accelerated

recovery

8%

5%

13%

+500 bp

21%

*Assuming initial EBITDA margin of 25%

Bharti Airtel: Scenario analysis summary

Idea Cellular: Scenario analysis summary

25

Sector: Telecom

Steady recovery scenario

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Our base case is steady recovery, implying ~8% traffic CAGR, 2.5% RPM CAGR and ~200bp

EBITDA margin expansion at the aggregate level

Bharti to clock ~6% traffic CAGR and 2.5% RPM CAGR (incl data)

Bharti to exhibit 10% revenue CAGR, 12% EBITDA CAGR, 49% PAT CAGR and 11% BV CAGR

Bharti’s RoE expected to improve from 4.2% in FY13 to 10.3% in FY16E

Idea to clock ~12% traffic CAGR and 2.5% RPM CAGR (incl data)

Idea to exhibit 15% revenue CAGR, 20% EBITDA CAGR, 53% PAT CAGR and 15% BV CAGR

Idea’s RoE expected to improve from 7.4% in FY13 to 17.8% in FY16E

Idea Cellular: Financial summary for base case scenario

Bharti Airtel: Financial summary for base case scenario

26

Sector: Telecom

Accelerated recovery scenario



Accelerated recovery would imply ~8% traffic CAGR, 5% RPM CAGR and ~500bp EBITDA

margin expansion at the aggregate level

Bharti to clock ~6% traffic CAGR and 5% RPM CAGR (incl data)

Bharti to exhibit 11% revenue CAGR, 15% EBITDA CAGR, 60% PAT CAGR and 13% BV CAGR

Bharti’s RoE expected to improve from 4.2% in FY13 to 12% in FY16E

Idea to clock ~12% traffic CAGR and 5% RPM CAGR (incl data)

Idea to exhibit 17% revenue CAGR, 26% EBITDA CAGR, 67% PAT CAGR and 18% BV CAGR

Idea’s RoE expected to improve from 7.4% in FY13 to 22% in FY16E

Idea Cellular Financial summary: Accelerated recovery scenario

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Bharti Airtel Financial summary: Accelerated recovery scenario

27

Sector: Telecom

Intra-incumbent trends and positioning:

Idea/Vodafone might continue to outperform

28

Sector: Telecom

Bharti’s market share decline arrested in FY13



Post two consecutive years of decline in the revenue market share, Bharti arrested its market

share decline in FY13 aided by an aggressive pricing stance

All three GSM incumbents gained revenue market share in FY13

Bharti’s market share improved by ~30bp YoY to 30.3%

Vodafone’s market share improved ~10bp YoY to 22.2%

Idea continued to gain market share for fifth consecutive year reaching 15.2%; up ~80bp YoY

Bharti arrested declining market share trend in FY13

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Incumbents control 69% revenue market share

29

Sector: Telecom

Bharti vs Idea: Significant divergence in EBITDA growth



During FY10-13, Bharti’s (India & SA) mobile EBITDA CAGR of ~2% and significantly lagged

Idea’s 18% wireless EBITDA CAGR

While RPM trends have been largely similar, higher volume growth for Idea has resulted in

faster revenue growth and operating leverage

Performance divergence is likely to reduce post corrective measures undertaken by Bharti

However we expect Idea’s outperformance to continue led by industry-leading growth and

expect ~21% wireless EBITDA CAGR for Idea vs ~11% for Bharti in domestic wireless business



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Bharti vs Idea: Wireless revenue and EBITDA trend (INR b)

30

Sector: Telecom

Valuation dichotomy: Expensive on PE but

attractive on EV/EBITDA and FCF yield

31

Sector: Telecom

Bharti and Idea: PE and PB Vs RoE metrics





Bharti (ex Africa) RoE ~8% in FY13 vs ~7% for Idea. FY13E P/B for Bharti is 1.8x vs 3.3x for Idea. FY16 RoE to improve

to 11% for Bharti (ex Africa) and 18% for Idea

Bharti (ex Africa) has the lowest (RoE, P/B) at (10,1.5) followed by Idea (17,2.5) and Sensex (17,2.0). Actual RoE for

Bharti is lower given PAT loss in the Africa business

FY15 P/B VS RoE

IDEA

SENSEX

BHARTI

Bharti (ex Africa) and Idea: Relatively expensive on PE & PBV vs RoE

FY15 RoE

(%)

32

Sector: Telecom

Bharti and Idea: FCF Yield based valuation

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Bharti/Idea offer strong FCF yield on FY14 basis. Cumulative FY13-16 yield is 20/6%

However spectrum renewal payments due in FY15/16 to drag down FCF

Our FCF calculations assume outlay of 50% of benchmark spectrum price of INR120b for 5MHz

pan-India spectrum in the 1,800 band

8-9% FCF yield for Idea in FY15E and Bharti in FY14/16E

Bharti has spectrum payments scattered in FY15/16 while Idea renewals due largely in FY16

Bharti/Idea: Strong near-term FCF yield

33

Sector: Telecom

Bharti and Idea: P/E and EV/EBITDA based valuation





Both stocks appear relatively expensive on one-yr forward P/E basis. Bharti trading at ~28x FY14 P/E while Idea

trading at ~22x. Premium P/E reflects the optimism on earnings recovery as current profitability levels unsustainable

Both stocks appear attractive on one-year forward EV/EBITDA basis. Bharti trading at 5.7x one-year forward

EV/EBITDA while Idea trading at 7.3x. Current valuations imply 5-35% discount vs historical median EV/EBITDA

Idea: Trading at discount to 1-year forward median

Bharti: Trading at premium to 1-year forward median

Bharti: Trading at discount to 1-year forward median

Idea: Trading at discount to 1-year forward median

34

Sector: Telecom

Companies

35

Sector: Telecom

Bharti Airtel

(BHARTI

IN; Mkt Cap USD20.0b; CMP INR290; TP INR390; 35% Upside; Buy)

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India wireless market share decline arrested:

Post three consecutive years

of decline, Bharti reversed gained ~30bp revenue market share in FY13 led

by competitive pricing. We expect traffic growth of 8% in FY13E and 6%

CAGR over FY13-16E for Bharti India wireless business.

Strong FCF generation:

We expect Bharti to generate FCF of ~USD4b

cumulatively over FY13-16E even after factoring-in ~USD1.8b spectrum

renewal payment.

Sustained leadership to help capture rural and data opportunities:

Bharti

has sustained its leadership in the Indian wireless market with a subscriber

share of 22% and revenue share of 30%. High population coverage at ~87%

should aid growth in rural areas. With its 3G spectrum footprint in 13

circles and 4G in 8 circles, Bharti is well-positioned to capture the data

opportunity.

Africa business performance a concern:

Africa business performance has

been disappointing as compared to earlier management targets. With

increased competitive intensity and tough macro/regulatory situation in

some of the African countries, Bharti Africa EBITDA (USD) growth declined

to 6% YoY in FY13 vs 27% in FY12. We expect EBITDA CAGR of 13% over

FY13-16E for Bharti Africa.

INR Depreciation not a significant negative provided Africa currency

basket holds:

While INR depreciation leads to higher debt for Bharti on a

consolidated basis, (~INR10b increase in debt for every 1 rupee change in

USD/INR) it also drives EBITDA upgrade for the Africa business provided

that Africa currency basket does not depreciate vs USD.

12% EBITDA CAGR; Buy with price target of INR390:

We expect 12%

EBITDA CAGR and 49% PAT CAGR over FY13-16E led by ~10% revenue

CAGR and ~210bp EBITDA margin expansion. Valuation is attractive at EV/

EBITDA of 5.4x FY15.

Buy

with price target of INR390 implying 35% upside.

36

Sector: Telecom

Bharti: Sustained leadership in Indian wireless









Bharti continues to sustain its leadership position in

revenue and subscriber market share. Bharti reached

its peak subscriber market share (25.1%) in 3QFY09

and revenue market share (33.9%) in 1QFY10

While revenue and subscriber shares declined during

hypercompetition phase, market share has likely

bottomed-out

Bharti holds >30% revenue market share in 12 of the

22 circles. Bharti’s aggregate revenue market share is

~30%

Top-4 circles (Karnataka, AP, Delhi and Tami Nadu)

account for 38% of its overall revenue. Revenue

concentration for Bharti is relatively lower v/s other

operators

Circle-wise GR market share (%)

Bharti: subscriber and GR market share

Circle-wise revenue mix (%)

37

Sector: Telecom

Bharti: Africa business performance remains a concern











Africa constitutes 24% of Bharti’s consolidated

Bharti: FY13 consolidated EBITDA mix (%)

EBITDA

We expect revenue from Africa operations to

grow at 10% CAGR over FY13-16E

We expect only modest improvement in margin

given lower revenue growth. We expect EBITDA

margin to improve from 26.2% in FY13 to 28.6%

in FY16E

EBITDA expected to grow at 13% CAGR over

FY13-16E

With major investments likely behind,

Capex/Sales is expected to settle at 13-15%

Bharti Africa: EBITDA margin trend (%)

Bharti Africa: Revenue, EBITDA & Capex (USD b)

38

Sector: Telecom

Bharti: Currency sensitivity









While INR depreciation vs USD has been a key concern for Bharti Airtel, we highlight that trend in Bharti Africa

currency basket would be critical in determining the net valuation impact

Assuming a total USD exposure of ~USD10b for Bharti, 10% depreciation in INR vs USD (from INR54 to INR59.4)

results in an MTM impact of INR54b

However Bharti’s Africa EBITDA also increases in INR terms due to the currency movement. Bharti Africa currency

basket has depreciated by only ~2% vs USD during 1QFY14 as compared to ~10% depreciation in the INR vs USD

Valuation sensitivity for Bharti would be low (0.5%) even with 10% depreciation in INR vs USD provided Bharti’s

Africa currency basket does not depreciate. Assuming even a 5% depreciation in the African currency basket, net

valuation impact would be only ~3%

Calculation of net valuation impact of currency movements

Summary of net valuation impact of currency movements

Index of Bharti Africa revenue currency basket vs USD

39

Sector: Telecom

Bharti: Price target INR390; Buy



We expect 12% proforma EBITDA CAGR and 49% PAT CAGR over FY13-16E driven by inflection in tariff

trajectory along with continued voice traffic and data growth

Given lack of regulatory clarity, our target price incorporates potential liability of INR188b (75% of

potential liability as per current benchmark spectrum price)

At an FY14EV/ EBITDA of 6.7x FY14, we believe that valuation is attractive

Maintain Buy

with price target of INR390 based on target FY15 EV/EBITDA of 8x for India & SA

business (excl towers), Bharti Infratel stake at 15% discount to our target price, and 6x FY15

EV/EBITDA for Africa business







40

Sector: Telecom

Key assumptions

41

Sector: Telecom

Business mix: Revenue, EBITDA & Capex

42

Sector: Telecom

Bharti Airtel: Financials

43

Sector: Telecom

Bharti Airtel: Financials

44

Sector: Telecom

Appendix

Quarterly performance: Bharti Airtel

45

Sector: Telecom

Cost structure: India, South Asia and Africa

Bharti (India & South Asia): operating costs (% of revenue)

Bharti (Africa): Operating costs (% of revenue)

46

Sector: Telecom

Idea Cellular

(IDEA

IN; Mkt Cap USD8.2b; CMP INR143; TP INR175; 22% Upside; Buy)











Strong execution; continued market share gains:

Idea maintained its track-

record of consistently gaining revenue market share (RMS) and reached

15.2% RMS in FY13 vs 12.4% in FY10. FY13 traffic growth of 17% for Idea was

~2x industry growth of ~9%. We expect FY13-16E wireless traffic CAGR of 12%

for Idea driven by strong execution in established as well as new circles.

Best balance-sheet in the sector; expect further de-leveraging with FCF

inflection in FY14:

Idea has the best balance sheet in the Indian telecom

sector with FY13 Net Debt/EBITDA of 2.1x. FY14 would be an inflection year

for Idea’s FCF generation with FY14E FCF of ~INR18b. We expect further de-

leveraging with Net Debt/EBITDA expected to decline to 0.9x by FY15E

although it is likely to increase in FY16E due to spectrum renewal payments.

Operating leverage to drive margin expansion:

Above industry volume

growth and RPM improvement should drive operating leverage with

consolidated EBITDA margin expected to improve from 26.7% in FY13 to

30.4% by FY16E.

Regulatory challenges continue; major spectrum renewal payment due only

in FY16:

Idea continues to face regulatory challenges with respect to 1)

Spectrum pricing/renewal (higher downside risk vs Bharti), 2) Spice Merger,

and 3) Specific tax disputes. However major spectrum renewal payment for

Idea is due only in FY16.

20% EBITDA CAGR; Buy with price target of INR175:

We expect 20%/53%

EBITDA/PAT CAGR over FY13-16E led by 12% traffic CAGR, 2.5% RPM CAGR

and 370bp cumulative EBITDA margin expansion. Buy with price target of

INR175 (INR150 earlier) based on 9x FY15 EV/EBITDA for core business, 20%

discount to Indus stake fair value, and INR129b for spectrum outlay.

Increased target multiple (vs 8x for Bharti) reflects superior growth visibility

for Idea.

47

Sector: Telecom

Idea: 15% Revenue CAGR; Market share improving











Idea has steadily gained revenue market share across

Proforma revenue breakup (INR b)

circles

While it has strong incumbency advantage in MP,

Kerala, UP (W) and Maharashtra (28-35% revenue mkt

share), we believe that all its circles except top-11 are

at sub-optimal scale

Idea generates ~50% of revenue from its top-5 circles

with Maharashtra contributing 15%

We expect revenue to grow at 15% CAGR between

FY13-16E to INR 339b driven by 12% traffic CAGR and

2.5% RPM CAGR

Established circle revenue (ex-3G) to grow at 12%

CAGR; higher growth to be driven by new circles and

3G data revenue

Circle-wise GR market share (%)

Circle-wise revenue mix (%)

48

Sector: Telecom

Idea: 20% EBITDA CAGR over FY13-16E











Strong volume growth, stable RPM and margin

expansion resulted in 10% QoQ increase in the

standalone EBITDA per minute for Idea

We believe there is further scope for operating

leverage benefits to kick-in

We expect Idea’s EBITDA to grow at 20% CAGR

between FY13-16E to INR 103b

Established circles to exhibit EBITDA CAGR of 16%

Margin expansion to be driven by improvement in

established circles and lower loss in new circles

4QFY13 proforma standalone EBITDA/min up 10% QoQ (p)

Proforma EBITDA breakup (INR b)

Established circle margin expanding (%)

49

Sector: Telecom

Idea: Price target INR175; Buy



We expect 20% proforma EBITDA CAGR and 53% PAT CAGR over FY13-16E driven by inflection in tariff trajectory

along with continued voice traffic and data growth

Given lack of regulatory clarity, our target price incorporates potential liability of INR129b (75% of potential liability

as per current benchmark spectrum price)







At an FY14EV/ EBITDA of 7.8x FY14, we believe that valuation is attractive considering strong growth

Maintain Buy

with price target of INR175 (Vs INR150 earlier) based on target FY15 EV/EBITDA of 9x (8x earlier) for

core wireless business and INR3.3m/tower for Indus stake (with 20% hold co discount)

Increased target multiple reflects superior growth visibility for Idea



50

Sector: Telecom

Idea: Key assumptions

51

Sector: Telecom

Idea: Business Mix

52

Sector: Telecom

Idea: Financials

53

Sector: Telecom

Idea: Financials

54

Sector: Telecom

Appendix

Quarterly performance: Idea

55

Sector: Telecom

Idea cost structure

Idea: Operating costs (% of revenue)

56

Sector: Telecom

Reliance Comm

(RCOM

IN; Mkt Cap USD4.4b; CMP INR125; TP INR111; 11% Downside; Neutral)











Fifth consecutive year of wireless market share decline though QoQ

trend stabilising:

RCom’s wireless revenue market share declined for fifth

consecutive year to 7.9% (down 60bp YoY) in FY13. However QoQ

revenue market share trend seems to be stabilizing over the past few

quarters. 4QFY13 RMS of 8% was marginally higher than the FY13

average of 7.9%.

High leverage remains a concern:

GSM rollout, 3G spectrum payments

and hyper-competition resulted in an increase in net debt from ~INR18b

in FY07 to ~INR389b in FY13. At Net debt/EBITDA of ~6x, the balance

sheet remains stretched.

Reliance JIO tower deal implies steady state incremental EBITDA of

INR7-7.5b pa:

INR120b tower rental deal with Reliance JIO implies an

incremental steady state rental revenue of ~INR8b per year and

incremental EBITDA of INR7-7.5b per year. The deal would aid de-

leveraging and there is further scope for a similar infrastructure sharing

deal for RCom’s intra-city fiber.

Improved industry environment to drive 13% EBITDA CAGR over FY13-

16E:

After three consecutive years of decline in revenue/EBITDA, there

was recovery in FY13 financial performance with 2-3% revenue/EBITDA

growth. We model 13% EBITDA CAGR driven by 5% traffic CAGR and 5%

RPM CAGR.

Maintain Neutral with price target of INR111:

RCom trades at an

EV/EBITDA of 7.8x FY14E and 6.2x FY15E. Maintain

Neutral

with a target

price of INR111 based on FY15 EV/EBITDA of 6x, ~INR40b upside

assumed from the two deals with Reliance JIO and ~INR35b outlay

towards spectrum liability.

57

Sector: Telecom

RCOM: Leverage remains a concern









High leverage remains a concern for RCom

At current levels of net debt to EBITDA of ~6x, balance sheet is stretched

Leverage is likely to reduce gradually over the next few years

We expect net debt/annualized EBITDA to reach 2.5x by FY16E

Leverage: Annual trend

Leverage: Quarterly trend

58

Sector: Telecom

RCOM: Market share and RPM stabilizing













There is significant discrepancy between reported

subscriber and revenue market shares for RCom

Subscriber market share decline is likely led by

churn recognition of dormant subscribers

Revenue market share seems to have bottomed-

out, implying improved execution in recent

quarters

RCOM has a >15% GR market share only in three

circles –M.P, H.P & Assam and double-digit market

share in eight circles

Top-5 circles contribute 43% to wireless revenue

Circle level revenue analysis underscores sub scale

operations and revenue concentration

Circlewise revenue market share (%)

Subscriber and GR market share (%)

Circlewise revenue mix (%)

59

Sector: Telecom

RCOM: Price target of INR111; Neutral





RCom trades at EV/EBITDA of 7.8x FY14E and 6.2x FY15E

We maintain Neutral with a target price of INR111 based on FY15 EV/EBITDA of 6x, ~INR40b upside

assumed from the two deals with Reliance JIO and ~INR35b outlay towards spectrum liability

60

Sector: Telecom

Key assumptions

61

Sector: Telecom

Business mix: Revenue and EBITDA

62

Sector: Telecom

RCOM: Financials

63

Sector: Telecom

RCOM: Financials

64

Sector: Telecom

Appendix

Quarterly performance: RCOM

65

Sector: Telecom

Cost structure

RCom: Operating costs (% of revenue)

66

Sector: Telecom

NOTES

67

Sector: Telecom

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Sector: Telecom

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Sector: Telecom

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