Sector Update
Sector Update | 7 October 2013
Telecom
Expect traffic decline in 2Q: Seasonality or Elasticity?
Quantifying the seasonality impact for wireless operators
Presenting…
Telecom Consolidation
“Call Tracker”
In our June 2013 report titled
‘Consolidation Calling’, we discussed
various
initiatives
/indicators/scenarios and likely
beneficiaries of the on-going
consolidation in the Indian wireless
sector. Voice business is reaching
maturity and rationality is returning
as focus shifts from ‘chasing
subscribers’ to ‘RPM /profitability
improve-ment’.
Wireless
incumbents are likely to benefit as
consolidation process accelerates
given their strong market position
and relatively better balance sheet
strength.
Consolidation thesis is playing out
well as signified by 4-6% RPM
improvement in 1QFY14 and
improved
aggregate
revenue
market share of top-3 wireless
incumbents. Expected seasonality
and potential elasticity post recent
RPM increases could result in
sluggish 2QFY14. While we maintain
our positive outlook, we would
closely monitor demand elasticity
due to its potential impact on RPM
trajectory. In this note, we quantify
the seasonality based on historical
trends which can be used to gauge
as to whether elasticity impact, if
any, is at play
Report dated June 2013
Historical 2Q seasonality pattern suggests potential traffic decline of ~3% QoQ:
Wireless traffic during 2QFY14 is likely to decline QoQ led by seasonal weakness
as well as potential elasticity impact post the 4-6% RPM increase for wireless
operators during 1QFY14. Traffic seasonality in 2Q is largely due to lower usage
in the rural markets and is well-established from historical trends. Traffic growth
in 2Q at the aggregate level has historically declined by 6-7 percentage points as
compared to the average QoQ growth witnessed during the preceding three
quarters (3Q-1Q). Based on the average traffic growth of 3% in the preceding
three quarters (3QFY13-1QFY14), a ‘normal’ seasonal impact should result in
~3% decline in traffic at the aggregate level. Our 2QFY14 traffic estimates are in-
line with this.
Idea has historically been more impacted by seasonality than
Bharti/Vodafone…:
Given its higher proportion of rural subscribers and lower
mix of revenue from metro circles, Idea is more prone to traffic seasonality as
compared to Bharti and Vodafone. In the past five years, the average growth
differential for Idea’s mobile traffic in 2Q has been ~10 percentage points as
compared to average growth clocked during the preceding three quarters. This
compares to a growth differential of 6/7 percentage points for Vodafone/Bharti.
…in line with its ‘seasonality score’:
To quantify the seasonality impact, we
have devised a ‘seasonality score’ defined as percentage mix of rural subscribers
(which exhibit high seasonality) minus percentage revenue contribution from
the metros (likely to be relatively immune to seasonality). Among the GSM
incumbents, Idea has the highest ‘seasonality score’ of 44 (54% mix of rural
subscribers less 10% revenue contribution from metros) as compared to a score
of 29-30 for Bharti/Vodafone as well as industry aggregate.
RPM to exhibit a step function; weak traffic momentum can delay next up-
move:
RPM is expected to follow a step function as operators are likely to
maintain a time gap between two large tariff interventions to minimize the
elasticity impact. Post significant improvement in 1QFY14, we expect RPM to
remain stable in 2QFY14. While RPM improvement measures should re-start in
2HFY14, potential weak traffic momentum can delay these initiatives till growth
recovers.
Revised estimates and TP for Bharti to reflect change in forex assumptions:
In
line with our economist view, we have revised our USD/INR assumptions for
FY14/15 to 60.6/60 vs INR58/58 earlier. While our revenue/EBITDA and target
price for Bharti are impacted marginally, FY14/15 PAT estimates have been
downgraded by 16/6% due to modeled MTM loss and translation impact of PAT
loss in the Africa operations. Our estimates and target prices for Idea/RCom are
largely unchanged.
Retain positive view on Bharti/Idea despite sluggish 2QFY14:
Despite likely
sluggish 2QFY14, we maintain our positive stance on the sector given ongoing
consolidation. Maintain Buy on Bharti/Idea which offer 14/22% EBITDA CAGR
over FY13-16E and trade at 6.1/6.5x FY15 EV/EBITDA.
Shobhit Khare
(Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428
Anil Shenoy
(Anil.Shenoy@MotilalOswal.com); +91 22 3029 5126
Investors are advised to refer through disclosures made at the end of the Research Report.

Sector Update
Comparative Valuation
CMP
(INR)
Bharti Airtel
Idea
RCom
323
172
147
Rating
Buy
Buy
Neutral
TP
(INR)
445
200
110
Upside Mcap
38
16
-25
21.0
9.3
4.9
EV
29.5
11.4
11.3
42.1
28.9
30.1
P/E (x)
FY14E FY15E FY16E
23.6
19.3
13.1
15.3
16.1
8.8
EV/EBITDA (x)
FY14E FY15E FY16E
7.6
8.2
9.1
6.1
6.5
7.3
5.0
5.9
6.1
EV/Sales (x)
FY14E FY15E FY16E
2.4
2.5
3.0
2.1
2.1
2.5
1.8
1.9
2.2
(%) (USDb)(USDb)
*Proportionate EV/EBITDA and EV/sales
RoIC (%)
FY14E FY15E FY16E
Bharti Airtel 4.7
6.9
9.8
Idea
8.8
12.4
13.5
RCom
5.4
7.2
8.8
RoE (%)
FY14E FY15E
5.2
8.4
12.8
16.6
3.4
7.5
EBITDA Margin (%)
FY14E FY15E FY16E
31.9
33.6
34.3
31.0
31.9
32.6
32.4
34.4
35.5
Net Debt/EBITDA (x)
FY14E FY15E FY16E
2.3
1.6
1.0
1.2
0.6
0.7
4.9
3.6
2.7
EPS (INR)
FY14E FY15E
7.7
13.7
6.0
8.9
4.9
11.2
Net Debt/Equity (x)
FY14E FY15E FY16E
1.0
0.7
0.4
0.6
0.3
0.3
1.2
0.9
0.7
EPS Gr. (%)
FY14E FY15E FY16E
27.9 78.7 54.3
95.6 49.4 20.3
416.4 130.3 48.3
Source: MOSL
Fair value
(INR b)
1,789
234
437
497
188
1,541
Value/
Sh
448
59
110
125
47
445
323
38
Source: MOSL
Driver
Multiple
9.5
3.3
Fair Value (INR b)
806
40*
54
663
3,303
172
16
Source: MOSL
Methodology
Driver
79
8
Multiple
6.5
5.0
Fair Value
(INR b)
514
40
294
35
225
2,063
110
147
-25
Value/sh
(INR)
249
19
141
17
110
Value/sh (INR)
243
12
16
200
FY16E
11.7
17.2
10.2
FY14E
Bharti Airtel 13.5
Idea
12.5
RCom
5.5
Capex/Sales (%)
Sales Gr. (%)
EBITDA Growth (%)
FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E
13.5
11.1
10.9
7.9
8.9
16.9
13.8
11.2
10.0
9.0
17.5
13.5
12.0
36.0
17.1
14.3
5.6
8.6
4.5
7.6
6.3
7.6
14.4
9.6
FY16E
21.1
10.7
16.6
Bharti - SOTP valuation
SOTP VALUATION
India business (excl. towers)
Tower business (15% discount to fair value)
Africa business
Less FY15 net debt
Less 75% of potential spectrum liability within 4 yrs
Total Value
Shares o/s (b)
CMP
Upside (%)
FY15 EBITDA
(INR B)
199
81
Owner
ship (%)
100
79
90
Proportionate
EBITDA (INR b)
199
73
EV/EBITDA
9.0
6.0
3.99
Idea - SOTP valuation
SOTP Valuation (INR)
Methodology
Core Business (ex-Indus)
FY15 EV/EBITDA
85
Stake in Indus
FY15 EV/Tower
118,000
Less Net debt (FY15E)
Less 75% of potential spectrum related payments within 4 yrs
Total Value
Shares o/s (m)
CMP (INR)
Upside (%)
RCom - SOTP valuation
SOTP Valuation (INR)
Core business (ex Reliance JIO)
FY15 EV/EBITDA
Add upside from announced Reliance JIO (towers + inter-city fiber)EV/ Steady state EBITDA
Less Net debt (FY15E)
Less 75% of spectrum liability due in next four years
Total Value
Shares o/s (m)
Value per share (INR)
CMP (INR)
Upside (%)
Source: MOSL
7 October 2013
2

Sector Update
Historical 2Q seasonality pattern suggests potential traffic
decline of ~3% QoQ
Wireless traffic during 2QFY14 is likely to decline QoQ led by seasonal weakness as
well as potential elasticity impact post the 4-6% RPM increase for wireless
operators during 1QFY14. Traffic seasonality in 2Q is largely due to lower usage in
the rural markets and is well-established from historical trends. Traffic growth in
2Q at the aggregate level has historically declined by 6-7 percentage points as
compared to the average QoQ growth witnessed during the preceding three
quarters (3Q-1Q). Based on the average traffic growth of 3% in the preceding three
quarters (3QFY13-1QFY14), a ‘normal’ seasonal impact should result in ~3% decline
in traffic at the aggregate level. Our 2QFY14 traffic estimates are in-line with this.
Aggregate QoQ traffic growth: Sharp decline witnessed in 2Q (%)
Traffic growth in 2Q at the
aggregate level has
historically declined by 6-7
percentage points as
compared to the average
QoQ growth witnessed
during the preceding three
quarters (3Q-1Q).
Source: MOSL
Aggregate traffic growth differential in 2Q vs preceding three quarter average (%)
Source: MOSL
7 October 2013
3

Sector Update
Idea has historically been more impacted by seasonality than
Bharti/Vodafone
Given its higher proportion of rural subscribers and lower mix of revenue from
metro circles, Idea is more prone to traffic seasonality as compared to Bharti and
Vodafone. In the past five years, the average growth differential for Idea’s mobile
traffic in 2Q has been ~10 percentage points as compared to average growth
clocked during the preceding three quarters. This compares to a growth differential
of 6/7 percentage points for Vodafone/Bharti.
Company traffic growth differential between 2Q and preceding three quarter average (%)
In the past five years, 2Q
seasonality has, on average,
impacted Idea’s traffic
growth by ~10 percentage
points (6-7 for
Bharti/Vodafone) as
compared to average
growth clocked during the
preceding three quarters.
Source: Company, MOSL
Bharti:
For Bharti, the seasonality impact has led to an average 7 percentage points
growth differential in 2Q v/s the average growth in preceding three quarters. The
historical range of growth differential for Bharti has been 5-10 percentage points.
Bharti: Aggregate traffic growth declines by ~7 percentage points in 2Q (%)
For Bharti, the seasonality
impact has led to an
average 7 percentage
points growth differential in
2Q v/s the average growth
in preceding three quarters.
Source: Company, MOSL
Bharti: Traffic growth differential between 2Q and preceding three quarter average (%)
Source: Company, MOSL
7 October 2013
4

Sector Update
Vodafone:
For Vodafone, the seasonality impact has led to an average 6 percentage
points growth differential in 2Q v/s the average growth in preceding three quarters.
The historical range of growth differential for Vodafone has been 2-9 percentage
points.
Vodafone: Aggregate traffic growth declines by ~6 percentage points in 2Q (%)
For Vodafone, the
seasonality impact has led
to an average 6 percentage
points growth differential in
2Q v/s the average growth
in preceding three quarters.
Source: Company, MOSL
Vodafone: Traffic growth differential between 2Q and preceding three quarter average (%)
Source: Company, MOSL
Idea:
For Idea, the seasonality impact has led to an average 10 percentage points
growth differential in 2Q v/s the average growth in preceding three quarters. The
historical range of growth differential for Idea has been 7-11 percentage points.
Idea: Aggregate traffic growth declines by ~10 percentage points in 2Q
For Idea, the seasonality
impact has led to an
average 10 percentage
points growth differential in
2Q v/s the average growth
in preceding three quarters.
Source: Company, MOSL
7 October 2013
5

Sector Update
Idea: Traffic growth differential between 2Q and preceding three quarter average (%)
Source: Company, MOSL
7 October 2013
6

Sector Update
Gauging seasonal weakness through ‘seasonality score’
To quantify the seasonality impact, we have devised a ‘seasonality score’ defined as
percentage mix of rural subscribers (which exhibit high seasonality) minus
percentage revenue contribution from the metros (likely to be relatively immune to
seasonality). Among the GSM incumbents, Idea has the highest ‘seasonality score’ of
44 (54% mix of rural subscribers less 10% revenue contribution from metros) as
compared to 29 for Bharti (45% mix of rural subscribers less 16% revenue
contribution from metros), 30 for Vodafone (54% mix of rural subscribers less 24%
revenue contribution from metros) and 30 for the industry (47% mix of rural
subscribers less 17% revenue contribution from metros).
Revenue contribution from metros (%)
Idea has the lowest revenue
contribution from metros at
10% as compared to
16/24% for
Bharti/Vodafone
Source: COAI, MOSL
Mix of rural subscribers (%)
Idea has the highest mix of
rural subscribers at 54% as
compared to 45/54% for
Bharti/Vodafone
Source: COAI, MOSL
Seasonality score: Rural subscriber mix minus metro revenue mix
Idea’s seasonality score at
44 is 45-50% more than
Bharti/Vodafone (29/30)
7 October 2013
7

Sector Update
RPM to follow step function; prolonged traffic weakness can
delay next up-move
RPM is expected to follow a step function as operators are likely to maintain a time
gap between two large tariff interventions to minimize the elasticity impact. Post
significant improvement in 1QFY14, we expect RPM to remain stable in 2QFY14.
While RPM improvement measures should re-start in 2HFY14, potential weak traffic
momentum can delay these initiatives till growth recovers.
Aggregate quarterly RPM of wireless majors (p)
Post a 4-6% RPM
improvement for the
incumbents in 1QFY14, we
expect RPM to stabilize in
2QFY14 and have not built
in any growth in 2QFY14.
Source: MOSL
Bharti Airtel: YoY RPM growth (%)
Source: Company, MOSL
Aggregate QoQ traffic growth of wireless majors (%)
Source: MOSL
7 October 2013
8

Sector Update
Revised estimates and TP for Bharti to reflect change in forex
assumptions
In line with our economist view, we are changing our USD/INR assumptions for
FY14/15 to 60.6/60 vs INR58/58 earlier. While our revenue/EBITDA and target price
for Bharti are impacted marginally, FY14/15 PAT estimates are downgraded by
16/6% due to modeled MTM loss and translation impact of PAT loss in the Africa
operations. Our estimates for Idea/RCom are largely unchanged.
Bharti: Summary of change in estimates & TP
Previous
844
272
36
450
FY14
Revised
853
272
30
445
Change
1
0
-16
-1
Previous
917
310
59
450
FY15
Revised
921
309
55
445
Change
0
0
-6
-1
Source: MOSL
Revenue (INR b)
EBITDA (INR b)
PAT (INR b)
Target price (INR)
INR depreciation to a USD/INR of 62.5 from 59.7 has the following impacts in
2QFY14:
EBITDA: Positive impact of ~INR0.8b due to translation of Africa EBITDA.
Depreciation: Negative impact of ~INR0.6b due to translation of Africa
depreciation.
Finance cost: Negative impact of ~INR3.3b due to translation of Africa
finance cost as well as forex loss of INR2.8b on the USD debt on Indian
balance sheet (~USD1b).
Tax expense: Positive impact of ~INR0.9b.
Bharti Airtel: PAT bridge for impact of INR depreciation from 59.7 to 62.5 on 2QFY14
numbers (INR b)
Source: Company, MOSL
7 October 2013
9

Sector Update
Retain positive view on Bharti/Idea despite sluggish 2QFY14
Despite likely sluggish 2QFY14, we maintain our positive stance on the sector given
ongoing consolidation. Maintain Buy on Bharti/Idea which offer 14/22% EBITDA
CAGR over FY13-16E and trade at 6.1/6.5x FY15 EV/EBITDA.
Telecom Universe - CYTD stock performance (Jan 1 2013 price indexed to 100)
Source: MOSL
Bharti: EV/EBITDA chart
16
12
Median of 8.8x
8
4
Bottom of 6.2x
6.4
Peak of 14.5x
Source: Company, MOSL
Idea: EV/EBITDA chart
18
14
10
6
2
Median of 7.6x
Bottom of 5.3x
7.1
Peak of 16.9x
Source: Company, MOSL
7 October 2013
10

Sector Update
Bharti Airtel: Quarterly performance (INR m)
Y/E March
Revenue
YoY Growth (%)
EBITDA
YoY Growth (%)
QoQ Growth (%)
Margin (%)
Net Finance Costs
Depreciation & Amortization
Profit before Tax
Income Tax Expense / (Income)
Profit after Tax
Minority interest
Reported Net Profit / (Loss)
YoY Growth (%)
Consolidated net debt (INR b)
India - Mobile Traffic (B Min)
QoQ Growth (%)
India - Mobile RPM (p/min)
QoQ Growth (%)
Africa - Revenue (USD m)
Africa - EBITDA (USD m)
Africa - EBITDA margin (%)
1Q
185,601
9.3
54,856
-3.9
-12.0
29.6
7,367
35,901
12,294
4,543
7,751
-129
7,622
-37.3
656
239
3.7
42.7
-2.6
1,066
275
25.8
FY13
2Q
3Q
4Q
193,999 193,624 195,821
12.3
4.8
4.6
59,369 57,749 60,605
2.1
-3.1
-2.8
8.2
-2.7
4.9
30.6
29.8
30.9
9,250 12,310 11,157
36,891 37,350 38,006
14,211
9,032 12,317
7,195
6,192
7,254
7,016
2,839
5,063
196
-2
23
7,212
2,836
5,086
-29.8
-72.0
-49.4
612
585
586
234
241
253
-2.1
2.8
5.1
42.6
42.6
42.4
-0.2
-0.1
-0.5
1,097
1,133
1,120
298
300
285
27.1
26.5
25.4
1Q
202,639
9.2
65,449
19.3
8.0
32.3
11,676
38,470
16,125
8,573
7,553
-664
6,889
-9.6
593
258
2.1
44.0
3.9
1,062
283
26.7
FY14
2QE
3QE
4QE
209,143 216,734 224,461
7.8
11.9
14.6
64,406 68,582 73,454
8.5
18.8
21.2
-1.6
6.5
7.1
30.8
31.6
32.7
13,037 10,006
9,762
41,430 41,950 42,578
10,816 17,561 22,111
7,079
8,785 10,014
3,738
8,776 12,097
-388
-395
-395
3,350
8,380 11,702
-53.5
195.4
130.1
674
648
631
249
257
267
-3.5
3.0
4.0
44.0
44.5
45.0
0.0
1.2
1.1
1,085
1,124
1,162
291
306
313
26.8
27.2
26.9
FY13
769,045
7.6
232,579
-1.9
30.2
40,085
148,148
47,852
25,183
22,669
88
22,757
-46.6
586
968
42.4
FY14E
852,977
10.9
271,891
16.9
31.9
44,481
164,429
66,614
34,450
32,164
-1,842
30,322
33.2
631
1,032
44.4
4,416
4,433
1,157
1,193
26.2
26.9
Source: Company, MOSL
Idea Cellular: Quarterly performance (INR m)
Y/E March
FY13
FY14
FY13
FY14E
1Q
2Q
3Q
4Q#
1Q#
2QE
3QE
4QE
Gross Revenue
55,037 53,140 55,785 60,614
65,388 63,353 65,841 69,213 224,578
263,794
YoY Growth (%)
21.7
15.0
10.9
12.9
18.8
19.2
18.0
14.2
14.9
17.5
QoQ Growth (%)
2.5
-3.4
5.0
8.7
7.9
-3.1
3.9
5.1
EBITDA
14,355 14,225 14,734 17,491
21,013 19,175 20,140 21,592
60,045
81,670
YoY Growth (%)
19.2
19.9
9.6
16.1
46.4
34.8
36.7
23.4
17.9
36.0
QoQ Growth (%)
-4.8
-0.9
3.6
18.7
20.1
-8.7
5.0
7.2
Margin (%)
26.1
26.8
26.4
28.9
32.1
30.3
30.6
31.2
26.7
31.0
Net Finance Costs
2,670
2,164
2,416
2,244
2,211
1,953
1,608
1,544
9,494
7,316
Depreciation & Amortization
8,324
8,526
8,836
9,092
11,353 10,593 10,789 11,066
34,778
43,800
Profit before Tax
3,361
3,536
3,482
6,155
7,450
6,629
7,744
8,982
15,774
30,554
Income Tax Exp. / (Income)
1,019
1,136
1,196
2,313
2,572
2,320
2,710
3,144
5,664
10,746
Adj Net Profit / (Loss)
2,342
2,400
2,286
3,842
4,878
4,309
5,033
5,838
10,110
19,807
YoY Growth (%)
32.1
126.9
13.7
12.0
108.2
79.6
120.2
52.0
39.8
95.9
Margin (%)
4.3
4.5
4.1
6.3
7.5
6.8
7.6
8.4
4.5
7.5
Mobile ARPU (INR/month)
156
148
158
167
174
164
167
170
156
166
QoQ Growth (%)
-2.5
-5.1
6.8
5.7
4.2
-5.9
1.7
2.1
-0.9
6.3
Mobile MOU/sub/month
379
359
384
406
398
374
377
375
376
379
QoQ Growth (%)
0.0
-5.3
7.0
5.7
-2.0
-5.9
0.6
-0.4
1.2
0.8
Mobile Traffic (B Min)
131
126
132
143
147
141
146
150
532
584
QoQ Growth (%)
5.3
-4.0
5.2
8.5
2.8
-4.0
3.0
2.9
17.4
9.8
Mobile RPM (INR)
0.41
0.41
0.41
0.41
0.44
0.44
0.44
0.45
0.41
0.44
QoQ Growth (%)
-2.5
0.2
-0.2
0.0
6.3
0.0
1.1
2.4
-2.1
5.5
E: MOSL Estimates; # Adjusted for one-off provision for licence and WPC charges of INR0.76b in 4QFY13 and INR0.25b in 1QFY14
Source: Company, MOSL
7 October 2013
11

Sector Update
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