Telecom: Battle Royale – Detailed Report

Telecom | Battle Royale

Contents: Battle Royale

Summary

........................................................................................................

Infographics

....................................................................................................

Global Comparison

.........................................................................................

RJio launches its much-awaited telecom services

......................................

Industry Landscape

..................................................................................

15-32



Telecom industry has not made money for last 9-10 years! Can this be reversed? .......15

Hints of FY03-08 Renaissance? Data could drive long-term asset monetization phase .17

India’s technology advancement gap shortens, extending investment period ..............19

Gross industry revenue to be driven by data business ...................................................20

Voice market to be on a downward spiral ......................................................................21

Data business – the flag bearer .......................................................................................24

The IUC could see a sharp revision - a major risk for top 3 telcos ..................................31

RJio - Throwing rationality to the wind

..................................................

33-42



High capacity but weak coverage ....................................................................................33

Three-pronged product offerings....................................................................................33

Positive and negatives of test outcomes.........................................................................34

Unlimited voice plan - Has RJio underestimated the cost overrun related to IUC? ........36

Data-focused revenue model dismantles traditional voice-led business models ...........36

Expect EBITDA breakeven by FY20; estimate DCF value of ~INR5/share ........................38

Spectrum Footprint

.................................................................................

43-50

RJio/Bharti dominate LTE spectrum holdings too ...........................................................43



An INR368b spectrum hole to be filled ...........................................................................44



Ecosystem development progressing well

..................................................



1800Mhz, 800Mhz and 2100Mhz most compatible for LTE upgrades............................51

India’s smartphone penetration low but growing fast ...................................................52

Data coverage needs to grow v/s other markets ............................................................58

Barriers to internet usage in India...................................................................................61

5mbps good enough for major data needs .....................................................................62

Company Section

.....................................................................................

65-88

Bharti Airtel .....................................................................................................................66



Idea Cellular ....................................................................................................................74



Bharti Infratel ..................................................................................................................81

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October 2016

Telecom | Battle Royale

Telecom

Battle Royale

Data revenue pool to expand significantly



Indian telecom sector is set for a Battle Royale. In the last two decades, this

will be the third phase of competition and perhaps the fiercest one. In early

2000s, value migration from fixed to wireless services was a game-changing

event as voice revenues exploded despite intense competition. In FY07-08, the

incumbents were challenged by weak players, but it led to a disruption in

pricing, in turn impacting the return ratios significantly. Now, Reliance Jio’s

wireless services launch has set the stage for the third phase of the battle.

We expect this to be highly disruptive in the near term. It may be a battle of

survival, especially for uncompetitive marginal operators, as pricing strategies

and increased competitive intensity will enforce consolidation. The current

dynamic operating/regulatory environment and high investments – a scenario

similar to 2002 – would ultimately lead to select players surviving and owning

a pie of the expanded revenue pool in the longer term.

Over the next five years (FY17-22E), we expect revenue pool expansion, with

industry data growth of 32% more than offsetting voice revenue decline of 4%.

Over this period, we see RJio’s market share reaching 17%, with about 440bp

of that taken from the top three telcos and the rest from marginal operators.

Voice v/s data:

RJio’s wireless mobile services launch with free voice offering is

likely to lead to a major shift in the telecom market dynamics. Among RJio’s

announced plans/offering, we are surprised by the simplified unlimited voice

price plan with ARPU of INR149/28 days. In our view, this could potentially

change the course of the industry over the coming months. Although industry

voice ARPU of INR124/month (which contributes 75% of telecom sector

revenues) is below RJio’s INR149/month plan, it will be challenging for existing

operators to retain their mid-higher ARPU voice subscribers, who would find it

beneficial to go with RJio’s fixed monthly plan with free voice services.

Who wins, who loses:

Over next two years, we expect intense competition as

telcos battle to protect their market shares. We expect RJio’s ‘nothing to lose’

attitude to continue disrupting the market over next 6-8 quarters. As RJio’s

capacity utilization reaches 60% and market share increases to ~10%,

incremental investment will drive rationality in the market. We see RJio’s

market share reaching 9% by FY19E, with over 70% of that taken from marginal

players and the rest from the top three operators. As operators try to protect

their market shares, the voice/data price disruption should lead to 2% industry

revenue de-growth in FY17E (for the first time in over a decade) and low 4%

growth in FY18E, before growth rebounds to 9% in FY19E.

Market share:

RJio’s abundant network capacity and perishable product will

keep its pricing irrational over next 6-8 quarters. We expect RJio to attract 84m

subscribers (7% subscriber market share) by FY19E, and its high ARPU of

~INR250 to help it garner revenues of INR217b (10.1% revenue market share).

Profitability:

Given its high operating costs, we expect EBITDA to breakeven in

FY20E and generate 7.5% project IRR over the license period until FY30E. RJio’s

Structural change in telecom industry dynamics



Battle of survival

Telecom

RJio – EBITDA breakeven in FY20; Estimate DCF value of ~INR5/share

Al i asgar.shakir@MotilalOswal.com

+91 22 2261291565



Please click here for video

link

October 2016



Telecom | Battle Royale

stretched capital employed of INR1,500b compared to Bharti’s INR1,200b and

Idea’s INR700b would keep the return ratios under pressure. Under our DCF

model, we derive an equity value of INR5/share.

Battle of capacity and capital



The Indian telecom industry has become a battlefield for capturing market

shares with capacity and capital. We believe RJio’s high ARPU price plans should

improve overall industry ARPU. However, it will be a challenge for existing

operators to accommodate the heavy traffic even if they match RJio’s high-value

price plans. RJio’s heavy investment in spectrum/network and vacant cell sites

makes it challenging for existing operators to contest in a highly capital-

intensive industry. In our view, Bharti is the only other operator that can match

RJio’s capacity (spectrum and cell sites). Marginal operators, as well as Idea and

Vodafone remain the most vulnerable (in that order) to market share loss, given

their weak spectrum portfolio and network footprint.

Our view: Near-term freebies to impact telecom earnings; Bharti looks

promising over longer term



RJio’s free welcome offer should dilute voice and data traffic. Post the welcome

offer, RJio’s ARPU-centric price plan introduces an element of uncertainty to our

traditional price and volume driven model, and may weigh on Bharti and Idea’s

stock price. Following 6-8 quarters of disruption, the need for incremental

investment will drive rationality in the market. RJio’s high ARPU price plans

remain long-term positive for the industry. We continue believing that Bharti

should benefit over the long term from its network preparedness and strong

competitive positioning. Vodafone’s 4G execution capability in many European

countries and over USD7b recent equity investment should help it manage

competitive pressure. We believe Idea remains vulnerable given its weak

competitive footing.

Cut in estimates:

We cut Bharti’s consolidated revenue and EBITDA estimates

for FY17-19 by 6-9% and 7-12%, respectively. Similarly, Idea’s revenue and

EBITDA estimates for FY17-19 are lowered by 6-9% and 17-23%, respectively.

This is led by expectation of voice/data traffic dilution to RJio (which should

benefit from the second SIM phenomenon), even as telcos arrest the traffic shift

by lowering prices. We must admit that our estimates remain extremely fluid

and fragile, given the likely multiple rejig in strategy and offerings hereon.

Bharti – maintain Buy with TP of INR 410; Idea – maintain Sell with revised TP

of INR75:

We believe Bharti stands to benefit following the 6-8 quarters of

uncertain market scenario. We maintain our target price for Bharti at INR410

and retain Buy. On the other hand, Idea’s no. 3 position remains vulnerable due

to its weak competitive footing and stretched balance sheet. We have lowered

Idea’s TP to INR75, maintaining our Sell rating.

Bharti Infratel – key beneficiary in current scenario; Buy with revised TP of INR

435:

We expect the exits of marginal operators and the end of the ongoing

spectrum auction to improve market conditions and drive long-term sustainable

tenancy growth as serious operators will continue to expand. Concerns about

tenancy renewals should also be addressed over next six months. We expect

tenancy-led revenue CAGR FY16-19E of 8%. EBITDA should grow at 9% CAGR

over FY16-19E with tenancy driving 60bp margin improvement. We maintain our

Buy rating on Bharti Infratel on SOTP basis with a revised TP of INR435. Our DCF-

based valuation implies 11.5 EV/EBITDA on FY19E.

October 2016

Telecom | Battle Royale

India’s technology advancement gap shortens, extending investment period

Technology advancement gap between 2G and 3G

was 8-10 years, giving telecom companies

sufficient time to monetize their 2G investments.

India’s technology gap v/s developed nations reduces

Developed

Nations

…….

1991-92

Time-Gap:

8- 10 years

1999-2002

2000

…….

2002-04

Time-Gap:

8- 10 years

2011-12

2010

2010-12

Time-Gap:

3 - 5 years

2014-16

India’s time gap for technology upgradation v/s developed nations reduced from 8-10 years (2G-3G)

to 3-5 years (4G). This has left little time to monetize 3G investments, thereby hurting return ratios.

October 2016

Telecom | Battle Royale

India’s top 3 telcos’ market cap changed by -9% in last 10 years

New

operators

launch telco

operations in

FY08-09

4G rollout

- 2014-16

3,200

2,400

1,600

800

3G rollout

Spectrum

Renewal

None of the telcos have created value for investors

Bharti Airtel

300.0

225.0

150.0

75.0

0.0

Spectrum

Renewal

New operators

launch telco

operations in

FY 08-09

Idea Cellular

Rel. Comm.

4G rollout:

2014-16

Idea:

Stretched

Balance Sheet/

Weak

Competitive

rooting

Bharti’s Africa

Acquisition

3G rollout

Bharti – reaped healthy gains during 2002-08; 2008-16 remained a drag

MARKET DARLING

1750

1400

1050

700

350

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

…….

MARKET PARIAH

RoCE (%)

RoE (%)

45.0

30.0

Market Cap (NR b)

-2G rollout

-RCOM Launch

New operators

launch telco 3G

operations in rollout

Africa

2008-09

Acquisition

4G rollout: 2014-16

Spectrum

renewals

15.0

0.0

-15.0

October 2016

Telecom | Battle Royale

Telecom industry snapshot: 2017 resembles 2002 period

2001-02

Voice

Network Coverage

New Operator

Launch

Pricing

Subscriber

penetration

Traffic growth

Usage/sub

Profit and ROCE

Five years

post 2002

2016-17

Data

Next five years…



(RCOM)















(RJIO)











2017 resembles 2002

– Can new operator

and price decline

trigger data traffic

led growth and

profitability?

RJio launches its much-awaited telecom services

Disruptive

conditions in the

near term, but

expect RJio to

expand market in

the long term

Bharti and RJio hold majority of current spectrum share

Avg. spectrum/circle (Mhz)

21%

20%

34.4

33.6

13.3

12.3

Bharti

Vodafone

Idea

Reliance Jio

Bharti

Vodafone

Idea

Reliance Jio

October 2016

Telecom | Battle Royale

RJio’s profitability – scenario analysis

FY19- 3 years from launch (INR b)

Subs

mkt sh.

Data

revenues

216,670

104,109

385,661

Voice

Revenue

EBITDA

-29,100

-51,717

59,159

EBITDA

Margin

-13%

-50%

15%

Break

Even

4th year - FY20

6th year - FY22

2nd year - FY19

IRRs

7.5%

16%

NPV/share

@ 11%

-160

-336

370

Base

Bear

Bull

Majority of RJio’s gross RMS coming from marginal players (%)

6.5

4.4

2.0

FY17 RJIO Gross

RMS

-0.3

Bharti

2.8

Vodafone

Idea

RCOM+MTS+Aircel

Others

17.3

FY22 RJIO Gross

RMS

October 2016

Telecom | Battle Royale

Telecom: Global Telecom Peer comparison

Company Name

China

China Mobile

Malaysia

Axiata Group Bhd

DiGi.Com Bhd

Maxis Bhd

Thailand

Advanced Info Service

Total Access Communication

Indonesia

XL Axiata Tbk PT

Indosat Tbk PT

Telekomunikasi Indonesia Perse

Taiwan

Far EasTone Telecommunications

Taiwan Mobile Co Ltd

Philippines

Globe Telecom Inc

South Korea

LG Uplus Corp

SK Telecom Co Ltd

Singapore

M1 Ltd/Singapore

StarHub Ltd

Australia

Telstra Corp Ltd

Hong Kong

SmarTone Telecommunications

Japan

NTT DOCOMO Inc

India

Bharti Airtel Ltd

Idea Cellular Ltd

Reliance Communications Ltd

October 2016

MCap

USD m

Revenue (USD m)

EBITDA Margin (%)

PAT (M)

PE (x)

EV/EBIDTA (x)

RoE (%)

CY15 CY16E CY17E CY18E CY15 CY16E CY17E CY18E CY15 CY16E CY17E CY18E CY15 CY16E CY17E CY18E CY15 CY16E CY17E CY18E CY15 CY16E CY17E CY18

37.1

43.1

51.4

31.8

35.9

42.7

49.8

25.5

27.5

37.9

20.8

27.4

29.5

29.1

40.4

14.8

31.1

35.2

36.4

32.7

35.6 36.6 36.9 17,27 16,22017,918 19,77 13.8 15.5

38.2 38.9 38.5

42.8 42.8 42.7

50.5 49.9 49.5

657

443

447

486

411

457

563

417

454

902

12.7

4.4

4.8

4.5

4.2

11.3 11.9 12.2

252,031 106,36 107,22 111,82 117,42

11,482 5,117 5,129 5,483 5,942

9,493 1,779 1,685 1,730 1,754

11,189 2,213 2,084 2,107 2,157

13,464 4,540 4,435 4,583 4,747

2,053 2,552 2,468 2,489 2,480

2,070 1,710 1,762 1,904 2,027

2,332 2,001 2,225 2,439 2,597

30,268 7,660 8,768 9,797 10,682

7,514 3,186 3,063 3,132 3,227

11,978 3,803 3,759 3,901 4,053

5,571

2,637 2,767 2,954 3,180

631 21.7 23

9.2

7.3 6.9 11.5 8.5 9.7 10.6

415 24.3 23.3 23.1 23.1 14.4 13.6 13.2 13.1 285.8 302.7 298.9 303.5

457 29.4 24.8 24.6 24.7 13.5 12.5 12.5 12.5 39.1 42.1 40.8 41.6

919 11.5 15.2 14.8 14.6

131 12.1 22.1 20.5 15.8

7.1

3.9

6.4

8.9

3.8

4.8

4.3

7.3

8.1

3.6

4.4

3.9

6.6

7.7

3.5

4.1

3.7

82.3 65.7 66.2 62.6

19.7 11.7 12.5 15.7

-0.2 2.9 5.8 7.7

-10 7.1 12.1 16.8

21.7 22.8 23.3 24

40.1 42.4 43.2 1,145 891

31 32.4 33.8 172

38.7 39.4 39.7 -2

128

0 62.6 21.5 14.2

43.2 43.2 42.9 -98

148 204

30 15.5 10.4

50.9 50.6 51.1 1,158 1,436 1,653 1,868 19.7 20.7 17.9 16

27.6 29 29.4

28.6 28.7 28.5

38.9 38.5

376

514

363

372

492

348

393

516

370

412 19.2 20.2 19.1 18.2 9.9 9.7

8.6 15.9 16.3 17.4 18.1

537 17.4 19.4 18.6 17.9 10.3 12.5 12.1 11.7 26.2 25.6 26.2 27.3

411 15.4 16.2 15.3 14.1

6.8

3.9

4.3

8.5

9.7

7.8

5.3

6.7

5.9

7.8

6.9

3.8

4.8

7.7

8.8

6.9

4.9

6.1

7.3

6.5

3.6

4.7

7.6

8.7

6.6

4.8

6.7

5.7

4.7

6.8

6.1

3.5

4.6

28.9 27.4 27.1 27.6

8.1

10.1

9.6

9.4

9.6

8.5

9.9

8.8

4,479 9,544 10,150 10,379 10,566

15,599 15,151 15,519 15,848 16,086

1,662

4,283

842

822

830

827

1,779 1,813 1,842 1,872

20.8 21.2 21.4 311 403 435 483 12.9 11.4 10.6 9.6

27 1,343 1,350 1,268 1,335 10.3 11.1 11.9 11.3

30.5 30.4 30.2

29.4 29.3 28.9

130

271

126

264

124

263

119 14.2 13.2 13.3 13.7

263 17.2 16.4 16.4 16.5

7.7 44.2 40.5 37.9 34.7

8.6 221.2 182.2 171.2 169

6.6

6.4

5.2

4.4

6.8

38.6 45.5

46,339 18,877 21,462 22,567 23,425

1,773

2,366 2,452 2,472 2,485

38.2 37.9 36.9 4,211 3,153 3,333 3,332 17.6 14.7 13.7 13.7

14.1 14.3 13.8

103

107

109

121 18.4 16.3

14.7

19.5 19.6 19.3 19.4

10.3 12.2 12.3 12.3

8.6

12.6

1.8

7.9

5.2

8.5

5.6

2.6

10.9

3.2

97,788 37,741 45,310 46,907 48,609

19,119 14,760 15,472 16,683 17,943

4,509 5,495 5,866 6,326 6,812

1,904 3,287 3,434 3,622 3,656

30.9 31.6 31.9 4,572 6,413 6,865 7,182 18.1 14.4 13.3 12.3

36 35.8 36.2

34.2 34 33.9

33 33.4 33.2

839

471

104

812

196

101

966 1,176 25.6 23.4 20 16.5

229 268 12.9 22.1 20.5 16.7

138 159 18.2 19.3 14.1 13.1

Telecom | Battle Royale

Exhibit 1: Telecom sector EV/EBDITA (x)

19.0

15.0

11.0

7.0

3.0

6.2

5.1

8.5

Telecom Sector EV/EBDITA (x)

16.5

LPA (x)

Exhibit 2: Telecom sector P/E (x)

11.3

25.8

20.2

Telecom Sector PE (x)

56.8

LPA (x)

Exhibit 3: Bharti Airtel EV/EBITDA (x)

EV/EBDITA (x)

8.8

5.6

5.8

Peak(x)

22.2

Avg(x)

Min(x)

Exhibit 4: Bharti Airtel P/E (x)

13.9

29.0

18.0

PE (x)

Peak(x)

Avg(x)

Min(x)

69.9

Exhibit 5: Idea Cellular EV/EBITDA (x)

EV/EBDITA(x)

20.0

16.0

12.0

8.0

4.0

16.9

8.4

5.7

Peak(x)

Avg(x)

Min(x)

Exhibit 6: Idea Cellular P/E (x)

PE (x)

6.4

15.0

29.4

39.4

Peak(x)

Avg(x)

Min(x)

61.1

Exhibit 7: Bharti Infratel EV/EBITDA (x)

EV/EBDITA (x)

19.0

15.0

11.0

7.0

3.0

9.0

4.6

8.7

15.3

Peak(x)

Avg(x)

Min(x)

Exhibit 8: Bharti Infratel P/E (x)

24.9

15.4

22.4

PE (x)

Peak(x)

Avg(x)

39.1

Min(x)

Source: Company, MOSL

October 2016

Telecom | Battle Royale

RJio launches its much-awaited telecom services

RJio finally launched its wireless services on pan-India basis, nearly six years after

acquiring spectrum in May-10. While the commercial launch is scheduled after Dec-

16, Reliance announced free ‘Welcome Offer’ starting 5-Sept with its voice, data and

digital services. The company also disclosed information about plans/prices that it

would offer post the ‘Welcome Offer’ period.

Structural change in wireless space; battle of the big boys:

RJio’s big-bang launch

clearly indicates that it will not do business as an ordinary operator or play second

fiddle to any operator. RJio has changed the definition of aggressive pricing, with

free voice at INR149/28 days in a market that is 75% constituted by voice revenues.

This should dismantle voice customer segmentation above ARPU of INR149/28 days.

RJio’s price plans also indicate its belief and confidence in generating revenues from

the INR300b data industry, which is much lower than its capital investment of

INR1,500b. Overtime, RJio’s data offerings with minimum monthly outgo of over

INR400 will be ARPU-accretive for the industry. However, it will be a battle of

capacity and capital, with RJio’s free capacity and high data capability difficult to be

matched by other operators.

Mass-scale trial offering from 5-Sep; challenging four months for incumbents:

RJio’s ‘Welcome Offer’ starting 5-Sep till Dec-16 – wherein users will have access to

unlimited LTE data and national voice, video and messaging services free of cost – is

incomparable and unimaginable. We believe RJio’s welcome offer could shift

significant traffic away from incumbents (driven by the second SIM phenomenon or

JioFi). However, response to the commercial offerings post Dec-16 is the key

monitorable and could potentially alter the competitive dynamics in the telecom

industry.

Handset puzzle solved with low-ticket-size offering:

Out of the total smartphones

of about 300m, only 50-60m are LTE handsets which are used by less than 2% of the

active subscriber base. RJio’s LYF branded handsets will be available at prices

starting from INR2,999 and JioFi at INR1,999, which might still look attractive for

customers given the free services provided for four months under the welcome

offer. Post ‘Welcome Offer’, the VoLTE-led uptick could decelerate.

RJio’s INR149 plan – a game changer, could attract high-ARPU voice subscribers:

Nearly 75% of the telecom industry’s revenues are contributed by voice, with

average industry voice ARPU at INR124/month, which is below RJio’s 149/28 day

free voice plan. However, the INR149 price plan dismantles the ARPU-based

customer segmentation and seems attractive from the perspective of consumers

who incur more than INR149/28 days toward voice offerings. This, in our opinion,

could have a major impact on the voice business and force operators to rejig their

voice/data mix of offerings. The telecom industry will have to align to RJio’s data-

centric offering to recover revenue loss of voice business.

October 2016

Telecom | Battle Royale

Battle of capacity and capital; high-value data plans could be ARPU-accretive:

Post

the welcome offer, data price plans starting at ~INR400/28 days v/s Bharti/Idea’s

data ARPU at INR200/140 should be ARPU-accretive for the industry, with around

95-96% of subscribers comprising of prepaid users. However, RJio’s high-ARPU, high-

value price plan is a battle of capacity and capital. It will test existing operators’ data

capacity and will force high investments to accommodate incremental traffic

volumes. Telcos’ operating costs have limited link with incremental volumes. Thus,

an operator like Bharti having high capacity and capital could match RJio’s offering

over time, but the larger pack of operators having weak data network (including

Vodafone and Idea) would be unable to accommodate high data traffic.

RJio changes volume-pricing metrics to ARPU-sub metrics:

RJio’s current INR400-

499/28 days data plans could lead to a 30% decline for incumbents if we look

through the traditional lens of ARMBs. However, RJio’s INR400 plus ARPU price

plans could be volume accretive offsetting the price impact.

Free voice to cost INR54b annually for 100m subscriber base:

Assuming 400 MOU

(in line with Bharti) and 80% off-net calls for RJio’s 100m targeted subscribers, the

annual interconnect cost works out to be INR54b or ~INR50/sub/month cost. We

think this could be dealt in two ways. (1) The recent TRAI consultation paper to

eliminate IUC charge could lead to a hard-fought battle between telcos, and have a

decisive implication from RJio’s view. (2) With a cost of INR50/sub/month, RJio

could initially look at it as customer acquisition investment. Gradually, it can steer

up ARPUs to ~INR250 with on-net calls of ~50% to come closer to incumbents’ 10-

12% revenue.

Targeting 100m subscribers soon; we bake in 84m subscribers until FY19E,

reaching EBITDA breakeven by FY20E:

We expect RJio’s subscriber base to reach

84m by FY19E (84% of management’s 100m target with ARPU of INR251). With

these workings, it should be able to generate revenue of INR217b but remain loss

making at EBITDA level of INR29.8b. We expect RJio to breakeven in the third year

(FY20) at EBITDA level, with IRR of 7.5% and DCF-led equity value of INR5 at 11%

WACC and 2% terminal growth for FY17-30E.

Bharti, Vodafone’s price plans ~20-50% expensive v/s RJio

Free voice plan has changed pricing dynamics:

RJio’s free voice at INR149/28 days,

including 300MB of data, has targeted existing telcos’ largest revenue pool i.e. voice.

Average voice ARPU of INR140 and INR111 for Bharti and Vodafone, respectively, is

well below RJio’s price plan. However, its premium voice subscribers will now have a

good option at a fixed price plan.

Data plans until INR999 are at premium of 0-20%:

Eliminating voice consumption

and comparing RJio’s price plan purely on data subscription, Bharti and Vodafone’s

price plans are at about 20% premium at the peak. However, given RJio’s handset

requirements, other telcos could retain their subscribers with minor price plan

adjustments.

October 2016

Telecom | Battle Royale

Voice + data price plans until INR999 turn 11-50% expensive:

After adding average

voice ARPUs on price plans, Bharti/Vodafone’s offering turns out about 13%/11%

expensive for a high ARPU INR999 plan, ~30% for INR650 plan and 40-50% for

INR400-450 plans. Further, the low average of voice and data ARPU fails to explain

vulnerability of the INR400-500 voice consumer, who would be paying significantly

higher and may cut down the cost to zero with an unlimited voice offering

embedded in RJio’s data plans. This should hurt telcos and they may have to revise

their voice offering to arrest the churn and/or 2

SIM-led traffic dilution.

RJio launches its much-awaited telecom services

Exhibit 9: Operator-wise tariff comparison

Reliance JIO

Monthly

Rental

149

499

999

1499

2499

3999

4999

Data Quota

(GB)

0.30

Price/GB

(INR)

497

125

100

Monthly

Rental

250

450

650

1000

2000

3999

4999

Airtel

Data Quota

(GB)

0.2

Revised offer to

be launched soon

Price/GB

(INR)

400

250

150

130

100

Monthly

Rental

100

250

450

650

999

1499

3999

4999

Vodafone

Data Quota

(GB)

0.3

Price/GB

(INR)

333

250

150

130

100

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 10: Bharti's tariff card @ 20-50% premium v/s RJio

Pack Type

4G/3G

MRP

(INR)

455

655

755

855

989

Data

Plan

RJIO

tariff

299

499

999

1499

2499

3999

4999

RJIO's

Data Plan

Equivalent

Bharti Plan

368

664

1129

2118

3602

6074

7558

Bharti's premium

/(discount) over

RJIO

23%

33%

13%

41%

44%

52%

51%

Source: MOSL, Company

Exhibit 11: Vodafone's tariff card @ 10-50% premium v/s RJio

Pack Type

4G/3G

MRP

(INR)

250

450

650

999

1499

3999

Data

Plan

RJIO

tariff

299

499

999

1499

2499

3999

4999

RJIO's

Data Plan

Equivalent

Vodafone's premium

Vodafone Plan /discount over RJIO

486

711

1110

2110

3610

6110

7609

63%

42%

11%

41%

44%

53%

52%

Source: MOSL, Company

Key announcements in AGM



India will be among top 10 post Jio launch in mobile internet accessibility v/s

155th rank now.

Jio currently covers 18,000 cities and 2 lakh villages, and will cover 90% of

India’s population by March 2017.

4G LTE devices now available starting INR 2,999. Jio has launched JioFi (personal

router) for INR1,999.

Jio customers will get complimentary (content) subscription worth INR15,000

for one year.

Jio will be launched through Aadhar-based sign-up. Customers can get

connection in 15 minutes.

Plans will begin from INR19/day. RIL will charge only for data usage and not

voice.

Customer should pay only for one service – voice or data. Jio customers will get

voice free.

Free data at night from 2-5am.

To offer million wifi hot spots to users across India.

25% more data to students.

VoLTE calls will not incur data charges from the price plans.

Free Jio service from 5-Sep to 31-Dec.

Capacity to take 1 million customers per day.

Fiber-to-home in select cities: speed-up to 1GB per second.

Target to reach 100m subscribers at the earliest (wants to create a world

record).

Tariff plans; Simplicity of plans to attract subscribers



Jio welcome offer



October 2016

Telecom | Battle Royale

Industry landscape

Investors in telecom have not made money for last 9-10 years! Can this be reversed?

After the golden period of 2002-08, the telecom industry has remained in

doldrums for the past 8-10 years. FY08-09 marked the entry of new telecom

operators, thereby increasing competitive intensity in the sector. 3G roll-out

gained steam in FY10-11, and the industry doled out an investment of over

INR1,000b. Bharti’s Africa operations acquisition in FY10-11 only increased

pressure on return ratios. FY12-15 marked the era of high regulatory

intervention, starting with license cancellation and highly priced spectrum

renewals, forcing the industry to cough up cumulative investment of over

INR1,200b in FY14-15 auctions. A slew of capital-intensive events and high-

competitive intensity in FY08-16 have reduced them to market pariahs.

RJio’s launch is further hurting the industry with irrational pricing. However, there are two key factors currently

in favor of the telecom industry in comparison to FY08-16. First, unlike the last eight years of high capex toward

spectrum renewals and fresh technology spectrum – 3G, large part of the investment phase has been concluded,

especially for the leader in the telecom industry i.e., Bharti. Going forward, incremental spectrum and network

investment should be largely demand-led, having limited impact on the balance sheet of a stronger player like

Bharti. On the contrary, marginal operators may consolidate, while Vodafone and Idea would have to accelerate

investment to catch up with Bharti and RJio, which will subsequently hurt their balance sheets.

Second, increase in competitive intensity with RJio launch has a stronger resemblance with the FY03 period

rather than FY08. Similar to data growth opportunity currently, in FY02, voice was at a nascent stage with huge

growth prospects. This is unlike the FY08 phase, when multiple new operators were competing in a relatively

matured voice market. We believe the next 1-2 years could be highly volatile, driven by operators’ quest for

market share. However, as RJio’s capacity stabilizes, the data opportunity could resemble voice’s high growth

phase of FY03-08.



October 2016

Telecom | Battle Royale

India’s top 3 telcos’ market cap changed by -9% in last 10 years

New

operators

launch telco

operations in

FY08-09

4G rollout

- 2012-15

3,200

2,400

1,600

800

3G rollout

Spectrum

Renewal

Change in market cap for top three telcos in India

Bharti Airtel

300.0

225.0

150.0

75.0

0.0

Spectrum

Renewal

New operators

launch telco

operations in

FY 08-09

Idea Cellular

Rel. Comm.

4G rollout:

2012-15

Bharti’s Africa

Acquisition

Idea:

Stretched

Balance Sheet/

Weak

Competitive

footing

3G rollout

Bharti - Reaped healthy gains during 2002-08; 2008-16 remained a drag

MARKET DARLING

1750

1400

1050

700

350

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

…….

MARKET PARIAH

RoCE (%)

RoE (%)

45.0

30.0

Market Cap (NR b)

-2G rollout

-RCOM Launch

New operators

launch telco 3G

operations in rollout

Africa

2008-09

Acquisition

4G rollout: 2012-15

Spectrum

renewals

15.0

0.0

-15.0

October 2016

Telecom | Battle Royale

Hints of FY03-08 Renaissance? Data could drive long-term asset

monetization phase

In the near term, RJio’s aggressive pricing is likely to create an unstable market

environment; however, we see strong growth opportunity over next five years.



Comparison of the current telecom industry situation with the 2002 period

reveals many similarities. The year 2002 was the initial phase for subscriber

penetration in the voice market, as against the current period where data is in

its initial phase. During 2002, the sector was burdened by heavy capex toward

network and license cost. Low voice traffic volume was further repressed by

concerns about the deep-pocketed new operator Reliance Communication’s

service launch.



Drawing resemblance from the 2002 period, the industry now has been heavily

burdened with high network and spectrum capex, low data subscriber base and

weak data traffic. Besides, it is fraught with the launch of Reliance Jio

Infocomm’s telecom services. In 2002, Reliance Communication’s launch

triggered a steep correction in voice pricing, which in turn led to elasticity

benefits driving steady subscriber penetration and traffic growth.



FY03-08 remained the best phase in the telecom market with improving return

ratios, supported healthy growth in market cap. Bharti clocked its near peak

market cap of INR1,568b in FY08.



With improving ecosystem – both smartphone and network, we believe the

launch of RJio could trigger industry data growth. Operators with healthy data

capacity should be able to benefit from data demand growth. We believe among

the current operators, Bharti is best placed to take advantage of steep data

growth with its wide data network and spectrum investments.



Post the knee-jerk reaction in the initial 2-4 quarters driven by RJio’s aggressive

launch, the industry should see data-led huge growth opportunity. As

incumbents follow suit, increase in data demand could drive healthy asset

monetization and RoCE improvements (in line with the previous period).

Telecom industry snapshot: 2017 resembles 2002 period

2001-02

Voice

Network Coverage

New Operator

Launch

Pricing

Subscriber

penetration

Traffic growth

Usage/sub

Profit and ROCE

Five years

Post 2002

2016-17

Data

Next five years…



(RCOM)















(RJIO)











2017 resembles 2002

– Can new operator

and price decline

trigger data traffic led

growth and

profitability?

October 2016

Telecom | Battle Royale

Exhibit 12: Bharti: Adj. PAT v/s capex

100

Adj. PAT

Capex

625

500

375

250

125

Exhibit 13: Idea: Adj. PAT v/s capex

-10

Adj. PAT

Capex

500

400

300

200

100

Source: Company, MOSL

Exhibit 14: Net capex (INR b)

600

450

300

150

Bharti

Idea

Exhibit 15: Net capex (ex-spectrum) (INR b)

250

200

150

100

Bharti

Idea

Source: Company, MOSL

Exhibit 16: Net capex/sales (%)

120.0

90.0

60.0

30.0

0.0

Bharti

Idea

Exhibit 17: Net capex (ex-spectrum)/sales (%)

100

Bharti

Idea

Source: Company, MOSL

October 2016

Telecom | Battle Royale

India’s technology advancement gap shortens, extending

investment period

One of the key factors that has gone against the Indian telecom industry is the

country’s 4G technology migration, which started much sooner than the previous

technology advancements and thus hardly provided time to monetize 3G

investments. Historically, India has been about 8-10 years behind developed nations

like the US, UK and Europe in terms of technology advancement. This is evident

from the previous 2G/3G network rollouts, which happened about 8-10 years after

developed nations. However, 4G network rollout happened just after 3-5 years,

thereby reducing the technology transition gap.

In India, the technology advancement gap between 2G and 3G was 8-10 years,

giving telecom companies sufficient time to monetize their 2G investments.

However, the technology advancement gap between 3G and 4G reduced to just 3-5

years (~2010 for 3G; ~2014-15 for 4G), triggered by the threat of RJio launch. This

did not allow operators to monetize their 3G investments. The telecom industry

post the 4G network investment will be able to focus on asset monetization as

incremental investment hereon will be largely led by demand.

India’s technology advancement gap shortens, extending investment period

Technology advancement gap between 2G and 3G

was 8-10 years, giving telecom companies

sufficient time to monetize their 2G investments.

October 2016

Telecom | Battle Royale

India’s technology gap v/s developed nations reduces

Developed

Nations

…….

1991-92

Time-Gap:

8 - 10 years

1999-2002

2000

…….

2002-04

Time-Gap:

8 - 10 years

2011-12

2010

2010-12

Time-Gap:

3 - 5 years

2014-16

India’s time gap for technology upgradation v/s developed nations reduced from 8-10 years (2G-3G)

to 3-5 years (4G). This has left little time to monetize 3G investments, thereby hurting return ratios.

Source: Evolution to LTE report, GSA, July 2016; www.telecompaper.com

Gross industry revenue to be driven by data business

We expect the telecom industry to undergo a complete overhaul with the advent of

RJio – the big boy. We outlay the sector’s growth and specific vertical – voice and

data, to gauge the dynamics of the industry as well as key gainers/losers.

The overall telecom industry grew at just 6% in FY16, after growing at over 10-12%

over the last five years, due to the maturing voice market with low traffic growth

and pricing pressure. Data market growth also decelerated to 35% in FY16, from the

highs of 57% in FY15. RJio’s low INR149/28 days ARPU voice offering should further

deteriorate the voice business as all telcos are likely to follow suit to maintain their

market shares.

We expect the telecom industry to de-grow for the first time in more than 10 years

by 2% in FY17E, as RJio’s free offering will hurt the overall industry. However, in

FY18E, it should recover with 4% growth. We expect gross revenue CAGR of 9% in

the following three years (i.e., FY18-21), with incumbents likely to see gross revenue

growth of 8%, while marginal players may see revenue decline of 4% during the

same period.

October 2016

Telecom | Battle Royale

Exhibit 18: Incremental analysis of wireless revenue (INR b)

1151

320

2743

1927

Exhibit 19: Voice v/s data revenue growth (%)

Voice Rev

31.8

Data Rev

32.3

1.1

FY16

Voice Rev

Wireless rev

Data Rev

Non-Voice

FY22

Non-Vas Wireless rev

Rev

Source: Company, MOSL

-3.9

FY17-22E

Source: Company, MOSL

FY14-17

Exhibit 20: Operator-wise gross revenue market share

trends (%)

Bharti

Reliance Jio

40.0

30.0

20.0

10.0

0.0

FY15

FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Vodafone

Rcom+MTS

Idea

Others

Exhibit 21: Operator-wise subscriber market share trends

(%)

Bharti

Reliance Jio

40.0

30.0

20.0

10.0

0.0

FY15

FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Vodafone

Rcom+MTS

Idea

Others

We estimate the industry voice business to de-grow at 4% CAGR over FY16-21E, led

by an 8% drop in voice ARPUs, partly offset by 4% industry subscriber growth.

Subscriber growth – which would take total base to 1.27b with addition of 237m

over FY16-21E (compared to 222m over FY11-16) – factors in the rise of second SIM

users, with consumers looking to test RJio network without taking the risk of

changing their primary service provider. Additionally, second SIM users of marginal

players like RCom, TTSL, Aircel and others may also look to switch to RJio.

Exhibit 22: India telecom: Wireless revenue split (INR b)

Voice Rev

337

1,493

Data Rev

368

1,428

Non-voice Non-VAS rev

515

1,369

758

Data rev as % of wireless rev

1,245

1,488

Voice market to be on a downward spiral

250

1,476

1,003

1,316

FY19E

1,265

FY20E

1,215

FY21E

1,174

FY22E

FY15

FY16

FY17

FY18E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Expect weak voice ARPU over next 2-3 years

The weak ARPU outlook is governed by cannibalization of voice as a higher

proportion of users may subscribe to data services. This should reduce MOUs. Weak

market conditions could also lead to subsequent voice price decline as operators

may try to arrest traffic decline and protect market shares.

Exhibit 23: Voice and data ARPU trends (INR)

212

217

Voice ARPU

197

Data ARPU

194

197

Blended ARPU

198

201

206

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

Voice RPM pressure to continue

We believe that incumbent operators may focus on market share protection in a

weak market, thus leading to voice price decline. Subsequently, we expect voice

revenue decline of 2% for incumbents over FY16-21E, largely contributed by RPM

decline. Traffic growth should remain flat, with about 3-4% MOU decline, largely

offset by subscriber growth.

Market share dilution to be higher for marginal players, Idea

With the launch of RJio and its continued aggressive offerings, the key points to

observe are: (1) whether RJio will be successful in penetrating the market and

gaining market share and (2) whose market share would RJio take over the next five

years.

Exhibit 24: Incremental analysis of RJio’s gross rev market

share (%)

6.5

4.4

2.0

2.8

-0.3

2.0

17.3

2.7

0.3

0.2

3.0

Exhibit 25: Incremental analysis of RJio’s subscriber market

share (%)

3.9

10.4

Source: Company, MOSL

October 2016

Telecom | Battle Royale

We believe that given the advancements by incumbent operators, the gap between

their network quality (especially, Bharti which has invested heavily in network and

spectrum) and RJio’s perceived network quality has reduced substantially. This may

leave only pricing as the key weapon for RJio.

The biggest impact would be felt by marginal players (sub-10% market share) like

RCom pack (RCom, Sistema, Aircel), Tata Tele, Uninor and the PSU pack

(BSNL/MTNL), which may not be able to compete on product/services as well as

pricing, given their weak spectrum portfolio, network footprint and technology

advancement. We think market share dilution will be higher for marginal players like

RCom, Tata Tele as well as PSU operators which do not offer superior technology

and coverage. Among other major operators, Idea could be affected the most given

its weaker 4G/3G data footprint, while Bharti should also see some dilution.

Our workings indicate that market shares of incumbent operators could drop by

440bp to 70.5%, while marginal players could see a market share drop of 10.9%-

12.2%. This should allow RJio to gain market share of about 17.3% by FY22E. Among

incumbents, Vodafone and Idea should see combined impact of 480bp. Our

workings indicate that with 17.3%, RJio may be close to Idea’s 17.4% market share

by FY22.

This addresses one of the key questions about the state of existing operators post

RJio launch – the industry can accommodate four large operators: the top two spots

are up for picking between Bharti and RJio, with Vodafone and Idea’s current state

of operations putting them at third and fourth positions, respectively.

Operator market share in voice segment

Unlike incumbent telcos’ voice contribution of 75%, RJio will offer voice free at a

fixed ARPU (combined with data). Given RJio’s focus on data offerings, we have

factored in nil voice revenue for the company. This is also due to the structure of the

telecom industry which is likely to constitute about two-third of voice revenues.

Exhibit 26: Operator-wise voice revenue (INR b)

Bharti

2,000

1,500

1,000

500

FY15 FY16E FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Rcom+MTS

Vodafone

Others

Idea

Reliance Jio

40.0

30.0

20.0

10.0

0.0

FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Exhibit 27: Operator-wise voice RMS (%)

Bharti

Reliance Jio

Vodafone

Rcom+MTS

Idea

Others

October 2016

Telecom | Battle Royale

Voice RMS – marginal players with low ARPU subs could be highly impacted

We have factored in nil voice revenue for RJio, given its focus on data with free voice

offering at fixed ARPU (combined with data). However, there are two factors that

may hurt the voice business: (1) RJio’s complementary voice service with data,

leading to a steep drain in the voice market and (2) cannibalization effect from data

usage further hurting the overall voice market situation and thus pushing it on a

downward spiral. We expect incumbent operators’ combined voice market share to

increase by 820bp (1.9% CAGR decline) over FY16-21E to 80%. Marginal players are

likely to see a drop of 820bp in their market share to 20% over FY16-21E. Marginal

players have a large base of second SIM users given their weak service quality and

price being the only value proposition. Thus, marginal players could be the most

vulnerable to RJio’s complementary voice services.

Data business – the flag bearer

The last few quarters have witnessed a deceleration in data revenue growth, posing

serious introspection on data market potential. We understand that data remains

the focal point of all the digital development, and believe data growth will be

triggered by:

Pricing:

We think pricing will be key to data growth, triggered by RJio’s launch.

RJio’s over 30-40% lower average ARMB v/s peers indicates likely steep fall in

pricing in the industry. We think telcos have room to reduce price given two

factors: (1) price elasticity of demand from India’s low data usage/user as well

as low data penetration level. (2) Our workings indicate that data margins are

nearly double v/s voice margins, which offer room for price cuts.

Handset ecosystem:

Over the last two years, smartphones as a share of total

handset market has grown from mid-teen in CY13 to 45% as of June-16 quarter,

with about 8m monthly shipments. However, smartphone shipment’s

proportion to total shipment is still low compared to China’s two-third as well as

that of other countries. With 4G/LTE ecosystem improvement, there were about

60-70m LTE devices (as of March), with monthly run-rate of 5m shipments.

Further, Reliance’s LyF branded low-ticket-size LTE handsets are driving growth.

Need v/s availability – content development:

Telcos have been wary of

data price decline as they are unsure of the content and ecosystem

development, which can remain a chicken and egg story. RJio’s launch has

triggered price-led data volume expansion potential, which could be positive for

the industry in the long term.

Data subscriber base – huge growth opportunity

Low subscriber penetration and data usage/subscriber remain the key drivers of the

data market. With 322m data subscribers, about 31% of the total subscriber base

use data services. Again, out of this, only 132m (41% of total data subscribers) are

broadband subscribers, while the rest are 2G subscribers, including very infrequent

2G users, which may not be accounted by incumbents. The top telcos account for

two/thirds of 3G/4G subscribers.

October 2016

Telecom | Battle Royale

Exhibit 28: FY16: Internet subscriber split (m)

Broadband

subs (m),

132

non-

broadband

subs (m),

190

Exhibit 29: Operator-wise broadband subscribers (m)

Others,

29.3

Bharti, 36.6

Idea, 34.1

Vodafone,

32.3

Source: Company, MOSL

Exhibit 30: Data/broadband subscriber trend

Data subscribers (m)

Broadband subscribers (m)

34%

38%

41%

28%

18%

220

20%

233

248

30%

283

31%

300

305

312

322

3QFY14

4QFY14

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

Source: Company, MOSL

Top 3 telcos account for ~71% of broadband subscribers

As per the TRAI’s 4QFY16 report, out of the total 132m broadband subscribers in

India, about 71% are accounted by the top three companies, in line with the overall

subscriber market share. Bharti leads with about 28% broadband market share,

while Vodafone and Idea together hold about 50%. Idea holds the second-largest

broadband market share with 34m subscribers. The remaining 22.1% is held by

marginal players like Tata Tele, RCom and BSNL, amongst others. A high proportion

of this includes CDMA-based dongles from Tata Tele and RCom operating at 800Mhz

spectrum. With limited incremental investment by RCom and Tata Tele, they would

be vulnerable to RJio’s broadband offering.

Exhibit 31: Operator-wise data subscriber trend (m)

Bharti

Vodafone

Idea

Others

37.9

26.1

18.7

19.4

27.9

21.3

22.1

21.4

32.1

24.5

23.8

23.9

27.6

25.9

28.1

27.4

35.5

38.9

30.5

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 32: BHARTI:

sub trend

Data/broadband

Exhibit 33: VODAFONE:

Data/broadband sub

Data subscribers (m)

Broadband subs as % of internet subs

Exhibit 34: IDEA: Data/broadband sub

trend

Data subscribers (m)

Broadband subs as % of internet subs

Data subscribers (m)

Broadband subs as % of internet subs

35.6

FY14

46.4

FY15

58.2

FY16

58.9

1QFY17

FY14

FY15

67.5

FY16

69.7

1QFY17

25.3

FY14

33.4

FY15

44.0

FY16

49.1

1QFY17

Source: Company, MOSL

Data market to reach 49% of overall wireless space over FY16-21E

We expect data subscriber growth and data ARPUs to drive overall data growth.

Data subscriber base should grow at a 23% CAGR over FY16-21E to 911m. Gross data

ARPU stands at INR93 (calculated on data subscribers), which should grow at a 5%

CAGR over FY16-21E to INR120. We expect the overall data market to grow at a 30%

CAGR over FY16-21E, led by subscriber growth and volume-led higher data ARPU.

Exhibit 35: Operator-wise data revenue (INR b)

Bharti

2000

1500

1000

500

FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Vodafone

Idea

Reliance Jio

Others

40.0

30.0

20.0

10.0

0.0

FY15

FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Source: Company, MOSL

Exhibit 36: Operator-wise data revenue market share (%)

Bharti

Reliance Jio

Vodafone

Others

Idea

Exhibit 37: Data subscribers and gross data ARPU trends

Data subscribers (m)

Gross Data ARPU (INR)

104

112

120

130

283

FY14

283

FY15

322

FY16

395

FY17E

526

686

811

911

997

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Data pricing

Data pricing is expected to come down drastically. We believe this should drive

price-led volume elasticity, improving data ARPU as well as subscriber growth. We

expect Bharti/Vodafone/Idea’s pricing to drop by 48%/74%/50% over FY16-FY21E,

reaching a base of INR0.12-15/MB from the current base of INR0.21-22/MB.

However, cumulative data volume growth of 2-5x (led by subscriber growth as well

as usage/subscriber growth) should increase data market size.

Exhibit 38: Operator-wise data ARMB (paise)

35.5

30.0

27.2

26.3

23.2

17.9

14.3

24.0

24.2

19.2

13.5

14.3

FY18E

19.7

16.0

17.7

14.5

12.7

12.6

FY19E

Bharti

Vodafone

Idea

Reliance Jio

16.3

12.1

11.8

13.8

15.5

11.6

11.1

13.1

14.7

11.2

10.4

12.4

FY15

FY16

FY17E

FY20E

FY21E

FY22E

Source: Company, MOSL

Data usage/subscriber has strong propensity to grow

The shift from 2G to 3G and then 3G to 4G could lead to average 2-4x increase in

data usage. Apart from higher data subscriber penetration, data consumption/user

can be a strong growth driver. Developed countries have witnessed an increase in

data consumption of about 2-4x due to technology upgrades from 2G to 3G and

then to 4G. Better speed experience and wider content access at higher speed allow

higher growth. Higher proportion of online SD/HD video streaming as well as online

games triggers higher consumption. Additionally, it allows more data usage due to

faster connectivity.

Operators are increasingly bundling video/audio streaming apps with their tariff

offers, usually focused on 4G data and LTE capable devices to drive data usage.

Overall, data consumption by video is expected to rise to almost three-quarters of

total usage in 2019 in Western Europe, up from 56% in 2014.

Exhibit 39: 4G stimulating data demand, average monthly

usage (GB)

3.7

Exhibit 40: Average data usage for Europe as of September

2015

Average data usage for Europe

1.6

1.5

0.9

1.8

0.7

1.6

Germany

Netherlands

Spain

Source: Vodafone Presentation (Q1FY17)

October 2016

Telecom | Battle Royale

This can be a strong growth lever of data volumes as subscribers switch from 2G to

3G. This is also evident in India’s case – Vodafone and Idea have seen 3G/4G usage

at about 2x of 2G usage, thus allowing average data consumption/user to grow at

about 10-12% annually over the last five years.

Exhibit 41: Vodafone India and Idea’s data usage up on

3G/4G (mb)

875

641

454

200

463

444

Avg

3g,4g

889

904

674

Exhibit 42: Avg. data/user/month (MB)

Avg data usage/sub/month

899

Vodafone

Idea

Bharti

Vodafone

Idea

Reliance

Source: Vodafone 1QFY17 Company financials

Source: 1QFY17 Company financials

With over 50% of industry data subscribers on 2G (FY16 data subscribers: 322m),

there is strong potential for data traffic to grow. Most of incremental smartphones

shipped are 3G/4G and this ecosystem development will support data

usage/subscriber growth.

RJio launch should be positive in long run, triggering data traffic growth

Growing handset ecosystem, improving local content coupled with RJio-led industry

data price decline should trigger data growth, which has slowed over the last 4-5

quarters to just 20% (1QFY17 annualized). Industry participants, especially Bharti,

should benefit from the launch of RJio over the next 4-5 years. However, this could

be with a lag of two quarters. The next 2-3 quarters may impact peers led by the

steep data price decline and voice cannibalization. With a lag of about six months,

we expect incumbents to start seeing price elasticity benefits as data volume growth

from existing and new users may start accelerating. However, RJio’s high data

offering will test existing operators’ capacity to accommodate heavy data traffic.

Over the next five years (i.e. FY16-21E), we expect the data industry to grow at a

28% CAGR.

Exhibit 43: Operator-wise data traffic trends (b MBs)

5000

3750

2500

1250

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

Bharti

Vodafone

Idea

Reliance Jio

October 2016

Telecom | Battle Royale

Operator market share in data segment

We believe RJio should lead data growth, implying data market share loss of

incumbents. However, given that overall data revenue is expected to continue

growing at an accelerated pace, incumbents should see healthy data revenue

growth despite market share loss. Our workings indicate that RJio should command

about 33.6% revenue market share and 9.4% of overall subscriber base over the

next five years. We expect incumbents to achieve a 20% CAGR over FY16-21E with

24.2pp market share loss to 60.4%. Our workings have factored in all of RJio’s

revenue within data, given its data-centric price plans. Marginal players may see

steeper revenue impact from RJio launch, given their weak data offering, as well as

low network and spectrum footprint. We expect marginal players’ revenues to grow

6% over FY16-21E, with a market share loss of 950bp to a meager 6%.

Exhibit 44: Operator-wise data revenue market share (%)

40.0

30.0

20.0

10.0

0.0

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

Bharti

Vodafone

Idea

Reliance Jio

Others

Strong case for ARPU increase led by data usage/user

By FY21E, Bharti and RJio should have higher data ARPU of INR178 and INR290,

respectively, with flat ARPU for Bharti and RJio’s ARPU base growing from INR210.

RJio’s ARPU is significantly higher as we have allocated entire revenue toward data,

unlike other operators. Bharti and RJio’s ARPU is ahead of industry ARPU of INR112

in FY21E. This is due to two factors. (1) Better consumer profile with a higher share

of 3G/4G subscriber base consuming over 1GB data/month will increase overall

demand. (2) We think Bharti and RJio’s better spectrum portfolio and wider data

network should allow them to accommodate more data traffic. Thus, it can test

price elasticity gains of data volume growth to increase data absorption unlike other

smaller operators that could be stuck with network capacity utilizations.

Exhibit 45: Operator-wise data ARPU (INR)

375

300

225

150

FY15

FY16

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

October 2016

Bharti

Vodafone

Idea

Reliance Jio

Telecom | Battle Royale

Data margin at ~2x of voice margin and strong price elasticity

While the risk of significant erosion in data yield remains high post the launch of

RJio, data margin at prevalent pricing is at about ~2x of voice margin, assuming

constant voice revenues. This indicates three things.

First, even as the proportion of data revenues increases, it may provide support, as

witnessed in the case of both Bharti and Idea’s consistent improvement in wireless

margins over the last 3-4 years.

Second, this also reduces the impact of steep data rate decline on overall margin

over the long term as data and voice businesses stabilize.

Third, high data margin allows operators to test data price elasticity in a market

which has less than 10% 3G/4G data subscriber penetration. Also, average data

usage per subscriber at sub-1GB is far below global 3G/4G data consumption of over

1.5GB, thus increasing the potential for data volume growth.

Some of the key factors that allow data margin to hover at about ~2x of voice

margin are as follows:

Access cost:

One of the key factors that reduces variable data cost is that there is

limited access cost attached with data volumes. Typically, the voice segment incurs

access cost of about 17-18% as per interconnect regulation. On the contrary, there is

no regulatory interconnect cost on the data business. Our workings have assumed

2% data access cost to factor the 3G ICR arrangement between telcos to seek data

coverage in circles where they do not hold own 3G network. With the ramp-up of

own network, this may reduce.

Low network cost:

Incumbent operators leverage their existing voice network

significantly to implement the data network.

1. Nearly 80% of the 3G sites are on existing 2G sites, which incur incremental site

operating cost of only 20% charged as loading while offering equivalent

incremental capacity compared to the existing site. This reduces both passive

rental as well as energy cost of the sites significantly. So any revenue over and

above 20% of the existing site revenue directly flows to the bottom line.

2. Technology developments like Single RAN and carrier aggregation multiply

capacity on the existing site without adding any incremental operating cost on

the same. Thus, high data consumption pockets which already have high density

voice coverage could be utilized to upgrade the network and data capacity with

limited incremental network cost, thus allowing high capacity utilization levels

and margin. Further, 3G/4G should provide higher capacity and garner higher

volumes without any steep cost increase.

Low SUC:

Bharti holds 2300Mhz spectrum across 10 circles, which is charged only

1% spectrum usage charge compared to 5% on existing spectrum. This provides

steep regulatory cost savings. Our discussions with TRAI and DOT indicate that there

is little way to bifurcate revenues among multiple frequencies charged at different

SUC rates. Further holding 20Mhz of 2300mhz spectrum should provide huge

capacity to offer data services, thus reducing SUC costs.

October 2016

Telecom | Battle Royale

Operating leverage:

The data segment can leverage the large sales and distribution

network, which is already established by incumbents. This allows benefits in terms

of employee, distribution and marketing costs. However, with free voice announced

by RJio, reducing voice ARPU could put pressure on overall margins in the near term.

Exhibit 46: Voice v/s data margin bifurcation (incl. 2G data revenue also, while sites are

only 3G/4G)

Revenue (INR)

BTS (nos)

Average Sub (mn)

Traffic (min b)

Realization (INR)

Revenue/BTS (INR)

Opex per BTS

Interconnect (INRmn)

License fee & SUC (INRmn)

Network (INRmn)

Cost/BTS/month (INR)

SG&A + Employee

cost/sub INR

as a % of revenue

Total opex

(INRmn)

EBITDA (INRmn)

EBITDA margin (%)

Total

359,772

159775.5

166

Voice

261,461

119600

166

785,975

0.32

182,178

45,169

17%

31,114

12%

64,584

25%

45,000

41,834

251

16%

182,701

78,760

30%

Data

69163

40175.5

297,920

0.23

143,461

1,308

6,916

10%

10,595

15%

21,977

6,916

157

10%

25,736

43,427

63%

Non voice Non data

29,148

159,776

166

187,645

46,477

13%

41,508

12%

84,275

23%

43,955

50332

302

14%

222,591

137,181

38%

15,202

3,478

12%

9,095

31%

4,744

1,581.49

14,154

14,994

51%

Source: Company, MOSL

TRAI’s August 2016 consultation paper to review IUC is an indication of possible

reduction in IUC, which will be vigorously challenged by large telcos – the IUC charge

revision in FY15, which is yet sub judice, is a case in point. However, there are two

things to observe.

IUC a declining trend, both in India and globally:

Since it was established, IUC has

been reduced four times from the highs of INR0.50/min to INR0.14/min, indicating

its downward trend. Globally too, IUC has reduced over 50% in many developed

markets like Australia, UK, and other European countries. TRAI’s recent consultation

paper to review IUC is a possible indication towards IUC reduction.

TRAI exploring zero IUC charge:

Globally, despite the prominence of IP calling and

voice becoming less relevant, nowhere has IUC been reduced to zero. TRAI, in its

consultation paper, has hinted that IUC could be charged on BAK (Bill and Keep)

model, implying zero charge, led by two factors – (a) potential growth of VoLTE/IP-

based calling, which has increased the variability in estimating costs, and (2) need

for support deployment of efficient network technologies.

Will IUC be reduced or cut to zero?

While there is a possibility of further IUC

reduction, given its inclination to promote IP-based calling, TRAI may not cut it to

zero due to the steep operational impact for majority of the operators. TRAI’s

observation during previous IUC workings in 2011 indicated that any steep changes

in IUC could be in 3-year phases to avoid any knee jerk impact.

October 2016

The IUC could see a sharp revision - a major risk for top 3 telcos

Telecom | Battle Royale

Can RJio sustain free voice calling?:

We see IUC reduction as a potential risk over

the next 1-2 years for the incumbent large telcos due to its high on net calls

termination.

If the current heat over IUC discussion derails, RJio’s strategy to provide free voice

may not be sustainable over the long term.

October 2016

Telecom | Battle Royale

RJio- Throwing rationality to the wind



RJio to become the world’s first telecom operator to have full IP-based LTE network

with no fallback on 2G/3G network, allowing it to offer full-fledged high-speed 4G

services without any legacy network backlog.

RJio’s current holdings in 800Mhz/1800Mhz/2300Mhz give it enough capacity to

handle impeding data explosion. In terms of coverage, the existing spectrum holding

along with a cell site base of ~90k is still less than Bharti’s 157k/75k 3G/33k 4G sites

and may not be sufficient for pan-India coverage.

RJio’s significant delay in commercial launch has waded the 4G novelty factor.

Subscribers will now rate RJio on quality of speed.

Our 84m subscriber estimates by FY20 indicate a breakeven in the third full year of

operations and 7.5% project IRRs.



High capacity but weak coverage

RJio is the first operator in the world to have full IP-based LTE network with no

fallback on2G-3G network. This allows the company to offer full-fledged high-speed

4G network with no legacy network backlog. However, RJio’s network launch with

just about ~90,000 cell sites combined with 2300-1800-800Mhz spectrum may not

be sufficient for a pan-India footprint. This compares with incumbents like Bharti

operating with over 1,50,000 2G and 75,000 3G cells over and above the 4G sites.

Our channel check indicates that RJio continues to add more sites, but the first

phase will not have substantially higher quantum of sites. Further, many pockets

(which are currently voice-only regions) may not be viable for 4G operations, and

given RJio’s pure 4G-based network, it could have a patchy network. This could

make it difficult for RJio to penetrate in smaller towns in the country.

Exhibit 47: Top 4 operator-wise cell sites

2G sites

3G+4G sites

214

121

140

Exhibit 48: Top 5 operator-wise fiber portfolio

Fiber Portfolio ('000 R-km)

250

190

Bharti

Idea

Vodafone

RJIO

Bharti

Idea

Vodafone

RJIO

RCOM

Source: Company, MOSL

Distribution channel

SIM card distributor and retailer mapping is largely over with about 2.5 lakh mom

and pop stores, in comparison to 4 lakh SIM distributors and 8 lakh recharge

voucher sellers. Currently, SIMs are provided only through Reliance Retail outlets.

The rest of distribution, including modern retail as well as mom and pop store,

should start in 15-20 days.

October 2016

Telecom | Battle Royale

Three-pronged product offerings

For VoLTE device users:

A VoLTE device user can use RJio’s both data and voice

services seamlessly on any smartphone.

LTE device users

(subscribers who may not own a VoLTE handset but have an LTE

device and may not be willing to change handset):

LTE device users would be able to use RJio’s 4G data, but may not be able to use

VoLTE directly through the handset. Earlier this was understood as a big concern,

making RJio subscribers depend on existing service providers to make voice calls.

With the launch of Jio Join services, RJio subscribers can now seamlessly make voice

calls by downloading the Jio Join application, which allows it to call any mobile

number.

Non-LTE device users (consumers

with non-LTE handset who may want to

experience RJio without the hassle of changing device):

The subscriber can buy a JioFi device – a portable WiFi device and connect the

phone to the WiFi device for data usage. For voice calling, s/he can download Jio

Join application and connect the app to the JioFi device. This would allow the user to

make voice calls to any subscriber (RJio and others) using JioFi SIM number.

Additionally, the user can also receive calls from any other user with the same JioFi

number. JioFi at one point of time can be connected with only one Jio Join

application.

Product

Handset launch:

Currently, 13 handsets are launched across four umbrella brands

(Flame, Wind, Water and Earth) with prices starting from INR4,000-19,000. Every 15

days, a new handset is launched. RJio should have about 25-30 Jio handsets by Dec-

16. Incremental handsets will be launched in the premium range. JioFi device is

priced at INR1,999.

JioFi is like any portable WiFi device offered by incumbent telcos. The key advantage

for RJio is that unlike other telcos, data can only be accessed on LTE handsets, which

are witnessing increasing penetration from the current low levels. Thus, this product

helps addressing the non-LTE device user market.

Jio Join application, available on play store, is conceptually an extremely novel

product, which (unlike other IP-based voice-calling products like WhatsApp – only

app based calling) allows subscribers to make and receive calls from any subscriber

(RJio or non-RJio user) using the RJio SIM no. For an LTE user, the Jio Join application

can be linked to the RJio SIM in the phone, while for a non-LTE user, the Jio Join app

can be linked to the JioFi device. This allows subscribers to both make and receive

calls through Jio Join specific number without using VoLTE handset but retaining RJio

SIM no.

October 2016

Telecom | Battle Royale

Positive and Negatives of Test Outcomes

Positives

Addresses low VoLTE/LTE penetration rate:

Both JioFi and Jio Join could allow RJio

to address the key concern of VoLTE/LTE's low penetration for data as well as voice

usage.

Second SIM phenomenon:

Many non-VoLTE/LTE subscribers, who may use RJio

service purely for data use, could possibly also use it for voice calling through the Jio

Join app.

Battery life:

JioFi has an average six-hour battery life.

Negatives

Service lag; HD voice calling, not a big difference:

The product has many glitches in

terms of voice lag (nearly 2-5 seconds), far inferior than normal IP-based voice

calling. Marketed as HD voice calling, we actually found RJio voice calling subnormal

and patchy.

Weak product knowledge of front-end channel:

Our experience with RJio retail was

not very great, with none of the executive having complete detail on the product

and service, especially on the Jio Join and JioFi's integration and number

compatibility.

Ordinary speed results:

Our speed test results (across multiple locations of Mumbai)

provided sharp speed variations from 6mbps to 25 mbps (average 12-14 mbps) and

2-4mbps indoor speed. Incumbents like Bharti and Vodafone offer nearly 70-80% of

RJio's outdoor speeds and far higher indoor speed. This could be attributed to RJio’s

1800Mhz/2300Mhz led rollout. Incremental rollout on 800Mhz could solve this

issue.

Distribution reach

Reliance Jio has 1,071 Reliance centers across the country, with 35 centers in

Mumbai. These will be selling both handsets and wireless services.

Distribution of handsets and services are separate. Wireless services will be

provided via about 4,000 distributors (4x of Reliance centers), while handsets

will be available via 400 distributers (40% of Reliance centers).

RJio's handset distribution is better than the bigger handset sellers like Samsung

due to its wide Jio center reach and distributors, which has led them to reach 8-

9% share of smartphone market in just few quarters. However, risk of huge

inventory loss on reducing smartphone prices makes this segment vulnerable.

October 2016

Telecom | Battle Royale

Unlimited voice plan - Has RJio underestimated the cost overrun

related to IUC?

Unlimited voice could significantly increase RJio’s MOU and payout:

RJio’s

unlimited voice offering could result in a steep increase in its minutes of use (MOU).

We expect its INR149 price plan (pseudo voice plan) offering unlimited voice usage

to garner higher traction among low ARPU (average revenue per user of below

INR150) voice subscribers, largely impacting marginal players. Subsequently, the

current average MOU of 300-400 could cross 600-800 (implying 20-25 minutes of

voice daily), due to high elasticity on low ARPU voice subscribers.

In the developed market, MOU are at 200-300 and do not change substantially with

change in pricing. In countries where 3g/4g subscription has reached above 50% of

overall subscribers, voice offerings are embedded in high ARPU price plans (like RJio

price plans), making it difficult to segregate voice and data to gauge the pricing, but

perceived value is largely for data. However, India could see a different scenario,

since 3g/4g subscription is low, with a large voice-only market pool.

Global MOU may not be a correct reference

Assuming 90% on-net calls, since RJio is a new operator, at INR0.14/min termination

charge, at about 400 MOU, the IUC cost/subscriber could work out to be INR50.

However, if MOU goes up to 600-800, the IUC cost/subscriber could reach INR75-

100. This works out to be a high 35-45% of our estimated INR225 ARPU, leaving little

room for profit. For incumbents, access cost is 8-10% of revenue, about one-fourth

RJio’s cost.

RJio’s IUC charge/subscriber/month could range from INR50 to INR100 (20-

50% of estimated ARPU)

Smaller operators may see steeper impact

While RJio’s free voice could also hurt existing operators, due to the absence of

ARPU-based subscriber segmentation, the impact on operators could be difficult to

gauge. However, since high ARPU subscribers are sticky and quality conscious, the

impact could be higher for small operators that hold single-digit market share.

Can RJio sustain free voice calling

We see IUC reduction as a potential risk over the next 1-2 years for the incumbent

large telcos due to its high on net calls termination. If the current heat over IUC

discussion derails, RJio’s strategy to provide free voice may not be sustainable over

the long term.

October 2016

Telecom | Battle Royale

Data-focused revenue model dismantles traditional voice-led

business models

RJio’s pure IP-based network holds 90,000 cell sites. The company’s focus remains

the data market, which has low penetration and improving ecosystem. Thus, we

believe there is huge growth opportunity. The current industry revenue is composed

of 25% revenues from data and 75% from voice, given most operators are primarily

voice-offering companies. In the case of RJio, we have factored in complete

revenues from data offerings, as it has mentioned that voice remains free and there

is no voice-only plan. RJio product offering would be high-speed data, with voice as

an additional offering. This sets RJio apart from any other traditional telecom

company globally. We expect RJio to offer about INR232 ARPU.

High data consumption to drive overall ARPU

RJio being a new entrant should likely drive traffic growth due to two factors. First,

with empty capacity in the beginning, it would drive price elasticity of demand to

increase traffic volume. Second, being a 4G operator which drives data usage/user

by about 2-3x should further augment data consumption. We expect RJio’s data

usage/user at about 1.5GB, which is double compared to incumbent operators’

average data usage/user. Subsequently, we expect overall ARPU at INR210,

marginally better than Bharti’s INR193 and higher than other telcos on account of its

4G offerings.

Expect aggressive pricing to target market share

The previous instance of new operator launch in 2008-09 indicates that telcos

remain aggressive until they reach close to 60-70% capacity utilization as they

prioritize volume over profitability to monetize perishable traffic volumes. We

believe this may force RJio to remain irrational on pricing until it reaches about 60-

70% capacity utilization. With pan-India launch, our base-case factors in 11%

subscriber market share over the first five years of operations by FY21, driven by

free voice and data ARMB of below INR0.15/MB. This is currently at about 30-40%

discount to data pricing of INR0.20-22/MB offered by incumbent operators. Free

voice offering at INR149/28 days (minimum plan) will be the major game changer,

dismantling the telcos’ subscriber segmentation above INR149 ARPU.

Exhibit 49: Favorable data demand elasticity, with 50%

pricing discount

Data usage/user

0.14

0.13

Data tariffs (INR/MB)

0.12

Exhibit 50: Expect high market share focus with free

capacity

16%

12%

Base case

Bear case

Bull Case

0.12

0.11

1,500

FY17E

1,725

FY18E

1,984

FY19E

2,222

FY20E

2,488

FY21E

2,787

FY22E

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

With data being the only proposition, RJio should garner 100% revenue from data,

unlike just 25% by other telcos. We believe RJio would remain a data provider

garnering about INR210 data ARPU with about 1.5GB usage, i.e. nearly double data

usage/user compared to current usage. Voice offered on VOLTE network may not be

its mainstay, with weak network and low value proposition.

Expect EBITDA breakeven by FY20; estimate DCF value of

~INR5/share

Our base case expects RJio to turn EBITDA breakeven in its third full year of

operation as it would leverage its fixed cost, led by network cost, subscriber

acquisition/servicing cost and employee cost.

Exhibit 51: Base-case EBITDA breakeven in three years

300

200

100

-100

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

Base Case

Bear Case

Bull Case

High investment may lead to IRRs at 7.5% below WACC, with negative

project NPV

RJio’s total investment of about INR1,500b in the last five years even before the

launch of operations is a major drag on profitability. We believe this will be the

biggest dent on its returns. Our base-case suggests project IRR of about 7.5%,

factoring in 30% steady-state margin by FY24, led by 10% subscriber market share.

We have factored in INR232 ARPU, growing at 8% CAGR over the next six years,

better than the industry leader Bharti’s ARPU of INR203

Our post tax project NPV at 11% WACC works out to be INR -160/share. This is due

to high investment which has led to 7.5% IRRs. Our DCF-based valuation at 11%

WACC and 2% terminal growth offers equity value/share of INR5.

Scenario analysis

FY19- 3 years from launch (INR b)

Subs mkt

Base

Bear

Bull

Data

revenues

216,670

104,109

385,661

Voice

Revenue

EBITDA

-29,100

-51,717

59,159

EBITDA

Margin

-13%

-50%

15%

Break Even

3rd year - FY20

5th year - FY22

2nd year - FY19

IRRs

7.5%

16%

NPV/share @

11%

-160

-336

370

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Base-case scenario

Period

Subs mkt Share

Subs base

Voice Revenue

Voice ARPU

Voice RPM

MOU

Voice Traffic

Data Revenue

Data ARPU

Data RPM

Data Usage.user

Data traffic

Total Revenue

Network Cost share

Spectrum and license costs

Access and Roaming Charge

Employee Expenses

Selling and admin costs

Ad exp

EBITDA Margin

NPV @11%

Per Share NPV

IRR

3 years

7.0%

331

285,768

216,670

251

0.13

1,984

1,713,960

216,670

49%

11%

17%

19%

-13%

Base Case

5 years

9.5%

120

365

485,716

386,018

290

0.12

2,488

3,314,570

386,018

40%

11%

14%

10%

10 years

13.6%

186

407

881,424

824,811

380

0.10

3,752

8,136,286

824,811

32%

11%

10%

29%

End of license period 14 years

15.1%

212

411

1,029,975

1,116,369

445

0.10

4,561

11,442,044

1,116,369

33%

11%

10%

30%

-518,064

-160

7.5%

Source: Company, MOSL

RJio – a substitute to existing marginal operators due to second SIM

phenomena

As RJio’s key proposition is data services, customers are likely to choose it as a

second service provider (second SIM phenomena) in the initial period of launch,

driven by three key issues:

Current ecosystem of VoLTE handset.

Risk of network volatility.

Risk to change mobile number until MNP gets activated

Challenges RJio likely to face in the market:

Low penetration of VoLTE handsets in the system:

Current user base of LTE

handsets remains weak at about 60-70m; maybe even smaller for VoLTE.

Considering the magnitude of launch, the subscriber base requirement remains

high in order to recover the heavy investment (twice the size of Idea’s current

balance sheet size and about 1.5x the size of Bharti). RJio’s own handset sales

have caught steam with it being third-fastest handset seller on a monthly basis.

However, in comparison to total subscriber base and monthly subscriber

addition requirement, it remains weak. We feel over time (after about eight

quarters), this concern should fade as majority of new handsets (introduced at

USD ~50-100 average selling price) will be VoLTE-enabled, but it will be a

challenge to convert the existing subscriber base. Further, non-VoLTE handsets

may allow voice calling through Jio Join, but it may not be seamless. With most

RJio customers likely to be data consumers, this could be addressed.

October 2016

Telecom | Battle Royale

Peer network gap:

RJio’s delay in launch over the last five years has allowed

incumbents, especially Bharti, to bridge large portion of the gap between

technologies. Bharti offers 4G in most of the metro and Tier I towns. Thus, there

is little reason to switch, except for the price factor.

Technology:

Majority of the developed countries, where operators upgraded to

4G, saw a steep migration of the ecosystem toward 4G-enabled audio/video

content, which forced operators to their upgrade network in order to normalize

consumer data experience. On the contrary, India’s content library can largely

be serviced with 3-5mbps speed, thus leaving little value of speed upgrades over

that base. Thus, in India, many cities and towns may be comfortable with 3G

speeds, provided there is a well-covered network.

RJio to reach 84m+ subscriber base by FY19 with subscriber share of ~7%:

Our base case suggests RJio should reach ~84m subscriber base with a subscriber

market share of ~7% by FY19. It would garner over 70% of the share from RCOM,

MTS, Aircel and other marginal players. The revenue market share loss of Top 3

telcos is 5.5pp over FY17-22E, largely led by the growing second SIM phenomena in

India. The market share impact on marginal players is expected to be 10.5pp.

Exhibit 52: Base case: Subscriber base (m)

200

150

100

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

0.0

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

102

120

Base case

Bull case

Bear case

Exhibit 53: Base case: Subscriber market share (%)

16.0

12.0

134

8.0

4.0

5.2

2.7

7.0

8.2

9.4

10.4

Base case

Bull case

Bear case

Marginal operators, Idea and Vodafone should be impacted:

While the large second SIM phenomena is expected to keep subscriber share loss to

the minimum for the top three telcos, the impact on gross RMS is starker. Bharti is

likely to lose 130bp, while Vodafone/Idea should lose 210bp gross market share

over FY17-22E. ~10.5% of the 18.1% expected gross RMS of RJio in FY22E is expected

to come from RCOM, MTS, Aircel and other marginal operators. This is because

RJio’s aggressive pricing strategy is expected to ensure supremacy in the second SIM

market – the Holy Grail for marginal players.

RJio’s pre-operational capital investments stretched at INR1.5t:

With over 2x of Idea’s capital employed and inching closer to that of Bharti’s, RJio’s

pre-operations capital investments stands tall at INR1.5t.

October 2016

Telecom | Battle Royale

Exhibit 54: Capital employed: RJio 2x of Idea’s pre-operations (INR b)

1595

1500

717

Bharti India

Idea

RJIO

Source: Company, MOSL

RJio: FY20 to mark EBITDA breakeven; return ratios to follow suit

Our base case builds EBITDA break-even in FY20 (FY21E EBITDA: ~INR37b). RoCE is

expected to hit positive territory in FY22 as we expect RJio to take ~5 years to

recoup its colossal pre-operational capital investments.

Exhibit 55: RJio: FY20 to mark EBITDA break-even; return ratios to follow suit

5.0

0.0

-5.0

-10.0

-15.0

-20.0

FY17E

FY18E

FY19E

FY20E

FY21E

FY22E

Source: Company, MOSL

RoCE (%)

EBITDA (INR b)

100.0

50.0

0.0

-50.0

-100.0

October 2016

Telecom | Battle Royale

Exhibit 56: Abridged Profit & Loss statement (INR m)

Abridged P&L

Data ARPU (INR/month)

Data Traffic (m MB)

Data Usage/sub/month (MB)

Data revenue (INR b)

Data RMS (%)

Total subscribers

ARPU (INR/month)

Total traffic (m MB)

Total revenue (INR m)

Gross RMS (%)

Tower Rental Cost

% of Sales

Spectrum and license costs

% of Sales

Access and Roaming Charge

% of Sales

Employee Expenses

% of Sales

Subscriber acquisition/servicing and admin costs

% of Sales

Ad exp

% of Sales

Total Expenditure

Consol EBITDA

EBITDA margin (%)

FY17E

215

67,500

1500

9675

3.0

215

81000

9675

0.5

10125

105

1064

2475

4125

9113

5000

31902

-22227

-229.7

FY18E

232

931,500

1725

125388

29.4

232

1101600

125388

6.9

73585.2

13793

22750

17820

33510

24000

185458

-60070

-47.9

FY19E

251

1,713,960

1984

216670

33.2

251

1999728

216670

10.9

106602

23834

36339

19246

41750

18000

245770

-29100

-13.4

FY20E

270

2,479,529

2222

300856

34.6

102

270

2867102

300856

13.9

130577

33094

46712

21825

46622

18000

296830

4026

1.3

FY21E

290

3,314,570

2488

386018

35.5

120

290

3800286

386018

16.6

154448

42462

55321

24042

52309

18000

346581

39437

10.2

FY22E

312

4,254,116

2787

475532

36.5

134

312

4827419

475532

19.0

181162

52309

57668

26485

57478

19440

394541

80991

17.0

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Spectrum foot-print

RJio/Bharti dominate LTE spectrum holdings too

Bharti/RJio hold lion’s share in 4G LTE spectrum

Bharti/RJio together (21%/28%) hold ~49% of the current LTE spectrum pool. Their

4G spectrum holding is over 6x that of Vodafone/Idea. However, Bharti’s holdings

(212Mhz) in the 1,800Mhz band, which is globally more prominently used for 4G

(courtesy its more evolved infrastructure and device ecosystem), is almost double

that of RJio. We believe RJio’s spectrum sharing/trading deals with RCOM are

expected to cushion the shortfall. We believe RJio would prefer owning more

spectrums in the 1,800Mhz band to reduce dependence on RCOM.

Vodafone/Idea hold meager 8% share in current LTE spectrum pool

Vodafone and Idea have remained laggards in terms of 4G/LTE spectrum acquisition

with a meager 8% share. The no. 2 and 3 telcos will have to significantly increase

their 4G holdings to participate meaningfully in the imminent data explosion.

Exhibit 57: Operator-wise 3G/4G spectrum holdings (Mhz) and share (%)

Bharti

Vodafone

Idea

Reliance Jio

Others

210

158

119

469

4G/LTE

552

145

739

1,117

3G (% share)

22.0

16.5

12.4

49.1

4G/LTE (% share)

21.1

5.6

2.3

28.3

42.7

Source: TRAI ,MOSL

LTE spectrum holdings well balanced across category circles

Bharti/RJio with ~20%/26% share in the 2825Mhz LTE spectrum pool are well

covered in most of the relevant circles to offer 4G services. RJio holds

28%/25%/26%/26% in Metros/A-circles/B-circles/C-circles. Bharti holds 23% in

metros and 19% each in A circles/B circles/C circles.

Exhibit 58: Operator/category-wise 3G/4G spectrum holdings (MHz)

Metro

4G/LTE

111

163

130

387

A' Circle

4G/LTE

132

166

270

218

631

B' Circle

4G/LTE

184

260

165

422

351

934

C' Circle

4G/LTE

147

202

157

263

258

662

Total

4G/LTE

210

552

158

145

119

739

469

1,117

956

2,614

Bharti

Vodafone

Idea

Reliance Jio

Others

Total

Exhibit 59: Category-wise share in 3G/4G spectrum

Metro

4G/LTE

22%

23%

29%

41%

42%

A' Circle

4G/LTE

22%

21%

17%

18%

26%

43%

B' Circle

4G/LTE

17%

20%

19%

17%

28%

47%

45%

C' Circle

4G/LTE

29%

22%

31%

61%

40%

Total

4G/LTE

22%

21%

16%

12%

28%

49%

43%

Source: TRAI, MOSL

Bharti

Vodafone

Idea

Reliance Jio

Others

October 2016

Telecom | Battle Royale

INR368b spectrum hole to be filled

Idea/Vodafone could be most active in upcoming auction

Idea needs to spend about INR151b at reserve price, while Vodafone and RJio

require INR85b and INR99b in the forthcoming 2016 auction. Bharti’s need-based

investment could be the least at INR31b.

For the top-3 telcos in the ecosystem, we

have assumed minimum requirement of 10Mhz in each circle in the

900Mhz/1800Mhz/2100Mhz bands for 3G and 4G coverage, and an additional 5Mhz

for voice. For RJio, we assume minimum 10Mhz of own spectrum (excluding RCom)

in the 800-1800Mhz band, which can be used for both voice and data. 2300Mhz is

excluded, given its usage as capacity band. Any telco falling short of this yardstick is

expected to acquire spectrum in the respective circles in the forthcoming 2016

auctions.

Bharti

We expect Bharti to spend ~INR25.4b, two-thirds of which is expected to go

toward acquiring 1,800Mhz, largely in Maharashtra to augment its 4G offering.

Maharashtra – a bone of contention; competition to remain high:

Bharti, with

its relatively superior holdings, still has a few spectrum holes to fill. Bharti holds

18.5% gross RMS in Maharashtra, which is a large circle in terms of revenue

contribution, operates 4G on 2300mhz as its current 8.2Mhz holding in the

1,800Mhz band is not sufficient to service subscribers’ voice + data needs in the

circle. We believe

this circle might see increased bidding, considering Vodafone

and Reliance Jio too might eye at least a 5Mhz block each to fill their spectrum

holes in Maharashtra

(Maharashtra has 13.4Mhz to offer at a reserve price of

INR3.18b per Mhz).

No 3G in Kerala, but bidding intensity expected to be low

in the circle:

Bharti does not offer 3G services in Kerala, where it holds ~14.9%

gross RMS. But we believe the geography is not expected to see increased

bidding from competitors. Sufficient availability of the 2,100Mhz band, with

major operators (Vodafone/Idea/Reliance Jio) being adequately covered for 3G

services in Kerala, should allow Bharti to secure 3G services at reserve price.

Vodafone

Multiple spectrum holes to require INR85b spectrum outlay

Five 10-15% market share circles have no 3G-4G services:

Vodafone’s lower

markets like AP, MP, HP and J&K (~10% gross RMS each) and Bihar (RMS is

14.4%) are expected to be focus areas, with 9% revenue contribution but no 3G

or 4G services. Vodafone would be forced to acquire spectrum to protect its

turf. However, any increase in reserve prices due to a bidding war in any of

these circles could further increase its spectrum spend.

No 4G in Maharashtra:

Vodafone holds a meager 1Mhz spectrum in the

1,800Mhz band and no 2,300Mhz band spectrum in Maharashtra. Vodafone

holds 26% market share in a large market like Maharashtra where both Bharti

and Reliance Jio also need spectrum. Maharashtra has 13.4Mhz to offer at a

reserve price of INR3.18b per Mhz. This should push Maharashtra’s reserve price

in the event of intense bidding by Vodafone to acquire 1800Mhz spectrum.

No 4G in high market share circles like TN, Haryana, UP West, Rajasthan, WB

and North-East:

Vodafone enjoys 20%+ gross RMS in TN, Haryana, UP West,

Rajasthan, 36.7% in West Bengal, and 16.6% in North-East. However, its lack of

spectrum holdings in the 1,800Mhz band is expected to have a bearing on its 4G

October 2016

Telecom | Battle Royale

footprint in these circles, and consequently, its bidding decisions for these

circles. Vodafone does not have enough 1,800Mhz spectrum holdings to offer

both voice and 4G services in North-East too.

Idea

INR151b spectrum requirement – spectrum insufficient in 16/22 circles for either

3G or 4G, or both; Idea needs the maximum quantum of spectrum in the

forthcoming auctions

No 3G or 4G in Rajasthan, Bihar, Mumbai, West Bengal:

Idea holds 10% plus

market share in all these circles (together contributing 13%), but does not have

either 3G or 4G, which may force Idea to participate. Mumbai is a large market

and cannot be ignored. Since 1800Mhz spectrum is limited in Mumbai (only

4.8Mhz), it may lead to intense bidding, thus increasing the risk of high

acquisition cost or non-availability.

No 4G in high market share circles like Gujarat, UP West, UP East and HP:

Being high market share circles, Idea may be interested to hold 4G spectrum to

compete and protect market share against Bharti and RJio, promoting advance

technology. Also UP (E) has only 5.4Mhz of 1,800Mhz spectrum available, which

could be critical from future requirement perspective.

No 4G in Delhi and Kolkata:

Idea holds 12% and 8% market share in Delhi and

Kolkata, respectively. Kolkata is a large market, where only 4Mhz of 1,800Mhz

spectrum is available, which makes it critical for future requirement.

No 3G in TN, Orissa and North East, but could see limited bidding:

There is a

possibility that few of Idea’s circles like TN, Orissa and North East (with low

market share and having 4G) may not see interest from Idea, which could save

about INR19.7b from our INR 151b expectation. However, this could be more

than offset by any increase in reserve price from the current levels.

Reliance Jio

INR99b investment to smoothen coverage gaps without RCom dependence

No owned spectrum in 800-1800Mhz band in Punjab and UP (W):

With no

owned spectrum in 800-1800Mhz band, both Punjab and UP (W) may be high

priority for RJio. We expect INR17b for about 10 Mhz spectrum requirements.

RJio’s owned holdings in 800 MHz + 1800 MHz band < 10Mhz in 12/22 circles:

RJio’s owned spectrum in 12/22 Indian circles is less than 10Mhz. There is no

compulsion to bid for spectrum in these bands, considering RJio has 2300Mhz

for capacity as well as spectrum sharing/trading deals with RCom. Given

Reliance’s philosophy of seeking strong competitive position, if it explores

independence from RCom’s spectrum and its own 2,300Mhz band for 4G

services, it may bid for the 1,800Mhz band in the 11 circles, incurring about

INR82b investment.

October 2016

Telecom | Battle Royale

Exhibit 60: Bharti’s spectrum investments requirement (INR m)

Bharti

Circles

Delhi

Mumbai

Kolkata

Gujarat

Karnataka

Tamil Nadu

Kerala

Punjab

Haryana

UP W

UP E

Rajasthan

Bihar

Orissa

Assam

J&K

Total

650

16,550

14,650

8,850

15,900

5,800

1800mhz

2100mhz

2300mhz

2500mhz

Total

5,800

15,900

8,850

650

31,200

Source: dot; MOSL, Company

October 2016

Telecom | Battle Royale

Exhibit 61: Vodafone’s spectrum investments requirement (INR m)

Vodafone

Circles

Delhi

Mumbai

Kolkata

Gujarat

Karnataka

Tamil Nadu

Kerala

Punjab

Haryana

UP W

UP E

Rajasthan

Bihar

Orissa

Assam

J&K

Total

2,000

550

650

53,010

550

32,050

4,550

3,818

2,300

800

3,100

1,000

4,300

1,900

6,150

4,800

3,850

4,550

10,692

13,600

15,900

1800mhz

2100mhz

2300mhz

2500mhz

Total

15,900

24,292

8,400

4,800

4,550

9,968

2,300

1,800

7,400

1,900

2,000

550

1,200

85,060

Source: dot; MOSL, Company

October 2016

Telecom | Battle Royale

Exhibit 62: Idea’s spectrum investments requirement (INR m)

Idea

Circles

Delhi

Mumbai

Kolkata

Gujarat

Karnataka

Tamil Nadu

Kerala

Punjab

Haryana

UP W

UP E

Rajasthan

Bihar

Orissa

Assam

J&K

Total

650

76,064

75,350

2,000

2,300

800

3,100

4,300

1,900

2,300

600

2,600

4,800

5,750

4,550

7,000

16,400

17,200

11,900

1800mhz

19,950

14,304

5,960

23,050

2100mhz

2300mhz

2500mhz

Total

19,950

37,354

5,960

11,900

16,400

17,200

4,800

5,750

11,550

4,900

800

7,400

1,900

4,300

600

650

151,414

Source: dot; MOSL, Company

October 2016

Telecom | Battle Royale

Exhibit 63: Reliance Jio’s spectrum investments requirement (INR m)

Reliance Jio

Circles

Delhi

Mumbai

Kolkata

Gujarat

Karnataka

Tamil Nadu

Kerala

Punjab

Haryana

UP W

UP E

Rajasthan

Bihar

Orissa

Assam

J&K

Total

650

99,322

3,100

2,300

9,000

1,660

7,700

2,350

9,600

5,750

15,900

11,900

10,692

7,770

800 Mhz

900 Mhz

1800mhz

19,950

2100mhz

2300mhz

2500mhz

Total

19,950

15,900

11,900

10,692

7,770

1,660

7,700

2,350

9,600

5,750

2,300

3,100

650

99,322

Source: dot; MOSL, Company

October 2016

Telecom | Battle Royale

Exhibit 64: Gross Revenue Market Share (%)

Circles

Delhi

Mumbai

Kolkata

Gujarat

Karnataka

Tamil Nadu

Kerala

Punjab

Haryana

UP W

UP E

Rajasthan

Bihar

Orissa

Assam

J&K

Bharti

34.1%

23.8%

26.6%

18.5%

16.3%

41.0%

48.4%

33.2%

14.9%

30.6%

17.8%

21.0%

28.3%

46.1%

23.1%

32.6%

44.9%

46.3%

41.5%

36.8%

47.7%

40.4%

Vodafone

27.3%

33.4%

33.6%

26.0%

37.8%

10.3%

13.9%

23.6%

22.6%

18.0%

27.7%

22.2%

28.7%

22.0%

9.7%

36.7%

9.9%

14.4%

17.3%

21.7%

16.6%

9.6%

Idea

12.0%

10.3%

7.6%

33.1%

22.8%

24.7%

11.4%

6.2%

41.9%

30.6%

27.1%

31.7%

14.1%

14.5%

41.8%

9.4%

13.3%

14.5%

5.8%

5.3%

4.6%

Reliance Jio

0.0%

7.1%

0.0%

Source: dot; MOSL, Company

Not present in circles

4g LTE

Both

For Reliance Jio not present in circles (excluding 2300mhz

Min 10Mhz of owned

Min 5Mhz of owned

Exhibit 65: Total spectrum investments required (INR m)

Bharti

Vodafone

Idea

RJio

Total

31,200

85,060

151,414

99,322

366,996

Source: dot; MOSL, Company

11%

31%

54%

36%

October 2016

Telecom | Battle Royale

Ecosystem development progressing well

1800Mhz, 800Mhz and 2100Mhz most compatible for LTE

upgrades

The most widely used spectrum for LTE network deployments continues to be

1,800MHz (3GPP band 3), which is used in 246 commercially launched networks in

110 countries to represent over 47% of LTE network deployments. The next most

popular band for LTE systems is 2.6 GHz (band 7) used in 121 networks. 800MHz

(band 20) is by far the next most popular spectrum choice, being used by 119 LTE

operators.

For 4G network rollout, while 1,800Mhz and 800Mhz have remained the most

common bands for coverage, 2,600Mhz and 2,100Mhz are widely used capacity

spectrum globally. 2,100Mhz is also the third most preferred spectrum band globally

due to its device compatibility with 3G services. This makes 1,800Mhz, 800Mhz and

2100Mhz amongst the key spectrums in India. 2100Mhz, which is currently used for

3G, could be a vital spectrum due to the potential transition to 4G. Thus, operators

may look to acquire 210Mhz due to its current 3G as well as future 4Gcapability.

Exhibit 66: Globally preferred LTE networks

Rank

1st

2nd

3rd

Spectrum

1800 MHZ

2600GHZ

800MHZ/700mhz

2100mhz

1700mhz/1900mhz/2500MHZ

/2300MHZ/

Countries

UK, France, Italy, Japan

Germany, Italy

UK, France, Germany, Italy, US, Japan,

US, Japan,

US, Japan, China, India

Source: GSMA, August 2016

Exhibit 67: Band-wise Device Ecosystem

LTE FDD

1800 Mhz band 3

2600 Mhz band 7

2100 Mhz band 1

800 Mhz band 20

800/1800/2600 tri-band

AWS band 4

850 Mhz band 5

900 Mhz band 8

1900 Mhz band 2

700 Mhz band 17

700 Mhz band 13

APT700 band 28

700 Mhz band 12

1900 Mhz band 25

No. of compatible Devices

3,227

2,993

2,613

1,809

1,710

1,365

1,334

1,253

1,159

1,123

607

372

281

271

Source: Evolution to LTE report, GSA,July 2016

Volte Global Deployment

While VoLTE is only used by RJio presently in India, it has started seeing good

traction globally. 82 operators in 43 countries have commercially launched VoLTE-

October 2016

Telecom | Battle Royale

HD voice service, and additional 146 operators are investing in VoLTE in 68

countries. We believe that differentiation between voice and data will fade in the

long term as connectivity will be on IP. However, India may be far away from the

transition period, given the priority toward data investments and no material value

adds with VoLTE. The only reason for the shift could be that it would allow telcos to

free spectrum assigned for GSM-led voice and use it for data.

Exhibit 68: Country-wise number of operators using Volte

Region

Oceania

Europe

Asia

North America

Middle East

Africa

Total

No of countries

No of Operators

Source: Status of the LTE Ecosystem, June’16

India’s smartphone penetration low, but growing fast

India’s smartphone penetration is about 28%, compared to other regions where

4G/3G remains highly penetrated. Developed markets have smartphone penetration

of over 60%. This has been a key deterrant to 3G/4G data absorbtion. While India’s

overall data penetration is about 31%, nearly 60% are using 2G data, which does not

require a smartphone. Smartphone-led 3G/4G penetration can more than double

data consumption per user.

October 2016

Telecom | Battle Royale

Exhibit 69: Smartphones and Data Usage

Particulars

Active Subs (VLR)

Data subscribers (mn)

growth

as a % of smartphone

3G,4G base (mn)

growth

as a % of smartphones

as a % total users

as a % data users

Smartphone Base(mn)

growth

as a % of active subs

Smartphone shipment (mn)

as a % of total handset

growth

Monthly Smartphone shipments(mn)

growth

Total handset shipment (mn)

growth

Increase in base(mn)

Replacement(mn)

% of shipment

as a % of smartphone

183.4

0.9

4.5%

11.2

28.94

52.0%

6.3%

15.2

36%

1.3

36%

221.6

21%

15.06

0.14

49%

18%

88.6%

10.9%

41.99

17%

176%

3.5

176%

247

11%

2.99

325%

CY 11

644.86

CY 12

700.07

143.2

CY13

761.55

219.92

54%

265%

40.27

CY14

824.37

248.06

13%

158%

70.42

75%

45%

28%

157

89.4%

19.1%

77.1

30%

84%

6.4

84%

257

CY15

899.86

311.7

26%

130%

120

70%

50%

13%

38%

239

52.0%

26.6%

97.11

39%

26%

8.1

26%

249

-3%

16%

Q1,CY 16

925.81

322.21

125%

132.77

11%

51%

14%

41%

259

8.3%

28.0%

23.5

44%

-76%

7.8

-3%

-78%

19.8

16%

Source: CMR,TRAI,CISCO,MOSL

October 2016

Telecom | Battle Royale

Exhibit 70: Smartphone penetration in countries

India

Turkey

Europe

Greece

Portugal

Netherlands

Spain

Italy

Germany

63%

61%

60%

59%

35%

34%

32%

49%

61%

59%

70%

77%

28%

27%

Q1 16/17

65%

64%

61%

58%

2015

2014

19%

46%

52%

63%

64%

60%

72%

71%

68%

50%

52%

Source:Vodafone Presentation (Q1FY17), MOSL

Higher proportion of smartphone shipments should accelerate penetration

While smartphone sales as a proportion of feature phone increased from single-digit

in FY11 to about 39% in CY15, and is likely to be about 52% in CY16, we think the

smartphone base has reached a critical mass. This change should accelerate

smartphone penetration as larger share of replacement will be toward

smartphones.

Handset replacement cycle is about 18-24 months. If we assume feature phone

subscribers move to smartphones, in ideal situation, smartphone penetration should

accelerate. However, feature phone proportion of total handset shipments

remained high over the years, indicating that feature phones were the 1

choice of

replacements.

October 2016

Telecom | Battle Royale

Exhibit 71: Handset shipments and smartphone share (%)

Total Handset(mn)

smartphone share

52.0%

221.6

247

17.0%

6.1%

2011

6.9%

2012

2013

2014

2015

257

30.0%

249

120

H1 2016

2016E

252

39.0%

43.5%

183.4

Source: Source:CMR,India Emerging Smartphone Brands, June 2016

Reducing average selling price of smartphones aiding growth

Average selling price of smartphones continues to reduce, enabling faster transition

from feature phones to smartphones. This is indicative of the large base of about

162 brands with 468 models sold in CY15, thus intensifying competition. Emerging

brands’ (launched FY13 onwards) share in total handsets grew from 3% in CY13 to

16% in CY15, and is estimated at 25% in CY16. These wider SKUs at lower range,

emerging brands has further accelerated smartphone absorption rate.

In CY15 and YTD CY16, 21 and 7 new brands were launched, respectively. The

prominent emerging brands include RJio’s JYF, and LeEco.

Exhibit 72: Prominent emerging brands launched since CY13

Brands

Gionee

Panasonic

Maxx

DatawInd

Xiaomi

OnePlus

Oppo

Vivo

Asus

InFocus

LYF

Qiku

Meizu

Year of Launch

CY13

CY14

CY15

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 73: Average selling price of smartphones

CY2016E

CY2015

Exhibit 74: Emerging smartphones by price bracket

71%

78%

2013

2015

81%

75%

21% 19%

4% 3%

4% 0%

13%

18%

Above Rs. 20,000

Rs. 10,000-20,000 Less than Rs. 10,000

Source: CMR, India Emerging Smartphone Brands, June 2016

Source: CMR, India High End Smart phone Market, June 2016

Exhibit 75: Emerging brands share increasing smartphone

sales

Emerging Brands

Established Brands

Exhibit 76: Indian smartphone market share by vendor

28.6%

26.6%

2015

Q1,2016

36.3%

29.3%

97%

91%

84%

75%

14.3%

11.4%

12.6% 9.6%

9.2%

8.2%

7.1% 6.8%

2013

2014

16%

2015

25%

2016E

Source: IDC, May 2016

Source:CMR,India Emerging Smartphone Brands, June 2016

LTE devices making inroads

LTE devices are the first choice of smartphones as handset makers are widening the

SKUs for LTE models. Also, telcos promoting 4G subscription are pushing consumers

to adopt LTE-enabled handsets to upgrade services. Nearly 50m handsets are LTE-

enabled in India. As of Q1CY16, about 63% of total smartphones sold are LTE-

enabled, growing from 33% in CY15. This trend is likely to continue as we expect

majority of new devices over the next few years to be LTE-enabled, supporting 4G

ecosystem development. Among handset makers, Samsung, Lenovo and RJio’s

recently launched LYF are driving LTE device uptick with wider models.

October 2016

Telecom | Battle Royale

Exhibit 77: Share of LTE-enabled smartphones growing

(m pieces)

Lte smartphones

Non-LTE smartphones

Feature phone

Exhibit 78: LTE devices market leaders in India (H1 2016)

Others

42%

Micromax

LYF

152

2015

H1 2016

Source:CMR Report,June 2016

Samsung

41%

Source:CMR Report,Sept 2016

Over 50% of smartphone users not shifted to 3G/4G

While smartphone penetration is yet to reach a sizeable base, nearly 50% of

smartphone users i.e ~130m active VLRs (14% of VLR users) remain non-3G/4G

users. We think this offers a reasonable base of subscribers for telcos to improve

data absorption. Our discussion with management has indicated that this non-usage

of 3G/4G data could be due to low relevance of data for smartphone users. While

content development could play a role in increasing data consumption, we think

India’s ARPU-centric subscribers could be attracted toward higher data usage

through price elasticity of demand.

Exhibit 79: 2G and mobile broadband subscriber base (m)

2G subscriber base

36.6

22.3

37.4

32.3

23.9

30.5

3G+4G subscriber base

Bharti

Vodafone

Idea

Source: MOSL

Exhibit 80: Large portion of India yet to be covered with 3G/4G (%)

2015

~95

>95

2021

~90

~55

~45

~15

GSM/EDGE

WCDMA/HSPA

LTE

Source: Ericsson Mobility Report, June 2016

October 2016

Telecom | Battle Royale

Data coverage needs to grow v/s other markets

According to Ericsson Mobility Report, 3G technology covered around 55% of India’s

population in 2015. This is expected to increase to around 90% in 2021. LTE

technology coverage, which was just about 15% in 2015, is expected to increase to

45% in 2021. We observe that 3G/4G coverage need not be across the entire circle,

but has to be covered in targeted pockets of high-data consumption. Even within

metros and tier 1 cities, prime locations need wider coverage v/s other areas. Thus,

overall population coverage may remain low, but larger high-consuming pockets

could provide higher data traffic growth. Yet we note that, compared to other

markets where data penetration is high, India’s data coverage remains low.

Exhibit 81: Large portion of territory covered by broadband, but remains unsubscribed

Not covered by mobile broadband(3G or 4G)

Covered but do not subscribe to mobile broadband

Subscribe to Mobile Broadband

21%

53%

27%

13%

77%

10%

21%

71%

10%

70%

20%

10%

69%

21%

45%

43%

12%

67%

26%

20%

65%

15%

24%

62%

14%

10%

59%

31%

30%

47%

23%

46%

21%

36%

43%

32%

66%

Source:GSMA, Connected Society, 2016

In India, 45% of the population is not covered by 3G/4G. Out of the 1.01b

subscribers, 55% are covered but only 12% have subscribed for 3G/4G data.

Furthermore, about 19% of subscribers are covered by 3G but use 2G data. This

shows that there is huge potential for growth in 3G/4G data.

This is a concern shared by most of the Asian countries which have high data

coverage but low data penetration rate. Thailand and China are the two countries

which have higher proportion of data subscribers compared to the category of

subscribers which are covered but not subscribed.

The issue of non-subscription to data services in India could be attributed to lack of

relevance of online content as well as pricing. While pricing needs to come down

drastically to improve demand elasticity, we think RJio-triggered price decline could

support data growth.

Also, the increase of local content and educating consumers about the relevance of

data usage should improve the penetration rate.

October 2016

Telecom | Battle Royale

Exhibit 82: Ecosystem upgrading towards LTE

Source: Ericsson Mobility Report, June 2016

The LTE technology started gaining traction in 2015. As per Ericsson report, mobile

broadband usage is set to increase dramatically with smartphone subscriptions and

increase in mobile traffic (smartphone subscriptions and mobile traffic are expected

to rise 4-fold and 15-fold between 2015 and 2021 to reach 810m and 4.5 ExaBytes

(EB) per month, respectively).

Exhibit 83: Operator-wise 2G/mobile broadband sites in India (1QFY17)

2G sites

Mobile broadband sites

68,500

48,825

97,714

Bharti

134,000

71,170

127,835

12,265

63,929

Vodafone

Idea

Rcom

Source: MOSL

Mobile internet, voice and text and non-mobile subscribers in Asia

20% of the population in India does not own a mobile. Out of the rest 80%, only 31%

use data services (2G, 3G and 4G). Even within this, 19% are 2G subscribers. The

remaining 55% of the population use mobiles for only voice and text services. This

offers huge potential to tap subscribers, subject to ecosystem development. While

Japan and South Korea are model states with 70-80% data subscriber base out of

the total population, even China (which started 3G just a year before India) has

reached a substantially high rate of 62% data subscription.

October 2016

Telecom | Battle Royale

Exhibit 84: Technology usage-wise global population split

Mobile Internet

10% 8%

Voice and text only

Non Mobile

21%

22% 28%

22% 20%

11% 20% 26% 27%

31% 34%

38%

47% 45%

56% 58% 62%

11% 18%

38%

26%

44%

17%

33% 31%

55%

24% 27%

79%

72% 68%

16%

23% 19%

62% 60%

46% 45% 41%

36% 35% 34%

25% 29% 28% 27% 20% 20%

Source:GSMA, Connected Society, 2016

Exhibit 85: Content ecosystem: Smartphone is used while commuting

Source:EY,Future of Digital Content Consumption in Inida, Jan 2016

As evident from the chart, people mostly use smartphones while travelling and

during lunch, largely for browsing, social networking and watching online videos.

Smartphones are least used for downloading content. On the contrary, desktop

(which is largely used at workplaces) is used for downloading multiple files apart

from browsing. This indicates that more than speed, customers prefer good network

quality – most of the content can be accessed at less than 5mpbs speed, leaving

little value for higher speed. However, speed or network variation could lead to

inaccessibility, leading to bad consumer experience.

October 2016

Telecom | Battle Royale

Barriers to internet usage in India

GSMA Intelligence consumer survey 2015 (study of common barriers for usage of

internet) indicated that the lack of awareness and locally relevant content remained

the key factor for lower usage of data in India. China was the only country in the

survey where the key barrier for not using data was lack of digital skills. Surprisingly,

none of the countries mentioned lack of network coverage as a major hindrance.

Exhibit 86: Coverage remains the least important reason for data’s non usage

Barrier

China

India

Indonesia

Philippines

Thailand

Vietnam

Asia

Lack of awareness and Lack of digital literacy and

locally relevant content

skills

Affordability Barrier

30%

89%

11%

80%

21%

23%

75%

10%

46%

51%

27%

13%

88%

23%

22%

80%

20%

24%

72%

24%

25%

Lack of network

coverage

Security and

trust barrier

Other

15%

12%

22%

12%

High perceived Barrier

Low perceived Barrier

Source: GSMA

Lack of local content availability

The content and services provided on the internet do not reflect cultural and

linguistic diversity of the world. For example, more than 50% of websites worldwide

are in English, 2% are in Mandarin and less than 0.1% in Hindi. Readers’ preference

for websites in local language was high, especially in China and India. Also, most of

the content surfed in Asia is for entertainment purpose. This creates a

misconception among non-users that internet is only for entertainment purpose and

they fail to realize other utilities that internet can provide.

October 2016

Telecom | Battle Royale

Exhibit 87: Most commonly spoken Asian languages v/s % of websites worldwide in

language

speaker in survey countries

Chinese, Mandarin

Hindi

English

Indonesian

Bengali

Japanese

Telugu

Marathi

Tamil

Chinese,Wu

Vietnamese

Thai

Filipino

Urdu

Kannada

Chinese,Yue

Gujarati

Chinese, Huizhou

0.5%

0.6%

0.3%

Source: GSMA Intelligence Consumer Survey 2015

2.0%

10%

14%

54.0%

website in language worldwide

35%

5mbps good enough for major data needs

One of the key factors promoted by telcos while promoting data services is the

speed they offer. In reality, majority of the content requires much lesser speed but

seamless connectivity. Most of the developed countries’ data connectivity moved

from 3G to 4G after nearly 8-10 years of data consumption on 3G. During this phase,

the content matured over time to high-quality HD and ultra HD, which required

higher data speed. Subsequently, telcos migrated to better technologies like LTE-

based 4G services.

Contrastingly in India, even before 3G penetration increased, the fear of RJio’s 4G

launch pushed all operators to migrate to 4G. In reality, India’s local content (apart

from You Tube videos) is far from maturing to HD and Ultra HD content as nearly

90% of content (including audio/video streaming) can be comfortably streamed on

3-5mbps of stable speed. The key deterrent apart from pricing is the quality of

network, which does not allow seamless data connectivity for high-data-consuming

content like audio/video streaming.

October 2016

Telecom | Battle Royale

Exhibit 88: Speed requirement for video streaming

0.5 Mbps – minimum Internet speed for streaming

1.5 Mbps – recommended Internet speed for streaming

3.0 Mbps – recommended Internet speed for Standard Definition (480) streaming

5.0 Mbps – recommended Internet speed for High Definition (1080) streaming

25 Mbps – recommended Internet speed for Ultra High Definition (4K) streaming

Source: Netflix

Average global 4G speed above 25-30mbps

We conducted speed test across multiple geographies to understand 4G network

speed. Typically, we observed speeds on average are significantly higher in outdoor

locations at about 35-40mbps, while indoor areas, basement tunnel or city outskirts

have about 50% lower speed at about 15-20mbps, in line with India. Average 4G

data speed in those geographies was nearly 2-3x higher than India’s 4G speed, with

minimum data speed at upward of 15mbps. Also, speed variations there were

relatively low, allowing seamless access to high-quality content like video streaming

even while commuting. On the other hand, static locations in India have good data

connectivity especially in larger cities, but while commuting, connectivity remains

abysmal in comparison to other countries.

October 2016

Telecom | Battle Royale

Exhibit 89: Average global 4G speeds (Indoor and Outdoor)

Moscow, Russia

Moscow , Russia

Moscow, Russia

Al Ahmadi, Kuwait

Kuwait City, Kuwait

Dar es Salaam, Tanzania

Dubai

Sydney, Australia

Singapore

Hartford, Connecticut, United States

New Jersey, USA

New York, USA

Mumbai, India

56.92Mbps

20.62Mbps

34.19Mbps

19.38Mbps

99.48Mbps

53.07Mbps

3.87 Mbps

2.72Mbps

24.81 Mbps

10.16Mbps

29.8 Mbps

23.24Mbps

18.67Mbps

21.7Mbps

17.7Mbps

16.36Mbps

4.29Mbps

Outdoor - Prime locations

Indoors

Outdoor - Prime locations

Indoors

Outdoor - Prime locations

Outdoors

Outdoor

Indoor

Outdoor

Indoors

Outdoor

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Companies

BSE Sensex: 28,243

S&P CNX: 8,738

October 2016

Companies

Bharti Airtel

Idea Cellular

Bharti Infratel

Prices as of 3 October 2016

October 2016

Bharti Airtel

BSE Sensex

28,243

S&P CNX

8,738

Update | Sector: Telecom

Telecom | Battle Royale

CMP: INR319

TP: INR410 (+30%)

Buy

Well invested to survive this turbulence

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val. (INR m)

Free float (%)

BHARTI IN

3,997.4

1,263/18.9

385 / 282

-7/-16/-10

1,307

33.3

Ahead of the technology curve, which keeps it in good stead:

Bharti’s early 4G

launch and wide data coverage remain its key strengths. The company’s staggered

4G launch since 2012 (perceived to be ahead of ecosystem development) has helped

it gain a first-mover advantage. Bharti has since then tested the network to

eliminate network glitches. In the battle of network capacity, it is clearly well placed

in the data market.



Highest spectrum in the industry:

Bharti’s overall spectrum of 762Mhz is the

highest in the industry, even ahead of RJio. In addition, it has about 108,000

broadband towers, i.e. 68% coverage v/s its 2G sites. This is nearly 18,000 more

than RJio and about 1.5-2x higher than Vodafone and Idea, providing it

wherewithal to compete in a capital-intensive spectrum starved market.



3G/4G across all circles with 68% coverage:

Bharti has commercially started

broadband services across 22 circles with a deep 68% coverage: 3G in 21 circles

and 4G in 22 circles.



2G fall back in addition to broadband coverage:

Bharti’s 2G fall back option also

allows it to offer seamless voice calling to about 69% of voice-only subscribers.

These sites are in addition to the broadband sites that match RJio’s cell sites.

High FCF generation; well-capitalized balance sheet:

Bharti’s consolidated annual

operating cash flow of over INR330b holds it in a very good stead. Even after

deducting overall capex of INR200b, it would hold strong FCF of ~INR130b and be

Estimate change

sufficiently capitalized for INR85b of annual interest cost. Debt including deferred

TP change

payment stands at INR960b as of Q1FY17, but its net debt to EBITDA at 2.4x remains

Rating change

comfortable. With majority of its spectrum investment completed, Bharti has

limited spectrum-related capex, putting it in a better position v/s peers like

Shareholding pattern %

As on

Jun-13 Mar-13 Jun-12

Vodafone, Idea and other marginal players.

Promoter

Dom. Inst

Foreign

Others

43.6

8.2

43.1

5.2

45.8

8.6

40.3

5.4

45.7

39.9

Financials & Valuation (INR Billion)

Y/E Mar

2016 2017E 2018E

Net Sales

965.3 971.4 1,013.2

EBITDA

339.8 354.6 364.0

49.1 52.7 45.6

EPS (INR)

12.3 13.2 11.4

EPS Gr. (%)

78.4

-5.6

-7.1

BV/Sh. (INR) 164.2 174.2 183.0

RoE (%)

7.7

7.8

6.4

RoCE (%)

6.2

5.7

DivPayout(%) 17.0 20.5 22.6

Valuations

P/E (x)

26.0 24.2 28.0

P/BV (x)

1.9

1.8

1.7

EV/EBITDA(x)

6.4

6.1

5.8

Div. Yield (%)

0.7

Stock Performance (1-year)

Africa – FCF positive foray, INR -90/share value factors in downside:

With the

announcement of sale of businesses in two African countries as well as tower sale,

6.0

management clearly appears to check losses in Africa with a mandate to turn FCF

positive. Our channel checks with African operators and market participants indicate

that Bharti is exploring options to either exit or consolidate with another operator in

circles where it does not expect to turn profitable. Bharti has turned FCF (EBITDA

minus capex) positive with INR640m as of 1QFY17. We expect 50bp margin

contraction in Africa until 4QFY18, valuing it at INR -90/share equity value, thus

largely factoring in the negative.

Bharti holds 27% of broadband data subscribers; growing LTE handset base more

favorable for RJio:

Bharti had about 27% broadband subscriber market share

(35.5m) in a total broadband market of 132m (as of 4QFY16). This broadband

8.4

October 2016

Telecom | Battle Royale

subscriber base is minuscule at 14% of total active subscribers (60% of data overall

subscriber base). We think these subscribers as well as incremental growth will be

vulnerable in the near term, given RJio’s free voice and data services until Dec-16

and low-priced 4G data services. With only about 50m LTE handsets in the industry,

the pool remains small, but high proportion of LTE-based smartphone shipment

could expand the market and threaten Bharti’s data growth.

Competitive pricing to hurt earnings:

RJio’s four-month free voice and data offering

could have a strong impact on subscriber churn as well as voice and data traffic

market share. Bharti’s price plans are about 20-50% higher v/s RJio’s price plans.

Also, RJio’s voice price plan at INR149/28 days is above Bharti’s voice ARPU of INR

139, but could attract many high ARPU voice subscribers. We believe this is just the

beginning and there could be multiple pricing-led new offerings in the market across

telcos, which could change the course of the business trajectory. We have revised

down our India wireless revenue estimate by 6-9% over FY17-19E. Subsequently, our

consolidated revenue and EBITDA estimates are revised down 6-9% and 7-12%,

respectively, over FY17-19E. Our estimates remain fluid as we foresee multiple

reactions by telcos to protect their market shares.

Stock factors in uncertain competitive environment:

We maintain our TP of

INR410/share despite the earnings cut, valuing the company on FY19E EBITDA. We

believe, Bharti’s strong competitive position should allow it to hold in good stead.

The stock is trading at 5.8x consolidated FY18E EBITDA. Our SOTP values: 1) India

wireless at 6x EV/EBITDA FY18E, 2) Tower business is valued at 20% discount to

Bharti Infratel’s fair value, 3.) Africa is valued at 3x EV/EBITDA FY19E. Pressure on

earnings and market share should continue to keep the stock under pressure over

the next 6-9 months, even as we believe Bharti is competitively positioned in the

telecom market.

Exhibit 90: Bharti Airtel: SOTP-based on FY19

EBITDA

(INR b)

320

Owner-

ship

100%

72%

90%

Proportionate EBITDA

(INR b)

320

EV/

EBITDA

Fair Value

(INR b)

1939

488

139

918

3485

Value/

485

122

230

412

India SA business (excl. towers)

Tower business (15% discount to fair value)

Africa business

Less net debt

Total Value

Shares o/s (b)

CMP (INR)

Upside (%)

4.0

319

29.2

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 91: Bharti: India mobile KPIs

Mobile ARPU (INR)

Mobile RPM (p)

52.9

Mobile MoU (mins)

28.4 29.7

Exhibit 92: Bharti India: YoY mobile traffic growth (%)

Bharti India: YoY mobile traffic growth (%)

49.9

44.2 43.6 42.5 44.5 47.5 47.1 46.2 46.7

12.2

8.6

6.7

4.9

8.4

4.5

2.3

1.9

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 93: Bharti India: Mobile RPM trend (incl. data)

YoY RPM (%)

0.53

Mobile RPM (INR)

Exhibit 94: Bharti India: Mobile data traffic

Data traffic (b MB)

621

YoY growth (%)

1,644

1,039

287

FY15

FY16 FY17E FY18E FY19E

Source: Company, MOSL

498

682

0.50

0.44 0.44 0.43 0.44 0.47 0.47 0.46 0.47

1 7

-16

-1

-2

-1

-2

-17

FY12

Source: Company, MOSL

151

109

FY13

FY14

Exhibit 95: Bharti India: Data revenue contribution and

ARMB

Data revenue per MB (p)

Data revenue (% of wireless)

FY12

FY13

FY14

FY15

Exhibit 96: Bharti India: Mobile churn rate per month (%)

8.8 8.5

5.9

3.2 3.2 3.2

3.3 3.5 3.4 3.3

2.8

2.7 2.4 2.7 3.1 2.7 2.5

FY16 FY17E FY18E FY19E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 97: Bharti v/s Idea: YoY India mobile traffic growth

(%)

Bharti QoQ growth

50.0

40.0

30.0

20.0

10.0

0.0

-10.0

Idea QoQ growth

40.1

Exhibit 98: India mobile revenue and EBITDA margin

India mobile revenue

EBITDA margin (%)

37.9 36.5 36.5

33.9 33.1

33.9 35.3

30.2 32.3

504

544

331

363

403

419

449

556

574

625

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 99: Africa revenue and EBITDA margin

Africa mobile revenue

26.5

21.9

26.2

26.1

EBITDA margin (%)

Exhibit 100: Bharti: Mobile cell site base and quarterly

additions

Cellsites ('000)

11.5 11.4

12.9

10.0

7.8

7.6

154

164

4.6

105

116

121

134

5.0

139

8.3

172

5.9

178

Sites added ('000)

22.7

21.1

22.0

21.8

21.9

131

198

240

272

269

251

218

217

235

147

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 101: Consolidated net debt and net debt/EBITDA

Net Debt (INR b)

3.0

2.9

2.6

Net Debt/EBITDA (x)

2.7

2.2

928

2.5

2.3

1.7

841

615

0.0 24

FY10

FY11

675

609

638

690

919

696

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 102: Key assumptions and value drivers

Mobile segment

Mobile - India

Subs (m)

YoY (%)

Total voice traffic (b min)

YoY%

Total data traffic (b MB)

YoY%

Average Rev Per User (INR/month)

YoY%

Minutes of Use/Sub/Month

YoY%

Mobile RPM (INR)

YoY%

Voice revenue per min (p)

YoY%

Data revenue per MB (p)

YoY%

Voice revenue (INR b)

YoY %

Data revenue (INR b)

YoY %

Data revenue as % of total revenue

Mobile - Africa

Subs (m)

YoY (%)

Netadds per month (m)

ARPU (USD/month)

YoY (%)

EBITDA margin (%)

21.9

0.7

7.3

0.7

7.1

-3

26.5

0.9

6.3

-11

26.2

0.5

5.6

-11

26.1

0.6

5.0

-10

22.7

0.4

4.0

-21

21.1

-11

-0.7

3.6

-11

22.0

0.5

3.6

21.8

0.5

3.6

21.9

303

331

201.1

-17.2

455

-1

0.442

-16.5

38.3

-19

187.8

-7

431

-5

0.436

-1

37.3

-3

41.0

162

792

181

889

188

965

621

185.1

-1

436

0.425

-2

35.3

-5

31.0

-24

341

445

206

1030

151

109

193.9

436

0.445

36.8

29.0

-6

379

226

1081

287

198.1

417

-4

0.475

37.4

27.2

-6

404

251

1171

498

192.9

-3

409

-2

0.471

-1

34.1

-9

24.2

-11

400

-1

120

267

1225

682

181.9

-6

394

-4

0.462

-2

33.0

-3

19.1

-21

404

130

280

1252

1039

178.2

-2

382

-3

0.467

31.3

-5

15.8

-17

392

-3

164

289

1276

1644

186.6

374

-2

0.499

29.5

-6

14.2

-10

376

-4

234

FY11

FY12

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 103: Business Mix

Revenue (INR b)

Mobile

Telemedia

Enterprise

Passive Infrastructure

Others (incl South Asia)

Africa

Total revenue

Eliminations and others

Consolidated revenue

YoY%

EBITDA (INR b)

Mobile

Telemedia

Enterprise

Passive Infrastructure

Others (incl South Asia)

Africa

Total EBITDA

Eliminations and others

Consolidated EBITDA

YoY%

Capex (INR b)

Consolidated capex

YoY%

Capex/Sales (%)

277

123

46.5

150

-46

21.0

130

-13

16.9

175

20.4

210

22.8

490

134

50.9

201

-59

20.7

201

19.9

201

18.3

127

(10)

172

-2

170

20.5

137

(9)

204

-4

201

17.8

130

(12)

205

-5

200

-0.2

158

259

-6

254

26.8

194

292

-5

287

13.0

219

321

-7

314

9.4

243

378

-9

368

17.4

235

378

-9

368

0.1

256

413

-10

402

9.3

FY11

363

131

668

-73

595

FY12

403

198

794

-80

715

FY13

431

240

842

-73

769

FY14

467

272

934

-77

857

FY15

520

269

998

-77

920

FY16

561

251

1039

-76

963

FY17E

572

112

218

1044

-73

970

FY18E

591

126

217

1088

-77

1011

FY19E

644

142

235

1186

-85

1101

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Financials and valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

769,045

7.6

536,891

69.8

232,154

30.2

148,147

84,007

40,084

423

44,346

25,183

56.8

-88

19,251

-54.8

2.5

FY14

857,461

11.5

580,865

67.7

276,596

32.3

156,496

120,100

48,381

6,385

78,104

538

78,642

48,449

61.6

2,467

27,726

27,519

43.0

3.2

FY15

920,394

7.3

608,118

66.1

312,276

33.9

155,311

156,965

48,463

6,588

115,090

-7,960

107,130

54,047

50.4

1,248

51,835

55,779

102.7

6.1

FY16

965,321

4.9

625,477

64.8

339,844

35.2

174,498

165,346

69,135

10,513

106,724

21,741

128,465

59,533

46.3

8,163

60,769

49,103

-12.0

5.1

FY17E

971,377

0.6

616,741

63.5

354,637

36.5

204,651

149,986

69,778

11,137

91,345

-3,536

87,809

32,375

36.9

5,012

50,422

52,655

7.2

5.4

FY18E

1,013,235

4.3

649,191

64.1

364,044

35.9

226,784

137,259

70,717

11,137

77,679

27,531

35.4

4,534

45,614

-13.4

4.5

(INR Million)

FY19E

1,105,149

9.1

701,592

63.5

403,557

36.5

248,613

154,945

66,997

11,137

99,085

33,799

34.1

5,566

59,719

30.9

5.4

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liabilities

Capital Employed

Net Fixed Assets

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY13

18,988

484,229

503,217

40,886

667,363

-45,935

1,165,531

1,286,663

77,098

170,001

1,109

67,824

16,078

84,990

368,231

356,719

11,512

-198,230

1,165,531

FY14

19,987

577,573

597,560

42,102

758,958

-45,777

1,352,843

1,406,145

155,308

207,692

1,422

62,441

49,808

94,021

416,302

404,533

11,769

-208,610

1,352,843

FY15

19,987

599,577

619,564

48,525

806,839

-44,392

1,430,536

1,501,440

170,357

226,519

1,339

67,252

11,719

146,209

467,781

459,472

8,309

-241,262

1,430,535

FY16

19,987

636,314

656,301

51,984

950,430

-32,382

1,626,333

1,817,263

114,498

270,173

1,692

73,106

37,087

158,289

575,601

565,925

9,676

-305,427

1,626,333

FY17E

19,987

676,409

696,396

56,996

988,365

-32,382

1,709,376

1,813,829

114,498

290,200

1,358

70,605

85,050

133,187

509,151

500,729

8,422

-218,951

1,709,375

FY18E

19,987

711,696

731,683

61,530

961,773

-32,382

1,722,605

1,788,261

114,498

371,768

1,823

68,195

138,664

163,087

551,923

541,467

10,456

-180,154

1,722,604

(INR Million)

FY19E

19,987

761,088

781,075

67,096

932,522

-32,382

1,748,312

1,740,865

114,498

484,518

1,647

83,196

255,952

143,723

591,569

581,434

10,134

-107,051

1,748,312

October 2016

Telecom | Battle Royale

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Asset Turnover (x)

Debtor (Days)

Leverage Ratio (x)

Net Debt/Equity

FY13

4.8

41.9

125.9

0.9

22.9

FY14

6.9

46.0

149.5

1.8

30.2

FY15

14.0

52.8

155.0

2.2

19.9

22.9

6.0

2.1

2.2

6.6

0.7

3.8

3.1

3.3

0.7

1.1

5.0

3.8

4.2

0.6

0.9

9.2

5.8

6.5

0.6

1.0

FY16

12.3

55.9

164.2

2.2

17.0

26.0

5.7

1.9

2.3

6.4

0.7

7.7

6.2

6.5

0.6

1.2

FY17E

13.2

64.4

174.2

2.2

20.5

24.2

5.0

1.8

2.2

6.1

0.7

7.8

6.2

6.3

0.6

1.1

FY18E

11.4

68.1

183.0

2.2

22.6

28.0

4.7

1.7

2.1

5.8

0.7

6.4

5.7

5.9

0.6

1.0

FY19E

14.9

77.1

195.4

2.2

17.3

21.4

4.1

1.6

1.8

4.8

0.7

7.9

6.4

7.2

0.6

0.7

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

E: MOSL Estimates

FY13

47,853

148,148

45,187

-31,294

19,634

229,528

-1,829

227,699

-130,063

97,636

-56,568

-130

-186,761

-579

-24,026

-34,339

-5,538

17,203

-47,279

-6,341

7,652

16,078

FY14

78,643

156,496

58,788

-35,039

17,533

276,421

-14,095

262,326

-174,659

87,667

-36,886

-38,188

-249,733

67,956

14,252

-37,620

-6,735

-12,182

25,671

38,264

1,311

49,808

FY15

107,130

155,311

73,252

-46,111

-1,639

287,943

-11,925

276,018

-209,786

66,232

-11,649

954

-220,481

-72,451

-33,887

-21,399

31,210

-96,527

-40,990

39,575

11,719

FY16

128,465

174,498

85,461

-59,533

-41,273

287,618

46,224

333,843

-490,321

-156,479

55,860

-434,462

143,591

-85,461

-10,327

78,184

125,987

25,368

11,719

37,087

FY17E

87,809

204,651

87,345

-32,375

-38,513

308,917

-201,217

107,701

-201,217

37,935

-87,345

-10,327

-59,737

47,963

37,087

85,050

FY18E

77,679

226,784

83,865

-27,531

14,817

375,615

-201,217

174,398

-201,217

-26,592

-83,865

-10,327

-120,784

53,614

85,050

138,664

(INR Million)

FY19E

99,085

248,613

80,145

-33,799

44,185

438,228

-201,217

237,012

-201,217

-29,251

-80,145

-10,327

-119,723

117,288

138,664

255,952

October 2016

Update | Sector: Telecom

Telecom | Battle Royale

Idea Cellular

BSE Sensex

28,243

S&P CNX

8,738

CMP: INR81

TP: INR75 (-6%)

Sell

Head I loose, tail you win

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val. (INR m)

Free float (%)

IDEA IN

3,600.5

288/4.3

160/ 79

-15/-36/-51

776

57.8

Behind the investment curve:

Idea’s

broadband investment has been marred by its

weak spectrum portfolio. Idea holds overall 271Mhz spectrum (12.3Mhz/circle),

which is about one-third the size of Bharti. Idea’s expectation of low consumer

response for 4G and ecosystem concerns put it behind the investment curve.

Network cost:

Idea’s (3G+4G) broadband sites stand at 71,000, about 50% lower

than Bharti and 25% lower than RJio. Our concern stems from the fact that Idea

does not have 3G or 4G in nearly 5 circles, and has 4G network in only 10 circles,

leaving gap in multiple high revenue share circles. This makes Idea highly vulnerable

to competition.

Spectrum investment:

Idea remains in a precarious situation: if it spends heavily to

fill spectrum gap, it would incur heavy capex, and if it does not spend, then it will

further deteriorate its competitive footing in the telecom market. Idea should

require about ~INR151b if it plans to fill all 3G/4G gaps with minimum of 5Mhz

contiguous spectrum at reserve price.

Weak balance sheet, high leverage further cause of concern:

Idea’s balance sheet

grew nearly 2.4x in the last three years – FY13-16E, but it has not yet fulfilled its

investment requirements. With a weak network footprint and its spectrum

investment in the upcoming auction, capital employed is likely to go up by about

20% and debt should go up by about 35% to INR 550-600b, leading to net debt to

EBITDA of over 5x. It will further require network rollout investment, which may

increase the already high capex of INR70b. A faster-than-expected technology

transition from 3G to 4G has hurt Idea the most in the telecom sector. We think Idea

will have to dilute equity for incremental investment given its high leverage position.

Weak competitive footing:

Idea’s lack of 4G/3G coverage leaves it in a weak

competitive footing, especially in some of the large circles and high market share

circles. Even if Idea invests heavily to fill the network gap with Bharti and RJio, we

think it still is about 6-8 quarters behind the market. In a highly competitive market,

this could lead to Idea losing both subscriber and revenue market share, thus

hampering its future earnings potential. Idea should likely face difficulty in dealing

with RJio’s capacity-led competition as it offers high-value, high-ARPU price plans.

Earnings vulnerable given RJio-led competition:

We have cut our revenue estimates

by about 6-9% over FY17-19E and subsequently our EBITDA estimates are revised

down 17-23% over FY17-19E. This is due to pricing and traffic issues in both voice

and data businesses, given RJio’s free voice and high-value data offerings. Our

estimates remain fluid as we expect the environment to remain extremely volatile

due to high competitive intensity.

Revising down TP to INR75; maintaining Sell:

We continue to maintain our negative

stance and reduce our TP to INR75, led by earnings cut. Idea’s weak competitive

footing and stretched balance sheet expose it to various market risks.

Financials & Valuation (INR Billion)

Y/E Mar

2016 2017E 2018E

Net Sales

359.8 360.9 371.2

EBITDA

127.8 107.9 108.2

29.1

-3.4

-6.5

EPS (INR)

8.1

-1.0

-1.8

EPS Gr. (%)

48.1 -110.8 -122.1

BV/Sh. (INR)

71.6

70.6

68.8

RoE (%)

11.9

-1.3

-2.6

RoCE (%)

6.8

2.6

2.0

Payout (%)

8.9

6.4

6.8

Valuations

P/E (x)

10.0 -84.9 -45.2

P/BV (x)

1.1

1.2

EV/EBITDA(x)

5.5

6.6

6.4

Div. Yield (%)

0.7

-0.1

Estimate change

TP change

Rating change

Shareholding pattern %

As on

Jun-13 Mar-13 Jun-12

Promoter

43.6

45.8

45.7

Dom. Inst

Foreign

Others

8.2

43.1

5.2

8.6

40.3

5.4

8.4

39.9

6.0

Stock Performance (1-year)

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 104: Idea: Subscriber and revenue market share (%)

Subscriber market share (%)

Gross revenue market share (%)

19.3 18.9 18.3

17.5 18.8

15.1 16.2

16.3 16.9 16.9 16.9 16.9

14.1 15.0

Exhibit 105: Idea: ARPU and RPM trajectory

Monthly ARPU

Voice RPM (p)

50.0

44.4

Mobile RPM (p)

11.4

13.2 14.4

12.4

47.5

42.4 42.7 41.7 44.4 45.5 44.9 45.8 45.7

10.9 11.0

37.0 37.0 35.4 37.2 35.6

32.4 33.2 32.0 30.3

201 167 160 158 169 177 177 164 160 162

Source: Company, MOSL

Exhibit 106: Voice traffic and YoY growth

Voice traffic (b minutes)

41.2

47.9

453

25.0

532

17.4

588

683

786

Exhibit 107: Monthly churn (%)

YoY growth

775

799

816

Monthly churn (%)

245

363

10.5

16.3 15.0

-1.4

3.1

2.1

Source: Company, MOSL

Exhibit 108: Data revenue (% of total Idea revenue)

Data revenue (% of total)

31.2

19.6

14.6

5.4

8.9

20.1

23.5

Exhibit 109: 3G subscriber base ramp-up

3G subscribers (m)

3G subs (% of total)

13.1

9.2

5.3

14.5

7.2

22.9

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

FY14

FY15

FY16

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 110: Data traffic and YoY growth

Data traffic (b MB)

112

117

298

398

FY15

FY16

FY17E

FY18E

599

YoY growth

32.3

953

29.1

Exhibit 111: IDEA: Data revenue per MB (p)

Data revenue per MB (p)

26.3

23.2

17.9

14.3

12.7

FY13

FY14

173

FY19E

FY13

FY14

FY15

FY16

FY17E

FY18E

FY19E

Source: Company, MOSL

Exhibit 112: Revenue and EBITDA margin trends

Revenue (INR b)

EBITDA margin (%)

Exhibit 113: EBITDA per minute (p)

EBITDA per minute (p)

15.2 15.5

13.1 12.8 14.0

13.6

10.1 10.9 10.7

13.5

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 114: 2G cell site additions

2G cell site additions

82,203

Exhibit 115: Net debt and net debt/EBITDA

Net debt (INR b)

2.8

1.8

Net debt/EBITDA (x)

3.7 3.6

3.1

3.0

1.3

2.6

2.3

2.5

21,957

35,000

7,481 9,522 6,992

14,644

7,541

14,466

17,500

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 116: Segmental break-up

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Consolidated revenue break-up (INR b)

Established service areas*

62.0

59.9

62.8

66.7

71.5

71.4

75.5

79.0

82.5

81.0

84.1

88.1

New service areas*

3.4

3.3

3.7

4.0

4.2

4.6

5.2

5.4

5.8

6.0

6.7

6.8

Idea standalone

65.4

63.2

66.1

70.4

75.6

75.7

80.1

84.2

88.0

86.8

90.1

94.8

94.9

Proportionate revenue - Indus

5.6

5.7

5.9

6.0

6.1

6.2

6.4

6.5

6.7

0.0

Eliminations

-5.6

-5.5

-5.6

-5.7

-5.8

-6.0

-6.1

-6.2

-6.3

-6.4

-6.6

0.0

Consolidated revenue

65.4

63.2

66.1

70.4

75.6

75.7

80.2

84.2

88.0

86.9

90.1

94.8

94.9

Consolidated EBITDA break-up (INR b)

Established service areas*

19.8

18.7

19.7

21.6

24.4

24.2

26.7

29.6

31.3

29.5

30.3

34.4

31.9

New service areas*

-1.3

-1.6

-1.7

-1.8

-1.9

-1.7

-1.8

-1.2

-1.1

Idea standalone

18.4

17.4

18.1

19.9

22.7

22.4

24.9

27.8

29.6

27.8

28.5

33.2

30.7

Proportionate EBITDA - Indus

2.3

2.4

2.5

2.7

2.8

2.7

2.8

3.0

2.9

Consolidated EBITDA

20.8

19.7

20.6

22.3

25.1

24.9

27.5

30.6

32.3

30.6

31.3

36.2

33.6

EBITDA margin (%)

Established service areas*

31.9

31.2

31.4

32.3

34.1

33.9

35.4

37.4

37.9

36.5

36.0

39.0

36.2

New service areas*

-38.8 -38.0 -47.5 -45.2 -42.7 -42.4 -40.8 -33.8 -31.1 -30.8 -29.6 -17.5 -16.7

Idea standalone

28.2

27.6

27.4

28.2

30.0

29.6

31.0

33.1

33.7

32.0

31.6

35.0

32.4

Implied margin - Indus

41.4

40.9

42.9

42.2

41.7

42.0

43.7

45.5

42.9

43.8

43.0

44.4

Consolidated EBITDA margin

31.8

31.2

31.1

31.7

33.2

32.9

34.3

36.4

36.7

35.2

34.7

38.1

35.4

Source: Company, MOSL

Exhibit 117: IDEA: SOTP Valuation

Methodology

Consol EBITDA

Less Net debt

Total Value

Shares o/s (b)

CMP (INR)

Upside (%)

FY19 EV/EBITDA

Driver

121

Multiple Fair Value (INRb) Value/sh (INR)

5.5

657

386

271

3.6

-7.0

Source: Company, MOSL

183

107

October 2016

Telecom | Battle Royale

Exhibit 118: Key assumptions

FY13

Subscribers (m)

YoY%

Average subscribers (m)

YoY%

Data subscribers (m)

YoY%

Average Rev Per User (INR/month)

YoY%

Minutes of Use/Sub/Month

YoY%

Data usage/data sub/month (mb)

YoY%

Voice traffic (m min)

YoY%

Data traffic (m MB)

YoY%

Voice revenue per min (p)

YoY%

Data revenue per MB (p)

YoY%

Voice revenue (INR m)

YoY%

Data revenue (INR m)

YoY%

Data revenue as % of total revenue

Non Data VAS revenue (INR m)

Capex (INR m)

Capex / Sales (%)

5.4

21,038

57,145

25.8

8.9

19,082

44,388

17.0

14.6

22,232

43,222

13.9

19.6

29,148

402,629

113.9

19.0

25,901

70,000

20.0

21.3

23,293

70,000

19.7

28.5

19,595

70,000

18.8

12,059

23,105

45,404

69,163

66,371

75,580

106,493

188,382

218,808

243,676

255,135

257,538

255,839

246,934

32.3

29.1

26.3

23.2

18.3

14.4

12.8

35.4

37.2

35.6

32.4

33.2

32.0

30.3

37,380

79,382

172,531

297,920

363,617

523,647

833,426

531,534

588,272

684,216

787,075

775,098

798,757

815,800

119

257

490

641

631

711

832

378

381

388

394

359

349

341

158

169

177

162

155

156

117

129

147

166

180

191

200

122

FY14

136

FY15

158

FY16

175

FY17E

185

FY18E

196

FY19E

203

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Financials and valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

PBT bef. EO Exp.

Share of profits of associates

PBT after EO Exp.

Total Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

224,577

14.9

164,531

73.3

60,045

26.7

34,778

25,268

9,495

15,773

5,664

35.9

10,109

39.8

4.5

FY14

265,189

18.1

181,852

68.6

83,337

31.4

45,194

38,143

7,700

30,443

10,765

35.4

19,678

94.7

7.4

FY15

315,709

19.1

207,592

65.8

108,117

34.2

53,036

55,081

5,755

49,325

17,396

35.3

31,929

62.3

10.1

FY16

359,772

14.0

231,932

64.5

127,840

35.5

65,466

62,374

16,993

45,382

16,239

35.8

29,143

-8.7

8.1

FY17E

360,940

0.3

253,081

70.1

107,859

29.9

80,736

27,123

36,628

-9,505

4,266

-5,238

-1,804

34.4

-3,434

-111.8

-1.0

FY18E

371,174

2.8

262,983

70.9

108,191

29.1

87,876

20,315

34,777

-14,462

4,618

-9,844

-3,390

34.4

-6,454

87.9

-1.7

(INR Million)

FY19E

394,006

6.2

273,410

69.4

120,596

30.6

93,767

26,829

33,297

-6,468

-506

7.8

-5,962

-7.6

-1.5

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY13

33,143

111,073

144,217

140,438

11,180

295,834

467,357

175,818

291,539

8,811

10,280

53,092

726

9,601

1,429

41,336

67,949

64,719

3,230

-14,857

295,834

FY14

33,196

132,073

165,269

206,350

18,133

389,752

516,970

221,012

295,958

114,194

2,155

53,206

683

8,006

1,881

42,636

75,823

68,960

6,863

-22,617

389,751

FY15

35,978

194,314

230,292

268,591

19,015

517,898

618,207

262,871

355,336

51,405

115,267

82,598

710

9,789

15,537

56,562

86,769

78,013

8,756

-4,171

517,898

FY16

36,005

221,670

257,675

415,031

30,714

703,420

1,011,254

328,336

682,918

60,986

13,728

68,807

1,065

11,776

7,818

48,148

123,081

112,331

10,750

-54,273

703,420

FY17E

36,005

218,236

254,241

429,694

30,714

714,649

1,081,254

409,072

672,182

60,986

13,728

71,592

910

9,953

13,400

47,329

103,900

95,081

8,819

-32,308

714,649

FY18E

36,005

211,782

247,787

403,231

30,714

681,732

1,151,254

496,948

654,306

60,986

13,728

72,018

1,020

12,393

3,572

55,035

119,367

108,062

11,306

-47,349

681,732

(INR Million)

FY19E

36,005

205,820

241,825

374,122

30,714

646,661

1,221,254

590,715

630,540

60,986

13,728

58,997

1,029

11,329

-7,104

53,743

117,650

107,592

10,059

-58,654

646,661

October 2016

Telecom | Battle Royale

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Leverage Ratio (x)

Net Debt/Equity

FY13

2.8

12.5

40.1

0.3

11.5

FY14

5.5

18.0

45.9

0.4

7.9

FY15

8.9

23.6

64.0

0.6

8.1

9.1

3.4

1.3

1.7

5.0

0.8

7.4

5.9

6.0

0.5

0.8

0.9

12.7

7.5

9.0

0.5

0.7

1.2

16.1

8.2

11.7

0.5

0.6

FY16

8.1

26.3

71.6

0.6

8.9

10.0

3.1

1.1

1.9

5.5

0.7

11.9

6.8

8.4

0.4

0.5

1.5

FY17E

-1.0

21.5

70.6

-0.1

6.4

-84.9

3.8

1.1

2.0

6.6

-0.1

-1.3

2.6

2.9

0.3

0.5

1.6

FY18E

-1.8

22.6

68.8

-0.1

6.8

-45.2

3.6

1.2

1.9

6.4

-0.1

-2.6

2.0

2.2

0.3

0.5

1.6

FY19E

-1.7

24.4

67.2

-0.1

7.5

-48.9

3.3

1.2

1.7

5.6

-0.1

-2.4

3.9

4.2

0.3

0.6

1.5

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

E: MOSL Estimates

FY13

10,109

34,778

9,963

-4,110

6,096

56,836

6,135

62,971

-34,766

28,205

657

-34,109

248

-10,368

-9,283

-250

-19,653

9,209

1,521

1,429

FY14

19,678

45,194

8,564

-6,384

5,354

72,406

9,786

82,192

-36,448

45,744

-29,194

-65,642

263

-15,936

-7,682

-1,306

-24,661

-8,111

10,729

1,881

FY15

31,929

53,036

9,337

-11,043

5,540

88,800

15,379

104,179

-41,576

62,603

-15,680

-57,256

37,374

52,355

-6,656

-2,792

80,280

127,202

3,543

15,537

FY16

29,143

65,466

16,993

42,384

153,985

11,699

165,684

-402,629

-236,944

101,539

-301,090

-1,760

146,440

-16,993

127,687

-7,718

15,537

7,818

FY17E

-3,434

80,736

36,628

-16,384

97,546

-70,000

27,546

-70,000

14,663

-36,628

-21,965

5,581

7,819

13,400

FY18E

-6,454

87,876

34,777

5,212

121,412

-70,000

51,412

-70,000

-26,463

-34,777

-61,240

-9,828

13,400

3,572

(INR Million)

FY19E

-5,962

93,767

33,297

629

121,731

-70,000

51,731

-70,000

-29,109

-33,297

-62,406

-10,676

3,572

-7,104

October 2016

Update | Sector: Telecom

Telecom | Battle Royale

Bharti Infratel

BSE Sensex

28,243

S&P CNX

8,738

CMP: INR363

TP: INR435 (+20%)

Buy

More they invest, more he wins

Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INR b)/(USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val (INR m)

Free float

Financials & Valuation (INR b)

Y/E MAR

2016 2017E 2018E

144.2

63.9

23.7

12.5

5.4

103.7

12.5

14.5

36.1

29.1

3.5

10.0

1.1

Net Sales

123.3 132.4

EBITDA

54.1 58.1

22.5 26.7

EPS (INR)

11.8 14.1

EPS Gr. (%)

48.1 33.9

BV/Sh. (INR)

96.7 95.8

RoE (%)

12.7 14.6

RoCE (%)

11.2 13.0

Payout (%)

39.0 32.0

Valuations

P/E (x)

30.6 25.8

P/BV (x)

3.8

EV/EBITDA (x) 12.3 11.4

Div. Yield (%)

1.1

Estimate change

TP change

Rating change

Shareholding pattern %

As on

Jun-13 Mar-13 Jun-12

Promoter

43.6

45.8

45.7

Dom. Inst

Foreign

Others

8.2

43.1

5.2

8.6

40.3

5.4

8.4

39.9

6.0



BHIN IN

1,896.7

704/10.5

437/ 302

10/-14/-4

843

28.3



Stock Performance (1-year)

Data to drive tenancy and pricing growth over 2-3 years:

Bharti Infratel

continues to remain the key beneficiary of high data-led investments in the

telecom market. With about 55% data coverage v/s voice coverage, the

aggressive network rollout may continue over the next 2-3 years. Further, RJio’s

launch may intensify data traffic, which may have a two-pronged effect. It would

(1) cramp existing sites, leading to higher density network rollout, and (2)

accelerate data network rollout to match peers’ competitive position. We

expect annual tenancy adds to accelerate to 14,400 in FY18, after moderate

growth of ~11,000 in FY17E due to the exits and spectrum phase.

Exits, spectrum auction and possible pricing pressure to hurt near-term

growth:

The ripple effect of the volatile telecom market is seen in the tower

industry. Videocon’s exit hurt tenancy in 1QFY17 (~1,400 tenancy adds v/s

quarterly run-rate of 2,500). This, along with the shrinking footprint through

merger/acquisition of RCOM, Aircel and Shyam Sistema as well as the lack of

visibility on Telenor India and Tata Tele, could lead to a continued decline in

tenancy over the next 2-3 quarters. Nearly 15% of tenancy is contributed by

operators excluding the top three telcos (Bharti, Idea and Vodafone). Over the

long term, this could benefit the tower industry as unutilized/underutilized

spectrum could be resourcefully deployed, thereby increasing tenancy.

However, we remain cautious on near-term tenancy growth, given (1) operators

are reassessing their network rollout strategy by analyzing the industry and own

spectrum position in the run up to the upcoming auction starting 30-September

and (2) ongoing data/voice pricing war in the telecom market with RJio’s service

launch, which could potentially squeeze cash flow and hurt already highly

levered balance sheets of telcos.

New MSA rates resolve renewal-led pricing risks, albeit we would watch

progress over two quarters.

We see management’s proactive action toward renewals positively. Tenancy

rental improvement over the next five years will be curtailed, given the

company’s new MSA proposals to freeze tenancy rates for 90% of existing

tenancies (until FY22E or before). This is done to bridge the tenancy rate gap for

tenants whose rental rates are already higher than new rack rates. However,

this has two key positives: (1) this will reduce uncertainty of ~20% renewals

coming up in FY18 and ~70% in FY22, which were previously expected to

demand lower renewal rates. This is because they were paying discriminatorily

higher tenancy rates compared to new tenants, on an inconsistent legacy

structure which did not factor in inflation adjustments in new tenants’ pricing,

keeping them abnormally lower; and (2) management has indicated quarterly

impact of INR450m for the rental freeze which is factored in Q1FY17 rental

pricing, removing uncertainty about the impact of rental freeze. We would like

to track the renewals over the next 2-3 quarters to evaluate the acceptance of

Bharti Infratel’s new MSA agreement.

October 2016

Telecom | Battle Royale



EBITDA CAGR of 9% over FY16-19E:

We expect 8% revenue CAGR over FY16-

19E, led by 6% tenancy growth combined with 2% rental increase. With

improving tenancy, ex-energy EBITDA margin is likely to improve 140bp over

FY16-19E to 67.1%. This should lead to overall EBITDA margin improvement of

about 60bp, with ~9% EBITDA growth to INR69.9b. Volatility on account of

mark-to-market on investments makes it difficult to estimate interest income

and thus PBT. However, the recent INR20b stock buyback should reduce share

count by 2.5%.

Attractively priced at 10.4x FY18E EBITDA:

Our SOTP values standalone and

Indus on DCF with 10.2% WACC and 4% terminal growth at (combined

enterprise value of INR380b) net equity value/share of INR435. At CMP, the

stock is attractively priced at EV/EBITDA of 11.7x/10.3x on FY17/FY18E. The

stock has been under pressure (-17% YTD) due to tenancy concerns on account

of exits and renewal-led pricing risks. We expect tenancy to improve post the

upcoming auctions, and capex-led tenancy to accelerate on account of high data

growth.

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 119: Continued momentum in tenancy demand

Towers (000's)

Average Sharing Factor

1.90 1.96 2.06 2.16

Co-locations (000's)

2.22 2.29 2.38

Exhibit 120: Sharing revenue per operator per month (INR)

Sharing revenue per operator per month (INR)

1.85

FY12

FY13

FY14

FY15

FY16 FY17E FY18E FY19E

Source: Company, MOSL

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 121: EBITDA margin (%)

EBITDA margin (%)

Exhibit 122: Net co-location additions

Net Co-location additions

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 123: Tower portfolio break-up (000s)

Infratel Standalone

Indus share

Exhibit 124: Co-locations break-up (000s)

Infratel Standalone

Indus share

106

113

119

128

136

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Story in Charts

Exhibit 125: Average sharing factor (x)

Consolidated

3.00

2.50

2.00

1.50

1.00

0.50

Infratel Standalone

Indus

2.46

2.22 2.28 2.36

2.13

1.97 2.02

1.79 1.90

1.73

Exhibit 126: Sharing revenue per operator (INR 000s/month)

Infratel Standalone

Indus

38.1 37.0 36.9 37.0 37.1 36.9 37.0 37.7 38.6 39.3

33.3 33.9 34.6

30.6 31.5 31.5 31.7 32.1 32.7

28.4

Source: Company, MOSL

Exhibit 127: Segment-wise revenue growth (%)

Rental

5 15

Enery and other reimbursements

Aggregate

Exhibit 128: Standalone v/s industry EBITDA margin (%)

Consolidated

50.0

40.0

30.0

Indus*

Infratel Standalone

45.0 45.7 46.3 46.6

41.5 44.4

38.2 38.1 39.4 39.2

7 9

9 9

20.0

10.0

0.0

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Source: Company, MOSL

Exhibit 129: Net Capex intensity expected to gradually

increase

Net Capex (INR b)

55.5

Net Capes/Sales (%)

Exhibit 130: Return ratios (%)

RoE

RoCE

12.7

14.6

12.5 12.9

11.4

28.5

16.1 15.7

12.4 15.5 15.4 14.1 12.9 12.0

2.1

3.1

4.0

4.7

5.3

5.7

6.3

6.6

8.6

11.1 11.2

13.0 14.5 14.7

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 131: Bharti Infratel: SOTP Valuation

Value (INR b) Value (INR/sh) Implied FY19 EV/Tower (INR m) Implied FY19 EV/EBITDA (x)

Standalone (Mar-18)

Indus (Mar-18)

Indus value (42%)

Indus value post holdco discount of 20%

Total Enterprise value

Net Debt

Shares o/s (b)

Fair value

CMP (INR)

Upside

412

969

407

326

737

-64

801

224

526

177

400

-35

435

363

20%

Source: Company, MOSL

10.6

11.5

Exhibit 132: BHIN: P/E band chart

PE (x)

24.9

15.4

22.4

Peak(x)

Avg(x)

39.1

Min(x)

Exhibit 133: BHIN: Relative P/E v/s Sensex

100

40.8

29.9

Bharti Infratel PE Relative to Sensex PE (%)

LPA (%)

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Exhibit 134: Bharti Infratel - A Snapshot

FY11

Towers (000s)

Consolidated

YoY (%)

Net additions

-Infratel Standalone

-Indus

Co-locations (000s)

Consolidated

6.1

4.5

2.2

5.5

142

FY12

0.8

0.6

0.4

0.6

150

5.5

7.8

2.5

12.6

1.85

1.79

1.90

33.7

-3.0

36.9

31.5

60.7

26.1

33.9

15.5

41.8

120

37.4

0.45

FY13

3.8

3.0

2.0

2.5

157

4.5

6.7

3.4

7.8

1.90

1.81

1.97

33.7

0.1

37.0

31.5

63.8

27.4

38.9

17.2

49.6

103

132

37.0

0.47

FY14

1.6

1.3

0.8

1.2

167

6.8

10.6

5.6

12.0

1.96

1.87

2.02

33.9

0.6

37.1

31.7

65.8

29.6

42.5

20.4

52.3

108

139

40.6

0.53

FY15

3.0

2.5

1.3

2.9

182

9.0

15.1

6.7

20.0

2.06

1.98

2.13

34.1

0.5

36.9

32.1

71.3

32.1

45.4

21.8

55.8

117

150

42.9

0.59

FY16

3.4

2.9

1.3

3.9

195

7.0

12.7

5.8

16.5

2.16

2.08

2.22

34.5

1.2

37.0

32.7

77.9

35.0

103

45.2

21.0

57.7

123

160

43.9

0.62

FY17E

3.1

2.8

1.5

3.1

206

5.6

10.9

5.0

14.1

2.22

2.15

2.28

35.1

1.8

37.7

33.3

84.5

38.1

111

47.9

21.6

63.3

132

174

43.9

0.64

FY18E

3.0

2.7

1.5

3.0

220

7.0

14.4

6.0

20.0

2.29

2.20

2.36

35.9

2.2

38.6

33.9

91.8

41.5

120

52.5

23.8

68.4

144

188

44.3

0.69

FY19E

2.9

2.7

1.5

3.0

235

6.5

14.4

6.0

20.0

2.38

2.27

2.46

36.6

1.9

39.3

34.6

99.8

45.0

131

57.2

25.9

74.5

157

205

44.5

0.73

YoY (%)

13.8

Net additions

17.3

-Infratel Standalone

7.6

-Indus

23.0

Average sharing factor (x)

Consolidated

1.75

-Infratel Standalone

1.70

-Indus

1.79

Sharing revenue per operator (INR '000/month)

Consolidated

34.7

YoY (%)

1.6

-Infratel Standalone

37.0

-Indus

Revenue break-up (INR b)

Rental revenue

YoY (%)

-Bharti Infratel standalone

-Indus

Energy and other reimbursements

YoY (%)

-Bharti Infratel standalone

-Indus

Total revenue

YoY (%)

-Bharti Infratel standalone

-Indus

Power and fuel cost (INR b)

YoY (%)

% of revenue

Power and fuel cost per tower (INR

'000/month)

EBITDA (INR b)

YoY (%)

EBITDA margin (%)

EBITDA per tower (INR m)

30.6

55.6

23.9

29.5

13.9

37.1

107

36.8

0.41

Source: Company, MOSL

October 2016

Telecom | Battle Royale

Financials and valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Power and fuel

Rent

Employee benefits expenses

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

102,720

8.7

38,016

10,876

3,341

12,437

64,670

63.0

38,050

37.0

22,199

15,851

3,945

3,379

15,285

15,307

5,282

34.5

10,025

10,011

33.3

9.7

FY14

108,267

5.4

40,612

8,886

3,670

11,098

64,266

59.4

44,001

40.6

21,259

22,742

3,997

4,487

23,232

8,053

34.7

15,179

51.6

14.0

FY15

116,683

7.8

41,950

9,460

3,997

11,235

66,642

57.1

50,041

42.9

21,847

28,194

2,902

5,223

30,515

10,591

34.7

19,924

31.3

17.1

FY16

123,314

5.7

42,598

10,322

4,279

12,007

69,206

56.1

54,108

43.9

22,236

31,872

-1,847

2,048

35,767

13,292

37.2

22,475

12.8

18.2

FY17E

132,369

7.3

45,715

11,233

4,707

12,577

74,231

56.1

58,138

43.9

22,619

35,518

-2,281

1,108

38,907

12,221

31.4

26,687

18.7

20.2

FY18E

144,244

9.0

49,721

12,207

5,248

13,136

80,312

55.7

63,932

44.3

23,792

40,140

8,056

3,793

35,878

12,198

34.0

23,679

-11.3

16.4

(INR Million)

FY19E

156,975

8.8

54,296

13,300

5,685

13,834

87,115

55.5

69,861

44.5

25,330

44,531

8,130

3,793

40,193

13,666

34.0

26,528

12.0

16.9

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY13

18,887

153,038

171,925

32,296

7,610

211,831

163,239

1,723

38,911

73,057

8,554

1,267

63,236

65,099

7,106

42,090

15,903

7,958

211,831

FY14

18,893

161,489

180,382

26,836

11,249

218,467

153,205

1,527

74,803

56,821

3,075

1,655

52,091

67,889

1,894

45,422

20,573

-11,068

218,467

FY15

18,938

151,262

170,200

17,131

12,247

199,578

148,121

2,260

58,822

62,344

3,532

9,120

49,692

71,969

1,342

43,694

26,933

-9,625

199,578

FY16

18,967

164,512

183,479

10,767

12,249

206,495

144,868

2,245

38,811

83,265

1,916

31,916

49,433

62,694

959

41,139

20,596

20,571

206,495

FY17E

18,496

163,124

181,621

10,767

12,249

204,637

140,974

2,245

38,811

88,509

2,160

35,744

50,605

65,902

1,055

43,783

21,064

22,607

204,637

FY18E

18,496

178,259

196,755

10,767

12,249

219,771

135,844

2,245

38,811

112,155

2,473

57,174

52,508

69,283

1,177

46,180

21,926

42,871

219,771

(INR Million)

FY19E

18,496

196,242

214,738

10,767

12,249

237,754

129,339

2,245

38,811

140,189

2,812

83,251

54,126

72,830

1,310

48,787

22,734

67,359

237,754

October 2016

Telecom | Battle Royale

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Net Debt/Equity

FY13

5.3

17.0

90.6

4.0

87.4

FY14

8.0

19.2

95.1

4.0

57.7

FY15

10.5

22.0

89.7

4.0

44.0

34.6

16.5

4.0

6.0

13.9

1.1

12.1

11.4

11.1

13.6

0.8

0.6

-0.3

FY15

30,515

21,847

2,946

-8,420

-517

46,371

-5,338

41,033

-18,144

22,889

17,588

-539

490

-7,601

-3,010

-21,755

-31876

8,618

1,640

9,120

FY16

11.8

23.6

96.7

4.0

39.0

30.6

15.4

3.8

5.4

12.3

1.1

7.4

12.7

11.2

15.2

0.9

0.6

-0.3

FY16

35,767

22,236

-1,847

-13,292

-7,400

35,464

-2,508

32,956

-18,968

13,988

20,011

10,883

11,926

-6,364

1,847

-8,763

-13252

31,631

285

31,916

FY17E

14.1

26.0

95.8

3.9

32.0

25.8

14.0

3.8

5.0

11.4

1.1

14.8

14.6

13.0

18.6

0.9

0.6

-0.4

FY17E

38,907

22,619

-2,281

-12,221

1,792

48,817

-2,048

46,769

-18,725

28,044

10,883

-7,842

-20,000

2,281

-8,545

-26,264

12,663

23,081

35,744

FY18E

12.5

25.0

103.7

3.9

36.1

29.1

14.5

3.5

4.5

10.0

1.1

19.0

12.5

14.5

21.2

1.1

0.7

-0.4

FY18E

35,878

23,792

8,056

-12,198

1,165

56,692

-2,048

54,644

-18,662

35,982

10,883

-7,779

-8,056

-8,545

-16,601

30,265

26,909

57,174

FY19E

14.0

27.3

113.2

3.9

32.2

26.0

13.3

3.2

3.9

8.8

1.1

21.5

12.9

14.7

25.0

1.2

0.7

-0.5

1.1

10.7

6.3

6.6

6.0

0.6

0.5

0.0

FY13

15,307

22,199

3,717

-3,722

3,463

40,964

-4,452

36,512

-16,173

20,339

-34,795

-6,976

-57,944

31,543

124

-3,715

-5,721

22231

799

468

1,267

1.1

13.1

8.6

9.6

0.7

0.5

-0.3

FY14

23,232

21,259

3,864

-4,345

-194

43,816

-5,646

38,170

-13,389

24,781

-35,977

25,904

-23,462

-4,254

-3,805

-7,003

-15005

-297

598

1,655

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

E: MOSL Estimates

October 2016

(INR Million)

FY19E

40,193

25,330

8,130

-13,666

1,590

61,578

-2,048

59,530

-18,825

40,705

10,883

-7,942

-8,130

-8,545

-16,675

34,913

48,339

83,251

THEMATIC GALLERY

SECTOR RESEARCH

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Telecom | Battle Royale

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Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a

subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the

Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

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October 2016

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