Motilal - India Telecom - COAI Presentation to Govt - May 10 2012

7/31/2019 Motilal - India Telecom - COAI Presentation to Govt - May 10 2012

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Shobhit Khare ([email protected]); +91 22 3982 5428

TelecomCOAI presentation to GovernmentClaims TRAI recos imply 30p/min increase in outgoing tariffs v/s TRAI'scalculation of 3.6p/min

Sector update | 10 May 2012

The GSM industry association, COAI (Cellular Operators Association of India)has released its presentation made to the Communications Minister, Mr KapilSibal, on 8 May 2012. According to COAI, TRAIs recent recommendations onspectrum auction will lead to an increase in outgoing tariffs by 30p/minute almost 8x TRAIs calculation of 3.6p/minute.An additional 30p/outgoing minute outlay would reflect an increase of ~40% onthe current estimated revenue per outgoing minute of 70-75p for GSMincumbents (RPM of 42-44p).COAI has cited several fallacies in TRAIs calculations, including the following:(1) TRAIs MOU assumptions include incoming minutes, which are non-chargeable at the customer-end, (2) lower spectrum assumed by TRAI v/s assignedquantity, (3) no provision for further spectrum requirement to support assumedMOU growth, (4) spectrum requirement for future data traffic not considered,(5) ignoring the impact of revenue sharing license fee and service tax, and (6) noimpact of price elasticity built into TRAI calculations.COAI estimates that proposed re-farming would result in ~INR1,250b incrementalcapex and ~INR250b asset write-off for the industry (mainly Bharti, Idea, BSNL/MTNL, Vodafone, and Aircel).We continue to believe that TRAI recommendations are impractical and wouldface stiff resistance from the industry.The government is expected to arrive at a conclusion on spectrum auction soon,given the Supreme Court deadline of 31 August to complete 2G auction. We donot rule out a prolonged legal battle, given significant divergence in the stanceof the industry and the government/regulator.While the regulatory environment remains challenging, our target price forBharti/Idea already incorporates regulatory risk outlay of INR142b (INR37/share)for Bharti and INR121b (INR37/share) for Idea.

Over FY12-14, we expect 18/26% EBITDA CAGR for Bharti/Idea, led by 10/14%traffic CAGR and 2/2% RPM CAGR in the India wireless business. Reiterate Buyon Bharti, with a target price of INR390, and Idea, with a target price of INR100.Maintain Neutral on RCom.

Comparative valuationsCMP Rating TP Upside EV P/E (x) EV/EBITDA (x) EV/Sales (x)(INR) (INR) (%) (USDb) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Bharti* 310 Buy 390 25.8 22.2 19.5 27.6 17.0 9.0 7.9 6.4 3.1 2.7 2.3Ide a 79 Buy 100 26.0 4.9 29.0 36.1 16.0 9.7 7.7 5.6 2.4 2.0 1.6

RCom 68 Neutral 85 24.6 2.6 9.4 18.1 12.2 7.0 7.8 6.1 2.2 2.5 2.1Source: Company/MOSL


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COAI calculations to ascertain true tariff impact @ TRAI reserve price (p)Tariff Impact as per TRAI - A 3.6Add back non-voice component not included - B 0.8Tariff impact as per TRAI including non-voice - C = A + B 4.4Total industry outlay used by TRAI (576MHz) INR937b

Actual outlay required considering current spectrum in use (1167MHz incl437MHz in 900 band) INR2,849bImpact vs TRAI reco (x) - D 3.0Corrrection required to consider only outgoing MOU vs all MOU (x) - E 2Total impact on tariff post these corrections - F= C*D*E 26.5Estimated savings to account for lowering of spectrum charge to 1% -2.1Impact post spectrum charge savings 24.3Impact of regulatory levies like service tax (12%), licence fee (8%), spectrum charge (1%) 5.1Total tariff impact after adjusting TRAI assumption for anamolies ~30

Source: COAI/MOSL

COAI methodology to assess impact of TRAI reserve price

TRAIs calculationTRAI had arrived at 3.6p/minute cost impact for the industry in the first year basedon EMI chargeable (@15% cost of capital) over a 20-year period.TRAIs assumed aggregate outlay of INR937b was based on its reserve price of INR36.2b applied to total unallocated spectrum of 576MHz.The 20-year EMI based on these assumptions would be INR148b.Assuming total traffic of 3,402b minutes in FY13 (~15% growth), this would resultin a tariff/cost impact of 4.4p/minute on total revenue and 3.6p/minute on voice

revenue, as per TRAI.

Adjustment #1: Non-voice component (Add 0.8p)TRAI has considered only voice component despite the increase in spectrum costfor non-voice revenue component as well, which will also use the same network.Adjusting for this, the cost burden increases to 4.4p/minute.

Adjustment #2: Considering total allocated spectrum (Multiply by ~3)TRAI has considered only unallocated spectrum (576MHz in 1800 band) to calculatethe impact while using the entire industry traffic in the denominator, which uses

the currently allocated spectrum in 900 as well as 1800 bands.Total allocated GSM spectrum currently stands at 1,348Mhz, including 180.4Mhz tonew entrants and 437Mhz in the 900 band allocated to incumbents.Applying the TRAI reserve price to entire allocated GSM spectrum, the total outlayfor the industry increases to INR2.9t, almost 3x TRAI estimates.

Adjustment #3: Consider only outgoing minutes (Multiply by ~2)TRAI has used all minutes (outgoing and incoming) to assess the impact.While this would be true to ascertain the impact of RPM (which is also reportedon aggregate basis), outgoing tariff impact should be calculated only on the

outgoing minutes.This would increase the overall impact by 100%.


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310 May 2012

Telecom

Adjustment #4: (Subtract 2.1p)The positive impact of proposed reduction in spectrum charges from current 5-6%of AGR for GSM incumbents to 1% of AGR would lead to a cost reduction of ~2.1p/minute.

Adjustment #5: (Multiply by ~1.2x)Regulatory levies like service tax, revenue sharing license fee and spectrumcharges are variable costs linked to revenue.Cumulative adjustment for these would be ~21%.

Re-farming to impact in several waysImpact of re-farming would be manifold given (1) increased tariffs due to additionalcost of network and spectrum, (2) lower quality and coverage of the mobilenetwork, and (3) higher energy requirement, as cell-site base will have to be

increased.COAI has estimated an incremental capex of INR1,250b required by GSMincumbents in case re-farming takes place.

ARPU-adjusted price comparison for spectrum

Source: COAI/MOSL


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410 May 2012

Telecom

Impact of re-farming as per COAI

Source: COAI/MOSL

Circle wise details of GSM spectrumOperator Allocated Spectrum Spectrum available

Total Cancelled as Not to be Unallocated post liecence

Allocated per SC order auctioned spectrum cancellationsDelh i 54 4 49 12 16Mumbai 72 13 59 5 18Tamil Nadu (Incl Chennai) 54 22 32 25 47Kolkata 60 18 43 23 41Maharashtra 69 22 47 6 28Gujarat 60 18 43 4 22A.P. 69 22 47 15 37Karnataka 69 22 47 12 34Kerala 61 18 44 28 46Punjab 63 18 46 1 19Haryana 64 22 42 4 26U.P.(W) 61 18 44 8 26U.P.(E) 62 18 45 0 18Rajasthan 64 18 46 3 21

M.P. 63 18 45 18 36W.B. & A&N 53 18 35 4 22H.P. 58 18 40 6 24Bihar 67 22 45 0 22Orissa 59 22 37 18 40Assam 55 22 33 4 26N.E. 53 22 31 7 29J & K 49 22 27 6 28

Sum 1342 414 928 211 625Average 61 19 42 10 28

Source: TRAI/MOSL


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510 May 2012

Telecom

Operator wise spectrum allocation details in 900mHz band (MHz)Circle Bharti Idea Vodafone RCOM Aircel Loop MTNL/BSNLDelh i 8.0 8.0 6.2Mumbai 8.0 8.0 6.2Kolkata 6.2 7.8 6.2

Maharashtra 7.8 6.2 6.2Gujarat 6.2 7.8 6.2A.P. 7.8 6.2 6.2Karnataka 7.8 6.2 6.2T.N. (incl. Chennai) 6.2 7.2 7.8 6.2Kerala 6.2 6.2 6.2Punjab 7.8 7.8 6.2Haryana 6.2 6.2 6.2U.P.(W) 6.2 6.2 6.2U.P.(E) 6.2 6.2 6.2

Rajasthan 6.2 6.2 6.2M.P. 6.2 6.2 6.2W.B. & A&N 4.4 4.4 4.4 6.2H.P. 6.2 6.2 6.2Bihar 6.2 6.2 6.2Orissa 6.2 6.2 6.2Assam 4.4 6.2 4.4 6.2N.E. 4.4 4.4 4.4 6.2Jammu & Kashmir 6.2 4.4 8.0Aggregate 100.4 65.2 68.0 39.8 21.0 8.0 138.2

Source: TRAI/MOSL

Comparative valuationsCMP Rating TP Upside EV P/E (x) EV/EBITDA (x) EV/Sales (x)(INR) (INR) (%) (USDb) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Bharti* 310 Buy 390 25.8 22.2 19.5 27.6 17.0 9.0 7.9 6.4 3.1 2.7 2.3Ide a 79 Buy 100 26.0 4.9 29.0 36.1 16.0 9.7 7.7 5.6 2.4 2.0 1.6RCom 68 Neutral 85 24.6 2.6 9.4 18.1 12.2 7.0 7.8 6.1 2.2 2.5 2.1

RoIC (%) RoE (%) EBITDA Margin (%) Net Debt/EBITDA (x) Net Debt/Equity (x)FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Bharti 9.8 6.1 8.6 12.6 8.1 12.3 33.6 33.2 35.0 3.0 2.7 2.5 1.2 1.2 1.0Ide a 6.1 5.8 8.8 7.6 5.7 11.8 24.5 26.1 29.1 2.8 2.6 1.7 0.9 1.0 0.8RCom 4.0 3.1 4.0 3.9 2.1 3.2 31.9 32.0 34.4 4.9 5.6 4.3 0.9 1.0 0.9

Capex/Sales (%) Sales Gr. (%) EBITDA Gr. (%) EPS (INR) EPS Gr. (%)FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Bharti 24.2 19.6 20.9 42.1 20.2 13.3 19.1 18.8 19.4 15.9 11.2 18.3 -32.6 -29.6 62.6Ide a 57.0 19.8 14.7 24.5 26.0 19.2 11.3 34.3 33.2 2.7 2.2 4.9 -11.6 -19.6 126.1RCom 62.6 7.0 8.6 -7.6 -2.0 10.6 -16.9 -1.5 18.9 7.2 3.8 5.6 -69.4 -48.0 48.1* Proportionate EV/EBITDA and EV/sales Source: Company/MOSL


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610 May 2012

Telecom

Bharti: Key Assumptions and other dataFY10 FY11 FY12E FY13E FY14E

Mobile segmentMobile - IndiaSubs (m) 128 162 181 200 212

YoY (%) 36 27 12 10 6Average subs (m) 111 145 172 190 206

YoY (%) 42 31 19 11 8Netadds per month (m) 2.8 2.9 1.6 1.5 1.0

YoY (%) 6 3 -45 -4 -34Total mobile traffic (b min) 610 792 889 994 1,068

YoY (%) 28 30 12 12 7ARPU (INR/month) 243 201 188 191 195

YoY (%) -25 -17 -6 2 2MOU 459 455 431 435 433

YoY (%) -10 -1 -5 1 0Mobile RPM (INR) 0.53 0.44 0.44 0.44 0.45

YoY (%) -17 -17 -1 1 3Mobile EBITDA margin (%) 38.7 34.7 33.9 34.9 35.3Mobile Capex (INR b) 34 59 32 73 41

Mobile Capex/sales (%) 10 16 8 16 8Mobile - AfricaSubs (m) 44 53 66 84

YoY (%) 5 20 24 27Netadds per month (m) 0.2 0.7 1.1 1.5ARPU (USD/month) 7.3 7.1 6.7 6.0

YoY (%) -2 -6 -10Capex (USD b) 0.85 1.51 1.05 1.36

Capex/Sales (%) 24 37 22 25EBITDA margin (%) 25 27 30 34Passive InfrastructureIndus Towers

Towers (000s) 103 109 109 113 117Cellsites (000s) 176 201 214 249 281Tenancy ratio (x) 1.71 1.85 1.96 2.20 2.40Sharing rev. per operator/month (INR000s) 29.5 31.3 28.7 27.8EBITDA margin (%) 26.6 28.5 30.0 31.9Bharti InfratelTowers (000s) 31 33 33 35 37Cellsites (000s) 50 58 60 74 86Tenancy ratio (x) 1.62 1.76 1.81 2.10 2.30Sharing rev. per operator/month (INR000s) 37.2 37.0 37.3 36.5 35.2

EBITDA margin (%) 46.2 48.1 47.8 49.5 51.4Source: Company/MOSL


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710 May 2012

Telecom

Bharti: Business MixFY10 FY11 FY12 FY13E FY14E

Revenue (INR b)

Mobile 331 363 403 453 499Telemedia 34 36 37 37 38

Enterprise 45 41 45 45 45Passive Infrastructure 71 86 95 101 111Others 6 10 16 19 22Africa 0 131 198 240 260Total revenue 487 667 794 895 976Eliminations and others -68 -72 -80 -86 -94Consolidated revenue 418 595 715 809 882YoY% 13 42 20 13 9EBITDA (INR b)Mobile 128 126 137 158 176Telemedia 15 16 16 15 17

Enterprise 13 10 8 9 10Passive Infrastructure 25 32 36 40 46Others -10 -10 -9 -8 -4Total India & SA 168 171 184 211 241

Africa 0 29 53 72 88Total revenue 170 202 240 287 333Eliminations and others -2 -3 -3 -4 -4Consolidated EBITDA 168 200 237 283 329YoY% 11 19 19 19 16Capex (INR b)

Mobile 34 59 32 73 41Telemedia 10 8 8 6 6Enterprise 12 4 2 4 3Others 16 14 9 5 5Passive infrastructure 12 23 14 12 12Africa 0 36 76 53 65Consolidated capex 83 143 140 153 133YoY% -41 71 -2 9 -13Capex/Sales (%) 20 24 20 19 15

Source: Company/MOSL


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810 May 2012

Telecom

Idea: Key Assumptions and other dataFY10 FY11 FY12E FY13E FY14E

Subs (m) 64 90 113 131 144YoY (%) 48 40 26 16 10Average subs (m) 53 77 101 122 137

YoY (%) 70 44 32 20 13Netadds per month ex acquisition (m) 1.7 2.1 1.9 1.5 1.1YoY (%) 40 23 -10 -22 -27Total mobile traffic (b min) 225 363 453 527 588YoY (%) 46 45 25 16 12Average Rev Per User (INR/month) 207 165 158 156 157YoY (%) -21 -20 -5 -1 0Minutes of Use/Sub/Month 388 394 372 361 357YoY (%) -5 2 -6 -3 -1Mobile RPM (INR) 0.53 0.42 0.42 0.43 0.44

YoY (%) -18 -21 1 2 1Mobile EBITDA/min. (INR) 0.15 0.10 0.11 0.13 0.14YoY (%) -19 -30 8 14 8Capex (Rsb) 33 88 39 34 26Capex / Sales (%) 27 57 20 15 10

Consolidated revenue break-up (INR b)

13 established service areas 118 142 174 202 222

9 new service areas 8 15 21 28 36

Idea standalone (ex-3G) 126 156 195 230 258

Proportionate revenue - Indus 8 11 13 15 17

Incremental 3G revenue 0 1 4 7

Eliminat ions -11 -12 -14 -16 -18

Consolidated revenue 124 155 195 233 264

YoY growth (%) 22 25 26 19 13

Consolidated EBITDA break-up (INR b)


9 new service areas -4 -5 -6 -6 -3

Idea standalone (ex-3G) 31 33 45 59 71

Proportionate EBITDA - Indus 3 5 6 7 8

Incremental 3G EBITDA 0 0 2 3

Consolidated EBITDA 34 38 51 68 82

Consolidated EBITDA margin (%) 27 24 26 29 31

YoY growth (%) 20 11 34 33 21

Revenue mix


9 new service areas 6 9 10 11 13

Incremental 3G revenue 0 0 1 2 3

Proportionate revenue - Indus 6 7 6 6 6

EBITDA mix


9 new service areas -12 -14 -13 -8 -3

Incremental 3G EBITDA 0 0 1 3 4

Proportionate revenue - Indus 8 12 11 10 9Source: Company/MOSL


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910 May 2012

Telecom

Bharti Airtel: Financials and Valuations


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1010 May 2012

Telecom

Idea Cellular: Financials and Valuations


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Motilal Oswal Sector Gallery


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Motilal - India Telecom - COAI Presentation to Govt - May 10 2012

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