Motilal Oswal foresees voice and data usage driving growth for telecom sector in Q4FY15

1. April 2015 266
Voice/data usage to drive growth; pressure on voice RPM
Spectrum uncertainty behind but at a cost
Expect seasonality to drive voice traffic
During 4QFY15 we expect average wireless traffic (Bharti/Idea/RCom/Vodafone) to
grow 2.7% QoQ as compared to 2.4% QoQ growth in 3QFY15 and 4% QoQ growth in
4QFY14. On a YoY basis, traffic growth is expected to decelerate to 6% (vs 7-8% in
the previous two quarters). Idea will lead with ~12% YoY growth in wireless traffic.
Blended RPM likely to increase by only ~1%QoQ; voice RPM to decline QoQ
We expect RPM for GSM incumbents to improve by 1-1.5% QoQ mainly supported
by continued s trong d ata gr owth. We exp ect v oice R PM to d ecline Q oQ l ed b y
impact of increased competition from smaller operators and impact of cut in the
termination c harges. Voice R PM t rend h as b een f lat to d eclining o ver past 3-4
quarters in c ontrast t o in dustry e xpectations o f s ecular m edium-term gr owth i n
voice RPM.
India mobile margin to improve QoQ on operating leverage
We exp ect India m obile EBITDA m argin to improve by 80-100bp Qo Q f or
Bharti/Idea, led by traffic growth and positive margin impact resulting from lower
termination revenues as well as costs for operators.
Bharti Africa – Currency fluctuations to impact financial performance
Bharti A frica p erformance is likely t o re main muted, i mpacted b y f ull impact o f
currency flu ctuations. We m odel 1.5/3.3% QoQ r evenue/EBITDA decline i n U SD
terms for Bharti Africa.
Subscriber additions accelerate
Subscriber a dditions have b een accelerating during t he past s ix months, l ikely
reflecting increased competitive activity and discounting. VLR subscriber base stood
at ~842m as of January 2015, implying an active subscriber penetration of ~67%.
Spectrum auction behind; data roll-out plans key to watch-out
The government conducted a successful spectrum auction in March 2015 resulting
in total outlay of INR1.09 trillion for the operators. Key highlight of the auction was
1) Successful renewal of 900 band spectrum for all three large incumbents - Bharti,
Vodafone, and I dea; 2 ) I nability o f R Com t o renew its 9 00 b and s pectrum in 5 /7
circles, an d 3) Bid ding in terest of R eliance J IO/RCom/Tata Tele in the 8 00 b and
spectrum for LTE deployment. Recent reduction in termination and roaming charges
by the regulator are negative for the incumbents. Key issues to watch out include
voice RPM trend post aggressive spectrum auction, further visibility on 4G roll-out
plans especially for Reliance JIO, and policy decisions pertaining to M&A, spectrum
trading and sharing, and Over-The-Top (OTT) applications.
Company name
Bharti Airtel
Bharti Infratel
Idea Cellular
Reliance Communications
Shobhit Khare (Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428
Telecom
March 2015 Results Preview | Sector: Telecom

2. April 2015 267
Exhibit 1: Expected quarterly performance summary
Sector CMP Sales (INR m) EBDITA (INR m) Net Profit (INR m)
(INR)
06.04.15
Reco. Mar-15 Var % YoY
Var %
QoQ
Mar-15
Var %
YoY
Var %
QoQ
Mar-15
Var %
YoY
Var %
QoQ
Telecom
Bharti Airtel 401 Buy 239,642 7.9 3.2 81,713 11.8 5.0 19,162 99.3 33.4
Bharti Infratel 380 Buy 30,314 8.7 2.8 12,821 11.2 0.7 5,436 15.1 7.2
Idea Cellular 193 UR 84,603 20.1 5.5 29,689 33.1 7.9 9,443 60.1 23.1
Reliance Comm 60 Neutral 53,457 -5.7 -2.3 18,707 1.0 1.1 336 -83.5 -85.7
Sector Aggregate 408,015 8.2 2.9 142,929 14.0 4.6 34,377 54.3 16.7
UR: Under Review
Exhibit 2: Wireless subscriber net additions (m)
Source: TRAI, MOSL
Exhibit 3: QoQ wireless traffic growth (%)
Source: Company, MOSL
Exhibit 4: Trend in wireless RPM (INR)
Source: Company, MOSL
-2 -1
6
-1
3 3 2 2
-6
5 6 5
7
10
1
3 3
5 4
6 6 5
2
7 8
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
4
-2
3
5
2
-3
1
4
2
-3
1
3
5
-4
5
8
3
-6
4
9
5
-2
4 42
-3
1
2
1
-5
0 0 1
-1
1
-1
4
-3
3
5
3
-3
2
4 3
-2
3 3
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
Bharti (India) Idea RCOM Vodafone-India
39
41
43
45
47
49
51
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
Bharti Idea Vodafone-India RCOM
March 2015 Results Preview | Sector: Telecom

3. April 2015 268
Exhibit 5: Aggregate traffic growth and RPM trend for wireless majors
Source: Company, MOSL
Exhibit 6: Aggregate India wireless revenue growth (YoY, %)
Source: Company, MOSL
Exhibit 7: Relative Performance-3m (%)
Source: Bloomberg, MOSL
Exhibit 8: Relative Performance-1 Yr (%)
Source: Bloomberg, MOSL
4
-3
3
5
2
-4
2
4
3
-2
2 3
-2
0 0 0 3
1 1
-1
2
1
2
1
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
QoQ traffic growth (%) QoQ RPM growth (%)
11
8
6
7
12 12 12
10 9
11
13 14
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15E
94
98
102
106
110
Jan-15
Feb-15
Mar-15
Apr-15
Sensex Index MOSL Telecom Index
90
102
114
126
138
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
Sensex Index MOSL Telecom Index
March 2015 Results Preview | Sector: Telecom

4. April 2015 269
Exhibit 9: Wireless KPIs
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15E YoY (%) QoQ (%)
EOP Wireless subs (m)
Bharti (India) 191 193 198 206 209 212 217 221 7.7 1.9
Idea 125 127 129 136 139 144 151 155 13.8 2.7
RCOM 127 116 118 112 110 111 107 109 -2.8 1.4
Vodafone - India 155 156 160 167 170 174 178 182 9.2 2.2
AV. Wireless Subs (m)
Bharti (India) 190 192 196 202 207 211 214 219 8.6 2.3
Idea 123 126 128 132 137 141 147 153 15.4 3.7
RCOM 125 122 117 115 111 111 109 108 -6.1 -1.1
Vodafone - India 154 155 158 163 168 172 176 180 10.0 2.3
ARPU (INR/month)
Bharti (India) 200 192 195 196 202 198 202 206 4.8 1.7
Idea 174 164 169 173 181 176 179 182 5.1 1.7
RCOM 119 121 125 128 135 136 141 143 11.7 1.2
Vodafone - India 196 191 193 192 193 187 193 193 0.5 0.0
MOU/Sub
Bharti (India) 455 437 434 437 435 418 416 418 -4.3 0.5
Idea 398 368 376 397 401 384 383 384 -3.3 0.2
RCOM 282 277 288 296 311 307 315 315 6.4 0.0
Vodafone India (reported) 346 334 334 335 336 321 324 328 -2.3 1.2
Vodafone India (adj) 461 445 446 447 448 429 432 437 -2.3 1.2
Revenue per min (p)
Bharti (India) 44.0 44.0 44.8 44.9 46.5 47.2 48.6 49.2 9.5 1.2
Idea 43.7 44.7 44.9 43.6 45.1 45.8 46.6 47.3 8.7 1.6
RCOM 42.0 43.5 43.5 43.1 43.5 44.2 44.7 45.3 4.9 1.2
Vodafone India (reported) 56.6 57.2 57.7 57.3 57.4 58.2 59.3 60.2 5.2 1.5
Vodafone India (adj) 42.5 42.9 43.3 43.0 43.1 43.6 44.5 45.2 5.2 1.5
Wireless traffic (B min)
Bharti (India) 258 251 255 265 271 264 267 275 3.8 2.8
Idea 147 139 145 157 165 162 169 176 11.9 4.0
RCOM 106 102 102 102 103 102 103 102 -0.1 -1.1
Vodafone India (reported) 160 156 158 164 170 166 171 177 7.5 3.5
Vodafone India (adj) 213 207 211 219 226 221 228 236 7.5 3.5
Source: Company, MOSL
March 2015 Results Preview | Sector: Telecom

5. April 2015 270
Exhibit 10: Quarterly Financials (proforma)
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15E YoY (%) QoQ (%)
Revenue (INR b)
Bharti (ex Africa) 141 141 144 149 162 162 166 174 16.4 4.4
Bharti (consolidated) 203 213 219 222 230 228 232 240 7.9 3.2
Idea 65 63 66 70 76 76 80 85 20.1 5.5
RCOM 54 54 54 57 55 54 55 53 -5.7 -2.3
Vodafone - India (implied) 90 89 91 94 97 96 102 104 10.6 2.3
EBITDA (INR b)
Bharti (ex Africa) 49.3 49.1 52.0 54.9 60.2 60.8 62.9 67.0 22.0 6.5
Bharti (consolidated) 65.4 68.3 70.9 73.1 77.2 77.1 77.9 81.7 11.8 5.0
Idea 21.0 19.7 20.6 22.3 25.0 24.9 27.5 29.7 33.1 7.9
RCOM 17.0 18.9 18.5 18.5 18.6 18.3 18.5 18.7 1.0 1.1
EBITDA Margin (%)
Bharti (ex Africa) 34.9 34.8 36.0 36.8 37.2 37.5 37.9 38.6 177bp 75bp
Bharti (consolidated) 32.3 32.0 32.3 32.9 33.6 33.7 33.5 34.1 121bp 56bp
Idea 32.1 31.2 31.1 31.7 33.1 32.9 34.3 35.1 343bp 76bp
RCOM 31.4 35.0 34.2 32.7 33.7 33.8 33.8 35.0 234bp 116bp
PAT (INR b)
Bharti (ex Africa) 14.8 14.0 19.4 23.8 21.8 23.0 25.6 25.7 8.0 0.1
Bharti (consolidated) 6.9 5.1 6.1 9.6 11.1 13.8 14.4 19.2 99.3 33.4
Idea 4.9 4.5 4.7 5.9 7.3 7.6 7.7 9.4 60.1 23.1
RCOM 1.3 2.7 1.5 2.0 1.6 2.1 2.3 0.3 -83.5 -85.7
EPS (INR)
Bharti 1.8 1.3 1.5 2.4 2.8 3.5 3.6 4.8 99.3 33.4
Idea 1.4 1.3 1.4 1.8 2.1 2.1 2.2 2.6 47.7 21.3
RCOM 0.6 1.3 0.7 1.0 0.8 0.9 1.0 0.1 -86.2 -86.2
Capex (INR b)
Bharti (ex Africa) 12.6 10.4 17.8 20.3 30.3 21.3 27.5 24.0 18.1 -12.8
Idea 4.3 8.8 10.2 12.9 3.9 10.1 9.5 14.0 8.1 47.4
RCOM 2.1 3.6 3.3 4.7 4.1 3.0 3.5 3.8 -18.6 9.2
Source: Company, MOSL
Exhibit 11: Comparative valuation
Sector / Companies CMP Reco. EPS (INR) PE (x) EV/EBIDTA (x) ROE (%)
(INR) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Telecom
Bharti Airtel 401 Buy 14.6 15.8 12.9 27.4 25.3 31.0 7.2 7.0 6.2 8.9 9.0 6.8
Bharti Infratel 380 Buy 10.5 12.9 16.3 36.3 29.4 23.3 14.9 12.7 10.9 10.8 12.9 15.6
Idea Cellular 193 UR 8.9 9.6 4.9 21.8 20.1 39.1 7.5 8.2 7.3 16.1 14.0 6.6
Reliance Comm 60 Neutral 2.6 1.5 0.4 23.1 39.0 163.8 6.7 6.8 6.6 2.1 1.1 0.3
Sector Aggregate 27.1 25.0 31.2 7.9 7.8 6.9 8.5 8.6 6.6
Source: MOSL
March 2015 Results Preview | Sector: Telecom

6. Motilal Oswal India Strategy Gallery