Despite steep stock price correction, we
recommend a cautious sector view – we
see downside risk to estimates (our FY11
forecasts are c20% below consensus)
􀀗 Sector rerating should be driven by a
shakeout/consolidation; unlikely soon
􀀗 We downgrade Bharti to UW(V) on fasterthan-
estimated progress on MNP; remain
cautious on Reliance Comm. (UW-V)
Sector view. Despite a meaningful de-rating of telecom stocks,
we have a cautious sector view as we expect tariff pressures to
continue and the competitive intensity to increase as more new
players with deep pockets enter an already unviable market for
so many players. Faster-than-estimated progress on MNP
clouds the outlook further. We see downside risk to earnings
(our FY11e estimates are on average c20% below consensus).
Market consolidation is inevitable, but not imminent. We
believe the sector will need to eventually consolidate in order to
re-rate, but do not view this as imminent. This may take c12-18
months, as funding is not a pressing issue for new players in the
near term. The government’s intention to maximise proceeds
from 3G spectrum (1Q 2010) will also prevent immediate
changes to the regulatory regime.
Outlook for new players increasingly unviable. Given suboptimal
operations in the 1800MHz band and low volumes,
new players will need to recover INR0.7 per minute in order to
break even, whereas incumbents can attain this at INR0.37 per
minute. Most exposed in our view are players with a regional
focus and/or CDMA pure-plays
Stock conclusions. We downgrade Bharti to Underweight (V)
from Neutral (V) on faster-than-estimated progress on mobile
number portability, as this will bring average prices down
faster. We remain Neutral (V) on Idea Cellular given downside
support from its quality spectrum and rural exposure. We are
Underweight Reliance Communications, Tata Tele and MNTL.