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Morgan Stanley India Company Private Limited+

Vinay Jaising +91 22 2209 7780

Surabhi Chandna +91 22 2209 7149

May 20, 2010

Industry View In-Line

India Telecommunications
3G Auctions Done; Upgrade Industry to In-Line
What's Changed
Industry View: India Telecommunications Cautious to In-Line

We upgrade our view on the India telecom industry to In-Line for three reasons: 1) The 3G auction is behind us; 2) tariff wars seem to have subsided; and 3) the F4Q10 results surprised us as they show revenue growth driven by higher minutes of usage (MOU). The 3G auction concluded at the end of day 34 of the bidding and 183 rounds. The overall license fee stands at Rs168bn (US$3.6bn), up 379% from the reserve price of Rs35bn (US$755mn). Bharti, Aircel, and RCOM won 3G bids in 13 circles each, Idea won in 11 circles, and Vodafone and Tata won in 9 circles each. We estimate the government could raise ~Rs921bn (US$20bn) from the 3G and BWA auctions or 1.2% of the country’s GDP. Tariff wars behind us: In the five months since the launch of “per-second billing” by Tata and the “Simply Reliance” plan by Reliance Communications (which lowered all tariffs by 30%), we have not seen any further reductions in tariffs in new launches. Most of the players now have similar tariff packages. Hence, there is not much differentiation for a consumer to choose one operator over the other, barring nationwide footprint and service. However, post-paid tariffs are still costlier than pre-paid tariffs, and we expect them to fall in the next quarter. Higher MOUs drive F4Q10: The group posted revenue growth of 1.7% QoQ; and absolute EBITDA stopped falling. The growth was driven by overall minutes, which rose 11% sequentially and over 30% YoY. Capex fell to 15-20% of sales; down from over 30% YoY.

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.




May 20, 2010 India Telecommunications

Bharti Is Our Key Pick for Four Reasons: 1) The stock has underperformed BSE Sensex by 16% YTD, and 51% in the last 12 months, and thus its valuation is close to historical bottoms. 2) Higher MOUs drove F4Q10: The company posted revenue growth of 1.9% YoY and 2.9% QoQ as absolute EBITDA declined 4.5% YoY and 2.3% QoQ. 3) Zain acquisition could contribute 10-15% of profits and 20-25% of cash profits in five years. We estimate Bharti would need to: 1) gain 5% additional in revenues, 2) inch margins in Zain assets up to closer to MTN’s levels at 40%, and 3) lift capex from US$4bn to US$5.7bn over five years for the deal to be worth the US$9bn equity value as agreed upon. 4) Bharti was selective in its 3G bids and won 13 circles for US$2.7bn against market expectations of an all-India license. Interestingly, in 12 of the 13 circles, Bharti has 900 MHz spectrum, with the 13th circle being Mumbai, the highest penetrated circle in the country. Our DCF-based price target is Rs367, implying 41% upside from current levels. In our view, the sale of a stake in its tower business could provide a positive trigger and improve the balance sheet.

However, we do not include Zain in our estimates for the company...
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