Research Notes – October 13, 2010

Sector Watch – Telecom
 It seems that the worst is over for the telecom sector and the outlook has turned positive.
 Discussion with equipment vendors, regulators and telecom operators suggest that competition and regulatory overhangs on the sector are easing.
 Tariff war between operators is fading out and the average revenue per user (ARPU) is unlikely to fall from the current level.
 Telecom subscribers’ number is increasing in a fast pace and the rural expansion along with broadband wireless connections would drive growth of the sector.
 Prospects of 3G appear good in India.
 Considering better prospects of the telecom sector, Bahrti and Idea have been upgraded to ‘buy’ from the earlier ‘hold’ recommendation and Bharti is our top pick from the telecom sector.
 However, Reliance Communication continues to be in the ‘reduce’ list.

Buy Idea Cellular – TP Rs.85
 Idea Cellular is upgraded to buy with a one year target price of Rs.85.
 The company had been under margin pressure for the last two years due to various reasons like its entry into 11 new circles, decline in average revenue due to tariff war between players and consolidation of Spice acquisition. Operating margin had declined to 23% from 68%.
 It seems that margins have bottomed out and a significant improvement is expected due to expansion into new markets, improving network utilization by the launch of 3G and also due to better price stability.
 The company is expected to offer 3G services to its customers at a lower cost while compared to others due to its smart bidding strategy (refrained from aggressive bidding) and this would help the company to capture broadband market.

Buy Bharti Airtel – TP Rs.440
 The company is expected to gain substantially from broadband wireless business through 3G because of high spending power of its customers.
 The company could maintain stable tariff and minutes growth even in the difficult times and this would help to drive wirelss revenue.
 Margin pressure is bottomed out and some improvement is likely by the launch of new services.
 Zain (Africa) acquisition may have limited impact on the prospects of the company.
 The stock has been upgraded to ‘buy’ from the earlier ‘hold’ recommendation with a target price of Rs.440 over one year.

Sell Reliance Communication – TP Rs.160
 The company has debt of USD 6.2 billion as on 1QFY11 and a part of it was intended to repay by tower sales. But, the deal has been cancelled. Debt concern has re-emerged in this scenario.
 Company’s plans to sell 26% stake to a strategic partner has not materialized as yet.
 The company is unlikely to benefit substantially from 3G launch despite its higher capacity as the other incumbents are also capable to provide broadband at reasonable tariff.

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