PC -Telecom Sector Update July 2013 -...

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India Telecom Still Ringing Strong

19 July 2013PhillipCapital (India) Pvt. Ltd.

We find that the Indian Telecom sector is breaking away from an EBIDTA margin dilutive and diminishing capital efficiency trend of FY08‐FY12/13 to a margin accretive trend backed by improving capital efficiency. The improvement in EBIDTA margins and capital efficiency will translate to a significant re‐rating of the sector over the medium term. We rate Bharti Airtel and Idea Cellular as our Conviction Buys with price targets of Rs 430 and Rs 190 respectively implying upsides of 32% and 26% respectively. Our key reasons are as follows:

Sustainable minutes growth at a lower cost: The consolidation in the sector and penetration in rural areas will help the incumbent telecom operators to register robust minutes growth over FY13‐15E. Sector consolidation while reducing the multi SIM usage phenomenon will not only help the incumbent operators to grow minutes at a rapid pace, but will also help in reducing churn. We note that the sector has a very high sensitivity of cost savings due to reduced churn. Thus, while the sector will continue to register robust minutes growth but the growth will be at a significantly lower cost and will be margin accretive.

The return of pricing power: Pricing power is clearly returning to the sector. We note that the discount between the card rates (headline tariffs) and market operating rates is 38% and market consolidation is reducing the gap rapidly. In our recent channel checks we have noted that 3 rounds of tariff hikes have been effected in certain circles and more hikes are expected in the near to medium term. The operating leverage benefits for Bharti and Idea cellular are immense and each Rs 0.01 improvement in RPM translates to an increase of 3.6% and 6.6% in EBIDTA for Bharti Airtel (India & SA) and Idea Cellular respectively.

Strong growth in 3G services augur well for margins: 3G services in India are at an inflection point. The proliferation of smart phones is increasing at a rapid pace as internet based applications like Facebook, Whatsapp, Linkedin and others are fast gaining traction. Operators, handset vendors, retail outlets and even application providers are encouraging proliferation of data. We expect the sector 3G revenues to grow by 4x over FY13‐15E and contribute to 5% of the sector revenues.

Improving capital efficiency and imminent re‐rating: The sector is now at unique positioning where EBIDTA growth will be faster than revenue growth while capex will not increase substantially. Historical data clearly shows that telecom stocks outperform during the periods of rising EBIDTA margins and improving capital efficiency. Thus, the sector will now see a virtuous cycle of profitability growth > (exceeding) EBITDA growth > revenue growth > minutes growth; resulting in continued improvement of valuations. Valuation and Conviction Buy Rating: Bharti Airtel and Idea Cellular currently trade at 6.1x and 7.1x FY14E EBIDTA. We believe that as the sector beats consensus revenue and earnings expectations on account of pricing power and cost benefits; re‐rating will occur. Bharti and Idea are our conviction Buys for the sector. We rate Reliance Communications as Neutral on account of corporate developments and market expectations of the company being acquired at a significantly higher price helping the stock trade at elevated levels.

Companies Covered Idea Cellular CMP Rs151Reco BUYTarget Price Rs190 Bharti Airtel CMP Rs323Reco BUYTarget Price Rs430 Reliance Communications CMP Rs147Reco NEUTRALTarget Price Rs160 Report Priced as of 18th July 2013 Naveen Kulkarni, CFA, FRM (+ 91 22 66679947) [email protected] Vivekanand Subbaraman (+ 91 22 66679766) [email protected]

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19 July 2013 / INDIA EQUITY RESEARCH / TELECOM SECTOR UPDATE

Contents Focus Charts _________________________________________________________ 3 Sustainable minutes growth at lower cost _________________________________ 4 Incremental minutes will be at a lower cost as industry churn is declining at a rapid pace _____________________________________________ 6 Reduced commissions and tigher subscriber norms imply that lower churn is sustainable ___________________________________________________ 8 Rural subscriber penetration + normal monsoon are tailwinds for subscriber growth _________________________________________________ 13 Reduced competitive intensity ‐ Industry consolidation ______________________ 15 The return of pricing power ____________________________________________ 18 Rate Cutters – waning discounting ______________________________________ 20 First Recharge Coupons – reduction in benefits ___________________________ 22 Rate increases rather public and also taken by new entrants _________________ 23 Data now at a critical mass – rapid growth to continue _____________________ 25 Quality 3G smartphones available at US$ 100 spot _________________________ 36 Relative valuation _____________________________________________________ 40 Companies Section Idea Cellular ________________________________________________________ 42 Bharti Airtel ________________________________________________________ 60 Reliance Communication ______________________________________________ 80

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Focus Charts

EBITDA/min (paisa/min) set to improve …as incremental EBITDA/incremental min (paisa/min) picks up

17.8

15.9 15.2

16.1 17.3

18.4

‐

2

4

6

8

10

12

14

16

18

20

FY10 FY11 FY12 FY13 FY14E FY15E

8.1

2.5

15.2 12.8

30.2

34.0

‐

5

10

15

20

25

30

35

40


Source: Company, PhillipCapital India Research Estimates Source: Company, PhillipCapital India Research Estimates

As both RPM and voice RPM (Rs/min) improve ….and the contribution of data to overall revenue increases

‐

0.100

0.200

0.300

0.400

0.500

0.600

0.700

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Voice RPM RPM

7.0%8.8%

11.6%

15.0%

18.3%

21.6%

0%

5%

10%

15%

20%

25%

‐

100

200

300

400

500

600

700

FY13 FY14E FY15E FY16E FY17E FY18E

Data as a % of revenue ‐RHS Data revenue ‐ Sector ‐ LHS


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Sustainable minutes growth at lower cost The Indian Telecom sector minutes growth over the last 5 years (FY08‐13E) was 26% CAGR. The high growth rate was driven by multiple factors which included: • Sharp reduction in tariffs on account of heightened competitive activity • Aggressive subscriber acquisition schemes by operators which resulted in multi‐SIM

usage • Network coverage and enhancement of reach in rural areas All the above factors resulted in sharp minutes growth but the effect of margins has largely been dilutive. Reduction in tariff results in lower gross margins and thus the growth driven by lower tariffs has largely been margin dilutive in the last five years (growth on account of lower tariffs from FY2003‐FY2008 was margin accretive on account of very high elasticity). Similar to reduction in tariffs, multi‐SIM usage leads to lower margins as significant increase in churn translates to sharp increase in subscriber acquisition costs. While network traffic (minutes) growth has continued to remain robust, recently we have started witnessing a reversal in industry trends of Multi SIM usage on account of stringent subscriber acquisition norms, decrease in channel commissions and stable headline tariffs. Correspondingly the sector growth minutes rate has come down from 37% CAGR over FY08‐11 to 12% CAGR over FY11‐13E. Minute growth for the telecom sector Operator (bn mins) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16EBharti 284 475 610 792 888 968 1,064 1,128 1,185Growth (%) 67% 28% 30% 12% 9% 10% 6% 5%Minutes market share 24.8% 27.3% 26.6% 26.9% 26.2% 26.1% 26.3% 26.3% 26.3%

RCOM 204 276 351 375 399 416 434 454 468Growth (%) 35% 27% 7% 6% 4% 4% 4% 3%Minutes market share 17.8% 15.9% 15.3% 12.7% 11.8% 11.2% 10.7% 10.6% 10.4%

Idea 102 175 247 363 453 532 593 652 706Growth (%) 72% 41% 47% 25% 17% 11% 10% 8%Minutes market share 8.9% 10.0% 10.8% 12.3% 13.4% 14.3% 14.7% 15.2% 15.7%

Vodafone 163 248 341 460 557 630 699 748 785Growth (%) 52% 38% 35% 21% 13% 11% 7% 5%Minutes market share 14.2% 14.2% 14.8% 15.6% 16.4% 17.0% 17.3% 17.4% 17.4%

Others 394 567 748 952 1,095 1,166 1,254 1,306 1,358Growth (%) 44% 32% 27% 15% 6% 8% 4% 4%Minutes market share 34.4% 32.6% 32.6% 32.4% 32.3% 31.4% 31.0% 30.5% 30.2%

Total sector 1,147 1,741 2,297 2,941 3,393 3,711 4,045 4,288 4,502Growth (%) 52% 32% 28% 15% 9% 9% 6% 5%

Source: Company, PhillipCapital India Research Estimates

Although the minutes growth rate has declined, we believe the addition of minutes in the recent past is more sustainable in nature as the usage is driven by actual addition of customers and not so much by scheme based multi‐SIM usage trends. We also believe that the penetration and network coverage led growth will continue to remain robust as scope for expansion in the rural markets continues to remain high. The current teledensity in the rural market is around 41% as compared to a teledensity of 139% in the urban markets. We expect the sector minutes to grow at 7% CAGR over FY13‐16E but we expect the incumbent operators Bharti, Idea and Vodafone to grow ahead of the market on account of consolidation activity in the market.

Minutes growth has moderated but is more sustainable Expect 7% minutes CAGR over FY13‐16, with incumbents growing faster at 8% CAGR during the same period.

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Minute‐market share movement for telcos

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Bharti Vodafone Idea RCOM Others


Market consolidation will help the incumbents in registering minutes growth ahead of the sector. Amongst the operators which have exited wireless business Uninor had developed significant scale of operations with a sizable share of minutes market share of 3.5%. The scale down of operations by Uninor will help the incumbents to register robust minutes growth over the medium term while reducing the competitive intensity will help the incumbents in managing costs. Rationalization of Gross additions is reducing acquisition costs

1,141

914

670 691 666

362

625

950130

192

234

107

3846

‐54

52

‐

200

400

600

800

1,000

1,200

FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

‐100

‐50

0

50

100

150

200

250

Gross adds Net adds


It is important to note that the industry is now seeing a structural improvement in subscriber additions which is also accompanied by reduction in costs. Subscriber churn has a profound impact on the profitability of telecom companies. Subscriber churn results in both direct and indirect costs which tend to bloat the cost structure of a telecom company.

We expect Bharti Airtel to maintain its minute market share. For Idea and Vodafone, we expect minute market share gains to continue from FY13‐16

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Monthly subscriber churn has returned and will remain at pre‐hyper competitive intensity levels

0%

2%

4%

6%

8%

10%

12%

14%

16%


Bharti Vodafone Idea Rcom Others Total sector


Industry consolidation and stringent customer acquisition norms have resulted in a significant reduction in customer churn. We believe the industry will see significant long‐term benefits because reduction in churn on EBIDTA margin and earnings accretion.

Incremental minutes will be at a lower cost as industry churn is declining at a rapid pace We believe that the telcos are likely to witness a trend of improving EBITDA/min on account of declining churn leading to stable cost structure and increased contribution of data revenue. EBITDA/minute for the telecom industry to pick up...

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Bharti Airtel Idea Cellular Vodafone India

Source: Company, PhillipCapital India Research

We expect a significant pickup in incremental EBITDA/min in FY14 as the industry will see reduced churn play out on a full year basis. Also, we expect the incremental EBITDA/min to continue to improve on account of strong growth in data services.

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…as FY14 will see a sharp pickup in incremental EBITDA/min (paise/min)

(5.0)

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


Idea Cellular Bharti Airtel Vodafone India


Incremental minutes growth for telecom operators will be driven by two major factors. • Addition of VLR subscribers driven by additions in rural parts which continue to

remain under penetrated • Increase in usage by existing subscribers We believe scheme based minutes growth and daily shopper phenomenon will decline over the medium to long‐term which will improve the predictability of minutes growth. While we expect minutes growth trend to continue to remain robust we also expect a decline in the cost of acquisition of additional subscribers due to the following reasons: • Reduction in channel commissions • Reduction in churn means lower gross additions and the subscriber stays on the

network longer • Reduction in promotional offers on customer acquisitions • Increase in prices on First recharge vouchers All the above mentioned initiatives are translating to lower customer acquisition costs and addition of minutes at significantly lower costs. Apart from addition of minutes by new subscribers, minutes are also added by existing subscribers and it can generally be assumed that the additional minutes consumed by mature subscribers grow in‐line or marginally lower than the real GDP growth rate. While minutes added by existing and mature subscribers grow slower than the market growth rate but it is important to note that the profitability from such additional minutes is significantly higher than the company’s margins. Hence, considering the above mentioned factors, we believe that the minutes growth while continuing to remain robust are moving away from a long‐term trend of margin dilutive growth to a margin accretive trend over the medium term to long term.

Incremental minutes to come from (1) continued addition of active subscribers, largely from rural areas, and (2) higher usage by existing customers

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Reduced commissions and tigher subscriber norms imply that lower churn is sustainable We believe that the reduced industry churn on account of the actions taken by the telecom industry and the regulator is sustainable. Below, we highlight these changes and explain why the reduced churn trend is sustainable. Activation retailer commissions are down by ~30% From our interactions with retailers across various circles, we find that commissions on activation of new connections are down by ~30%. This change was initiated by operators in Q2FY13 (August‐September 2012) and was implemented on a pan‐India basis by Q3FY13. The results of this exercise were seen in a sharp decline in gross adds, negative net adds and sharply lower commission spends by telcos. Earlier retailer commissions were volume‐linked and were offered in a slab‐wise manner, now telcos have largely substituted the same with a flat incentive structure. For new SIM cards retailer commissions are two‐fold • An on‐the‐fly commission (OTF) – offered to retailers immediately on the sale of

SIM cards • A month‐end scheme commission which takes into account SIM card activation

targets for retailers. For example, in the earlier structure, for a new SIM card bundled with a First Recharge Coupon (FRC) having an MRP of Rs 39, the OTF would be Rs 25 and the scheme commission would be say Rs 15. Telcos use a term ‘landing cost,’ which equals the MRP net of OTF and scheme commissions to the retailer. A negative landing regime existed earlier – as explained in the example below: a negative landing of Rs 1 (which the case discusses) implies that the retailer makes money (Rs 1 in this case) even if he/she doesn’t recover the MRP of the SIM and the FRC. Talk‐time for available for customers is additional and in this case is Rs 24, which has also been revised downwards to Rs 10. Illustration of on‐the‐ground changes as highlighted by channel partners In Rs, unless mentioned Prior scenario Current scenario

SIM card MRP (Rs 10) + Rs 29 FRC (a) 39 39One‐the‐fly commission to retailer (b) 25 20Scheme commission (c) 15 8

Landed cost of SIM (d) = (a)‐(b)‐(c) ‐1 11

Landing with free SIM ‐11 1

Commission payout 40 28

Drop in commission 30%

Talk‐time available (over and above commission) 24* 10*

Source: PhillipCapital Research, Company

* ‐ Discounted rate benefit of local calls at 35p/min for 30 days available; earlier this benefit was 30p/min for

30 days

Now, we find that there have been commission reductions at both levels – the OTF and the scheme commission. Scheme commission structure too has been altered from a slab based system to a flat commission structure. For the above FRC bundled SIM card with MRP of Rs 29, the OTF has been reduced to Rs 10 and scheme commission flat at Rs 15. This implies a positive landing of Rs 4. The talk time available for the customer has been reduced to Rs 10 along with a reduction in benefits (as we discuss in the changes in the First Recharge Coupon). Below are case studies explaining the new landing regime. We highlight that the final landing, i.e. minimum landing considering the SIM card to be free, is the highest for the dominant operator in the circle; Vodafone in Gujarat circle.

Idea’s management mentioned in their results conference calls that the recent changes have been made to ensure that (1) new SIM discounting is curbed – dummy activations curbed as retail commissions rationalised, (2) attractiveness of recharge vis‐à‐vis new connections… thus ensuring that customers who go for a recharge don’t end up buy a new SIM (rotational churn)

Telcos have cut both OTF as well as scheme commissions Also, slab‐based commissions (volume‐linked) have been replaced by a flat per connection incentive

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Case study 1 – Vodafone’s FRC and landed cost computations in Gujarat FRC* MRP ‐‐> (1) 13 29 52 79

OTF ‐‐> (2) 10 10 8 13

Plan voucher (including SIM cost)# ‐‐> (3) 10 1 1 1

Landing cost ‐‐‐> (4) = (1) ‐ (2) + (3) 13 20 45 67

Slab scheme (commissions) ‐‐> (5)

2 to 24 3 8 3 8

25+ 6 12 6 12

Landing after slab scheme ‐‐> (6) = (4) ‐ (5)

2 to 24 10 12 42 59

25+ 7 8 39 55

Final landing ‐‐> (minimum landing) 7 8 39 55

Landing limit ‐ ‐ 33 49

Talk time 7 23 43 67

Customer payment for SIM + FRC + plan voucher ‐‐> (1) + (3) 23 30 53 80


Case study 2 – Airtel’s FRC and landed cost computations in Gujarat FRC MRP ‐‐> (1) 12 16 38 63

OTF ‐‐> (2) 10 12 21 31

Plan voucher (including SIM cost) ‐‐> (3) 14 14 14 14

Landing cost ‐‐‐> (4) = (1) ‐ (2) + (3) 16 18 31 46


2 to 24 14 14 14 14

25+ 15 15 15 15


2 to 24 2 4 17 32

25+ 1 3 16 31


Talk time 9 23 25 45



Case study 3 – Idea’s FRC and landed cost computations in Gujarat FRC MRP ‐‐> (1) 13 18 29 58

OTF ‐‐> (2) 9 11 12 27

Plan voucher (including SIM cost) ‐‐> (3) 10 10 10 10

Landing cost ‐‐‐> (4) = (1) ‐ (2) + (3) 14 17 27 41


2 to 24 6 6 6 6

25+ 12 12 12 12


2 to 24 10 12 25 40

25+ 4 6 19 34


Talk time 10 22 10 68



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Volume‐based commissions replaced by a flat fee We also note that the prior model of volume‐based retailer incentives has largely been replaced by a flat fee. The earlier commission per gross add was resulting in significant wasteful gross adds as retailers would attempt to fulfill their targets to earn commissions as per the highest slab. Example of a prior slab‐based commission structure Commission per Gross add (Rs) Number of SIMs sold in the month

10 0‐50 20 50‐100 25 + other incentives/schemes Over 100

Source: PhillipCapital Research, Company The new scheme commission structure implies a flat Rs 10‐15 commission per gross add, which is significantly lower than the earlier slab Customer acquisition process is now far more stringent… The Department of Telecom (DoT) had revised the verification guidelines for new mobile connections. The changes mentioned are as under: • New connections require a detailed Customer Acquistion Form (CAF) along with

Proof of Identity and Proof of Address. • Connections to be activated only after CAF and identity/address proof verfied by an

employee of the telco. These details have to necessarily be part of the databases maintained by telcos.

• After SIM activation, the subscriber needs to tele‐verify details of the CAF and the same needs to be compared with the records in the database. SIM use is possible only after tele‐verification of subscriber details.

• Individual customers can only be sold 9 connections; beyond this the customer will be treated as a bulk consumer.

The DoT had mandated levy of hefty penalties on telcos in cases of non‐compliance of the above norms and has also specified several other operational details making the customer acquisition process far more thorough (Details of regulatory interventions are mentioned in the Appendix). We believe that this regulatory intervention has played a key role in curbing rotational churn and now a significant proportion of new connections added by telcos is for genuine users rather than rate shoppers or bargain hunters. …leading to decline in subscriber base, while active subscribers continue to grow The commission cuts and stringent subscriber verification norms for new connections resulted in a decline in net adds – industry net adds were negative from July 2012 to Feb 2013 while March 2013 saw a bounce back and saw a positive net subscriber addition. While net adds declined marginally in April 2013, we note incumbents continue to add subscribers. Between July 2012 and now, the industry continued to add active subscribers, with active subscriber count falling only in November 2012 (the month when the new verification guidelines were implemented).

Regulatory developments have made customer acquisition process far more stringent

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Industry Subs and VLR proportion Net adds and VLR subs. additions

‐

200

400

600

800

1,000

May‐12

Jun‐12

Jul‐12

Aug‐12

Sep‐12

Oct‐12

Nov‐12

Dec‐12

Jan‐13

Feb‐13

Mar‐13

Apr‐13

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

Industry subs (mn) VLR subs (mn)Industry VLR proportion (%)

(30.0)

(25.0)

(20.0)

(15.0)

(10.0)

(5.0)

‐

5.0

10.0

15.0

May‐12

Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

Net adds (mn) Active subs. net adds (mn)

Source: TRAI, PhillipCapital India Research

In FY13, while the industry total subscriber count is lower by 50mn, active subscribers increased by 41mn. We note that after a two‐month adjustment period for the new subscriber verification guidelines, the net subscriber addition and active subscribers addition trends have converged. Additionally, barring seasonal weaknesses, the industry continues to add active subscribers on a monthly basis. Industry churn has already declined and the same is expected to remain at these levels As highlighted earlier, across the board, the result trends clearly indicate that the industry’s corrective actions in reducing retailer commissions, customer benefits as well as the regulatory intervention have resulted in an industry‐wide decline in churn. Hence, incumbents as well as new entrants have seen a sharp decline in churn, as shown below. Telcos have seen churn nosedive

8.5%

10.1%

6.3%

13.0%

10.0%

5.9%6.9%

5.3%

12.0%

7.3%

3.2%4.3% 3.9%

5.0% 4.8%

0%

2%

4%

6%

8%

10%

12%

14%

Bharti Idea Vodafone Uninor Rcom

Q2FY13 Q3FY13 Q4FY13


…in‐keeping with trends witnessed in global markets We analysed churn trends of telcos in various developing markets which are largely prepaid and found that the mean churn level is less than 5%. This implies that the current industry churn levels of ~5% are sustainable and are in keeping with global peers.

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Globally monthly churn levels are < 5% for prepaid markets

4.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Bangladesh

Algeria

Africa

Phillipines

Average

Kenya

Pakistan

Turkey

Thailand


Advantage incumbents as the business model becomes less reliant on net adds Owing to the changes witnessed in the sector, we note the industry has already seen a consolidation of sorts. Incumbents garnered 67% & 109% of annual incremental industry minutes in Q3FY13 and Q4FY13 and 185% and 142% of Q3FY13 and Q4FY13 annual incremental revenue. As a result of the increasing customer acquisition cost and declining churn, along with exit of new entrants in Q3FY13 and Q4FY13, we believe that the industry is increasingly becoming favourable for the incumbents. For FY13, incumbents added 97% of industry’s active subscribers, 69% of industry minutes and 104% of industry revenue. YoY incremental industry market share of incumbents in FY13

69%

104% 97%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Q1FY13 Q2FY13 Q3FY13 Q4FY13 FY13

Minutes Revenue Active subscribers


Incumbents accounted for the lions share of industry growth in FY13

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Rural subscriber penetration + normal monsoon are tailwinds for subscriber growth While questions are being asked about subscriber growth for the telecom sector, we highlight that there are also underlying tailwinds which can potentially boost revenue growth. Rural telecom penetration continues to languish We observe that telecom penetration in rural areas continues to languish and stood at 39% in Q3FY13. Even this metric may be over‐stated as the telecom penetration level isn’t adjusted for (1) inactive subscribers – current industry active subscriber proportion is 83% of industry subscribers, (2) dual SIM behavior. Adjusting for these effects, we believe that actual rural penetration would be ~29% (assuming rural active subscriber proportion similar to that of overall subscribers and 10% of users on dual SIM phones). This clearly indicates that there is significant scope for rural subscriber base to expand and is seen in the annual net adds in CY 2012. In CY 2012, while net industry subscriber declined by 62mn subscribers owing to tightening of customer acquisition norms, we note that the industry added 24mn rural subscribers during this period; with a majority of the subscribers getting added by incumbents.

Rural telecom penetration remains low Incumbents continue to add rural subs. (yearly adds as of Dec’12)

37% 38% 40% 39%

161% 163% 162%155%

143%

40%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13

Rural Urban

(25)

(20)

(15)

(10)

(5)

‐

5

10

15

20

25

Voda Id

ea

Bharti

Uninor

Aircel

BSNL

HFCL

Tata Tele

Rcom

Others

Rural net adds (mn) Total net adds (mn)


Normal monsoon this year also makes the case for resumption of strong growth As observed from past trends, the telecom sector is affected by seasonality and is also reliant on good monsoons for continuing growth. We highlight that this year, monsoons have been bountiful till now and the India Meteorological Department (IMD), has projected a normal monsoon for this year. This is likely to subside inflation, improve growth and facilitate the telecom sector’s growth prospects.

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A normal monsoon is a potential tailwind for the telecom sector

Source: IMD, PhillipCapital India Research

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Reduced competitive intensity ‐ Industry consolidation We note that new entrants have scaled down operations in several circles and have also closed down operations in some circles. Recent commentary also indicates that some of the bigger new entrants, viz. Aircel and Tata Docomo are also contemplating closing operations in several circles. ~30% of FY14 incremental minutes of incumbents will come from exits Aircel has scaled down its operations in five circles, while Sistema and Uninor have exited several circles. Below we compute the minutes freed up by the exit of these operators.

We estimate freeing up of ~65bn minutes in FY14 due to operator shutdowns Circle Exiting operator Subscribers (mn) Minutes (bn) Expected MOU Comment

AP Sistema 0.6 2.0 268 Exit post Mar'13 auctions Assam Sistema 0.0 0.0 268 Exit post Mar'13 auctions Bihar Sistema 1.2 3.7 268 Exit post Mar'13 auctions Gujarat Aircel 0.7 2.0 250 Operations scale down from Nov'12 Haryana Aircel, Sistema 0.1 0.4 268 Aircel scaled down ops in Nov'12 & Sistema exited post Mar'13 HP Sistema 0.0 0.0 268 Exit post Mar'13 auctions J&K Sistema 0.0 0.0 268 Exit post Mar'13 auctions Karnataka Uninor 0.7 3.3 400 Scale down in Q3FY13 Tamil Nadu Uninor 0.5 2.4 400 Scale down in Q3FY13 Kerala Aircel, Uninor 2.0 9.5 400 Operations scale down from Nov'12 (Aircel) & Uninor in Q3FY13 Kolkata Uninor 1.5 7.0 400 Exit in Jan'13 Maharashtra Sistema 0.6 2.1 268 Exit post Mar'13 auctions MP & CG Aircel, Sistema 0.8 2.7 268 Aircel scaled down ops in Nov'12 & Sistema exited post Mar'13 Mumbai Sistema, Uninor 2.3 7.4 268 Sistema exited post Mar'13 & Uninor in Feb'13 North East Sistema 0.0 0.0 268 Sistema exited post Mar'13 Orissa Sistema, Uninor 0.0 0.0 268 Sistema exited post Mar'13 & Uninor in Q3FY13 Punjab Sistema 0.0 0.0 268 Sistema exited post Mar'13 UP (E) Sistema 0.5 1.7 268 Sistema exited post Mar'13 UP(W) Aircel 2.1 6.6 268 Operations scale down from Nov'12 West Bengal Uninor 3.0 14.3 400 Exit in Jan'13

Total minutes 16.6 65.1 328

Source: Company, Media Reports, PhillipCapital India

We estimate that ~65bn minutes have been freed up annually on account of the exit of these operators. Incumbents already saw benefits of the closure of operations of new entrants in Q4FY13 and we expect that on a year on year basis, incumbents should continue to benefit from the freed up minutes. As outlined in our minutes model, we expect incumbents to add 245bn minutes in FY14 – thus, consolidation activity will result in 27% of minutes addition for incumbents.

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Assessment of circle‐wise market share data indicates that consolidation is meaningful across all circles We analyse subscriber and revenue market share data of all 22 circles and find evidence of meaningful industry consolidation.

Herfindahl–Hirschman Index of subscriber market share and heat‐map (FY08‐13)

HHI movement (subs)* FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Change in

FY13

Delhi 0.440 0.362 0.233 0.205 0.184 0.181 0.183 0.181 0.169 0.160 0.159 0.166 0.007 Mumbai 0.409 0.320 0.220 0.198 0.181 0.181 0.184 0.171 0.155 0.134 0.135 0.144 0.008 Kolkata 0.487 0.475 0.330 0.257 0.222 0.212 0.211 0.073 0.065 0.065 0.066 0.073 0.008 Maharashtra 0.446 0.266 0.224 0.191 0.182 0.179 0.176 0.177 0.171 0.157 0.152 0.157 0.005 Gujarat 0.540 0.268 0.221 0.193 0.205 0.225 0.218 0.212 0.214 0.177 0.172 0.180 0.008 AP 0.385 0.246 0.222 0.182 0.183 0.185 0.191 0.194 0.178 0.163 0.162 0.168 0.006 Karnataka 0.515 0.300 0.206 0.205 0.204 0.229 0.244 0.261 0.202 0.171 0.159 0.175 0.016 TN 0.383 0.267 0.202 0.203 0.194 0.196 0.199 0.208 0.182 0.170 0.167 0.183 0.016 Kerala 0.515 0.297 0.213 0.211 0.215 0.193 0.186 0.193 0.157 0.148 0.157 0.197 0.040 Punjab 0.687 0.346 0.288 0.252 0.219 0.204 0.187 0.175 0.171 0.152 0.154 0.161 0.007 Haryana 0.727 0.301 0.220 0.197 0.175 0.176 0.170 0.173 0.172 0.150 0.151 0.166 0.016 UP(W) 1.000 0.402 0.277 0.223 0.185 0.176 0.176 0.180 0.166 0.150 0.144 0.153 0.009 U.P.(E) 1.000 0.500 0.345 0.285 0.248 0.218 0.203 0.199 0.178 0.158 0.149 0.147 (0.002) Rajasthan 0.503 0.336 0.236 0.214 0.223 0.196 0.196 0.199 0.197 0.180 0.176 0.175 (0.001) MP 0.532 0.304 0.312 0.287 0.272 0.237 0.239 0.233 0.202 0.184 0.187 0.205 0.018 WB 1.000 0.500 0.501 0.288 0.236 0.215 0.208 0.215 0.193 0.165 0.157 0.181 0.024 HP 0.550 0.382 0.427 0.430 0.387 0.314 0.279 0.253 0.204 0.180 0.174 0.203 0.029 Bihar 0.878 0.586 0.518 0.368 0.306 0.299 0.287 0.239 0.173 0.152 0.145 0.175 0.030 Odisha 1.000 0.502 0.503 0.352 0.293 0.251 0.251 0.234 0.168 0.147 0.150 0.178 0.028 Assam 1.000 1.000 0.577 0.515 0.320 0.255 0.255 0.245 0.225 0.205 0.208 0.212 0.004 NE 1.000 1.000 0.552 0.658 0.381 0.273 0.263 0.243 0.239 0.215 0.214 0.221 0.007 J&K 1.000 0.513 0.516 0.457 0.397 0.350 0.272 0.246 0.224 0.239 0.015 PAN INDIA 0.211 0.186 0.168 0.166 0.169 0.167 0.167 0.167 0.154 0.140 0.136 0.145 0.008

Source: TRAI, Company, PhillipCapital India Research

* Heat‐map for subscriber HHI is from FY08‐FY13. Green indicates higher HHI and red the lowest – as shown below

Lowest HighestLowest Highest

As seen in the heat‐map of subscriber market share Herfindahl–Hirschman Index for the telecom industry, competitive intensity has reduced in all but two circles. In several circles the HHI index indicates that the competitive intensity in FY13 is similar to that witnessed in FY10. This trend is also confirmed from the pan‐India HHI which is reverting to FY10 levels. The heat‐map also shows the worst of competitive intensity for the telecom industry was witnessed in FY10 and FY11 and we are now past the peak of competition. In addition, we note that going ahead market concentration is likely to increase, as recent data of industry net additions indicates that incumbents continue to add subscribers while new entrants lose subscribers. Analysis of circle‐level adjusted gross revenue data reported by the TRAI also confirms and corroborates the above findings. Below, we present time‐series data of circle‐wise HHI measured on the share of adjusted gross revenue of various operators.

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Herfindahl–Hirschman Index of gross revenue and heat‐map (FY08‐13) HHI movement + heat map (revenue) FY08 FY09 FY10 FY11 FY12 FY13 Change in FY13

Delhi 0.2383 0.2400 0.2377 0.2291 0.2316 0.2381 6.46 Mumbai 0.2081 0.2089 0.1969 0.1911 0.1819 0.1916 9.72 Kolkata 0.2433 0.2408 0.2369 0.2136 0.2015 0.2018 0.29 Maharashtra 0.1847 0.1929 0.1973 0.1977 0.1957 0.1978 2.13 Gujarat 0.2292 0.2417 0.2522 0.2394 0.2295 0.2337 4.18 AP 0.2061 0.2243 0.2318 0.2286 0.2242 0.2223 (1.95) Karnataka 0.2914 0.3211 0.3196 0.2873 0.2572 0.2625 5.30 TN 0.2118 0.2168 0.2243 0.2153 0.2078 0.2109 3.11 Kerala 0.1790 0.1863 0.1974 0.2003 0.2095 0.2259 16.39 Punjab 0.2087 0.2171 0.2303 0.2193 0.2166 0.2200 3.41 Haryana 0.1806 0.1819 0.1836 0.1822 0.1957 0.2051 9.47 UP(W) 0.1838 0.1908 0.1965 0.1917 0.1845 0.1843 (0.27) U.P.(E) 0.3149 0.3026 0.3104 0.3047 0.2909 0.2817 (9.16) Rajasthan 0.2029 0.2147 0.2279 0.2213 0.2268 0.2263 (0.48) MP 0.2617 0.2798 0.2872 0.2989 0.3166 0.3366 20.09 WB 0.2302 0.2461 0.2491 0.2191 0.2158 0.2128 (3.05) HP 0.3345 0.3098 0.2801 0.2345 0.2278 0.2308 3.04 Bihar 0.3229 0.3285 0.2873 0.2577 0.2394 0.2436 4.22 Odisha 0.2717 0.2890 0.2490 0.2137 0.2033 0.2164 13.09 Assam 0.2591 0.2537 0.2427 0.2232 0.2121 0.2155 3.42 NE 0.2642 0.2734 0.2747 0.2499 0.2418 0.2514 9.67 J&K 0.4427 0.4521 0.3213 0.2883 0.2567 0.2496 (7.12) PAN INDIA 0.1854 0.1957 0.1974 0.1891 0.1835 0.1883 4.86


* Heat‐map for subscriber HHI is from FY08‐FY13. Green indicates higher HHI and red the lowest – as shown below

Lowest HighestLowest Highest

As seen in the heat‐map of subscriber market share Herfindahl–Hirschman Index for the telecom industry, competitive intensity has reduced in all but two circles. In several circles the HHI index indicates that the competitive intensity in FY13 is similar to that witnessed in FY10. This trend is also confirmed from the pan‐India HHI which is reverting to FY10 levels. The heat‐map also shows the worst of competitive intensity for the telecom industry was witnessed in FY11 and FY12 and we are now past the peak of competition. In addition, we note that going ahead market concentration is likely to increase, as recent data of industry net additions indicates that incumbents continue to add subscribers while new entrants lose subscribers.

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The return of pricing power Our channel checks indicate that pricing power is clearly returning back to the sector. Analyzing the current tariff structure and the realisations per minute for the telecom operators we have noted that the operators offer steep discount to woo customers and increase usage. We believe that RPM can rise much faster than the market expectations on account of industry consolidation. Gauging the industry‐wide impact of minutes discounting Voice spending Industry

MOU 321O/w: Outgoing mins. 166VLR 77.1GSM prepaid ARPU (Rs) 81.0Adjusted ARPU (Rs) 105.1MOU adjusted 416 O/w: Outgoing mins. (adj.) 215 Local calls ‐ on‐net 85 % of outgoing calls 40%Local calls ‐ off‐net 85 % of outgoing calls 40%Local calls ‐ to landlines 4 % of outgoing calls 2%STD calls ‐ Mobile 40 % of outgoing calls 19%STD calls ‐ Landline 1 % of outgoing calls 1% Spending @ rack rate Calls to mobiles 1.2p/s 158.8 Calls to landlines 1.5p/s 3.8 Voice spend @ rack rate 162.6 Termination rate of 20p/min on incoming mins. 45.2 Total income from voice 207.8Voice RPM (assuming 5% channel commission) 0.475 Add: Non voice spend (assumed as 10% of revenue) 24.0 Roaming spend (assumed as 5% of rack spends) 8.1 Telecom spend incl. non‐voice revenue 239.9 RPM (assuming 5% channel commission) 0.549 Current industry RPM – prepaid (ex‐interconnect) 0.252 Current industry RPM – prepaid (adjusted for interconnect) 0.342Reduction in RPM due to STV's 38%Consumer spend (incl. service tax) 269.5 Non voice spend (% of revenue) 10.0%


According to our channel we have noted that there have been already 3 rounds price hikes and Q1FY14 results are likely to surprise on the realized minutes growth. The first one was undertaken in Jan 2013, followed by one in March 2013 and then a tariff hike as recent as May 2013. We have studied the changes in tariffs in various circles and have noted that tariffs have moved by a significantly over the last 6 months.

Discounted has resulted in realised rates being 38% lower than potential at headline tariffs

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The industry has seen three rounds of tariff hikes, in Jan 2013, March 2013 and another one as recent as May 2013. Below, we summarise the best tariffs of popular STV’s for the incumbents. While the headline tariffs have remained unchanged but discounting is reducing at a significant pace in the industry. Discounting is a widespread phenomenon in the Indian Telecom Industry. The discounting of tariffs occurs by “Special Tariffs Vouchers” or by “First Recharge Vouchers” which allow subscribers to access discounted tariff plans as compared to the headline tariff plans. Special Tariff Vouchers are also commonly known as “Rate Cutters” in the market place. Rate cutters fall under the purview of usage and retention domain for Telecom operators while First Recharge Vouchers (FRC) are part of acquisition schemes. We believe that the industry will start seeing the impact of these changes from Q1FY14. While there has been a varied increase in publicly available rate cutters, we note that information on customized personal offers is difficult to ascertain. Thus the positive RPM impact of the three rounds of rate cutter tariff changes is difficult to quantify.

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Rate Cutters – waning discounting Rate cutters help the subscribers in availing discounted tariff rates as compared to the headline tariffs. The Rate cutters also aid the Telecom operators in increasing usage and retaining subscribers but the sharp discount in the reported RPM versus the implied RPM (on rack rate basis) is on account of rate cutters and First Recharge vouchers.

There are three components to a Rate Cutter: • Price of the Rate cutter • Validity of the Rate cutter • Base tariff plan of the Rate cutter We have noted that all the three components have been changed recently which could result in an increase in Revenue per Minute for the telecom operators. As indicated earlier there have been three rounds of changes for rate cutters which have led to hike in base tariffs, reduction in validity and increase in price of the voucher.

Snapshot of rate hikes undertaken by Bharti Airtel Bharti Airtel rate hikes RATE HIKE 1 RATE HIKE 2 RATE HIKE 3

AP Circle ‐ (#1; RMS 41.3%) Rate in Dec 2012 (pre‐rate hike)

Rate in Jan 2013 (after rate hike during the month)

Rate in March 2013 (after rate hike during the month)

Rate in June 2013 (after May 2013 rate hike)

Minutes/seconds packs Rs 199 voucher gives 40000 Local secs; validity 30 days

Rs 199 voucher now gives 40000 Local secs; validity 28 days



STD rate‐cutter Rs. 18 STV ‐ mobile STD calls @ Rs. 0.25/min (First 2 min will be charged @ Rs. 0.02/sec) ‐ validity 60 day(s)

Rs. 18 STV ‐ mobile STD calls @ Rs. 0.25/min (First 2 min will be charged @ Rs. 0.02/sec) ‐ validity 8 weeks



Rate‐cutter (local/STD) Rs 35 STV giving call rates of 1p/2sec. 30 day validity

Rs 35 STV giving call rates of 1.2p/2sec. 28 day validity

Rs 53 STV giving call rates of 1.2p/2sec. Landlines at 2.5p/s. 28 day validity

Rs 67 STV now gives local calls at 1.2p/2s and STD at 1.4p/2s ( first 2mins of the day at 1.5p/s ). Landlines at 2.5p/s. Validity 28 days

UP(W) Circle ‐ (#3; RMS 18.8%)

Rate in Dec 2012 Rate in Jan 2013 (after rate hike during the month)



Minutes/seconds packs Rs28 STV giving 60 free local mins valid for 15 days

Rs28 STV giving 60 free local mins valid for 10 days

Rs28 STV giving 55 free local mins valid for 4 days

Rs28 STV giving 50 local mins valid for 4 days

STD rate‐cutter Rs 6 STV giving all STD calls at Rs0.25min; valid for 30 days

Rs 12 STV giving all STD calls at Rs0.30/min; valid for 30 days

Rs 12 STV giving all STD calls at Rs0.35/min; valid for 28 days

Rs 12 STV giving all STD calls at Rs1/3min; valid for 28 days

Rate‐cutter (local/STD) Rs33 STV ‐ local mobile calls @ Rs. 0.30/min, 10 mins free to local minutes each day; validity 28 days

Rs33 STV ‐ gives local mobile calls @ Rs. 0.30/min; Validity 28 days (not additional free minutes)

Rs 33 STV ‐ all local mobile calls @ Rs 30p/m (between 10 Pm to 5 Pm) & (5 Pm To 10 Pm) @1.2p/sec

Rs 33 STV ‐ all local mobile calls @ Rs 30p/m (between 10 Pm to 5 Pm) & (5 Pm To 10 Pm) @1.5p/sec

Note: The portion in red indicates affected tariff

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Snapshot of rate hikes undertaken by Idea Cellular Idea Cellular RATE HIKE 1 RATE HIKE 2 RATE HIKE 3

Maharashtra Circle ‐ (#1; RMS 34.1%)

Rate in Dec 2012 (pre‐rate hike)




Minutes/seconds packs Rs44 STV giving 12,000 local on‐net seconds free; validity 15 days

Rs44 STV giving 12,000 local on‐net seconds free; validity 7 days



STD rate‐cutter Rs29 STV giving STD calls at Rs 0.35/min validity 45 days

Rs29 STV giving STD calls at Rs 0.35/min with the first 60 secs daily at @ Rs 2p/s; validity 45 days

Rs29 STV giving STD calls at Rs 0.35/min with the first 60 secs daily at @ Rs 2p/s; validity 30 days

Rs29 STV giving STD calls to mobiles at Rs 0.35/min with the first 60 secs daily at @ Rs 2p/s; validity 30 days

Rate‐cutter (local/STD) STV of Rs72, local calls at 1.2p/2s; validity 90 days

STV of Rs72, local calls at 1.2p/2s; validity 60 days



Bihar Circle ‐ (#3; RMS 10.0%) Rate in Dec 2012 Rate in Jan 2013 (after rate hike during the month)



Minutes/seconds packs Rs 10 STV giving 20 free local and STD mins; validity 10 days

Rs 10 STV giving 20 free local and STD mins; validity 3 days



STD rate‐cutter Rs17 STV giving STD calls at Rs 0.3/min; validity 30 days

Rs17 STV giving STD calls at Rs 0.35/min; validity 30 days

Rs17 STV giving STD calls at Rs 0.4/min; validity 30 days

Rs17 STV giving STD mobile calls at Rs 0.4/min; validity 30 days

Rate‐cutter (local/STD) Rs17 STV giving local calls at Rs 0.4/min (first 60 secs will be charged at 1.2p/s); validity 60 days

Rs17 STV giving local calls at Rs 0.4/min (first 60 secs will be charged at 1.2p/s); validity 56 days




Snapshot of rate hikes undertaken by Vodafone India Vodafone RATE HIKE 1 RATE HIKE 2 RATE HIKE 3

Gujarat Circle ‐ (#1; RMS 47.0%)

Rate in Dec 2012 (pre‐rate hike)




Minutes/seconds packs Minutes pack of Rs250 gave 650 free local and STD mins over 30 days

Minutes pack of Rs250 gave 600 free local and STD mins over 30 days

Minutes pack of Rs255 gives 600 free local and STD mins over 30 days

Minutes pack of Rs255 gives 500 free local and STD mins over 30 days

STD rate‐cutter STV Rs31, STD calls @ Rs0.30/min; validity 30 days

STV Rs31, STD calls @ Rs0.30/min; validity 30 days

STV Rs31, mobile STD calls @ Rs0.30/min; validity 30 days

STV Rs31, mobile STD calls @ Rs0.35/min; validity 30 days

Rate‐cutter (local/STD) STV Rs39, giving local mobile calls @ Rs 0.3/min (First min charged @ Rs0.60/day); validity 30 days,

STV Rs39, giving local mobile calls @ Rs 0.3/min (First min charged @ Rs0.65/day); validity 30 days,

STV Rs39, giving local mobile calls @ Rs 0.3/min (First min charged @ Rs0.70/day); validity 30 days,

STV Rs39, giving local mobile calls @ Rs 0.4/min; validity 30 days

MP Circle ‐ (#6; RMS 10.0%)

Rate in Dec 2012 Rate in Jan 2013 (after rate

hike during the month) Rate in March 2013 (after rate hike during the month)


Minutes/seconds packs STV Rs119 gives 850 Local on‐net mins ; validity 30 days

STV Rs119 gives 850 Local on‐net mins ; validity 28 days



STD rate‐cutter STV of Rs 23, STD calls @ Rs0.30/min; validity 45 days

STV of Rs 23, STD calls @ Rs0.30/min; validity 30 days



Rate‐cutter (local/STD) STV of Rs31, local on‐net calls at Rs 0.1/min; validity 45 days, local calls to Vodafone no. @ Rs0.10/min

STV of Rs31, local on‐net calls at Rs 0.1/min; validity 30 days, local calls to Vodafone no. @ Rs0.10/min





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First Recharge Coupons – reduction in benefits First Recharge Coupons are plan vouchers which allow a consumer to avail a discounted tariff on purchase of a new SIM card. These vouchers are applicable only for new customers and they too have seen a reduction in benefits in Q4FY13. Generally, these vouchers are sold along with SIM cards for consumers to enroll to an attractive tariff plan. After rationalizing the process of customer acquisition, in keeping with the November 2012 guidelines of the DoT and reduction of retailer commissions, the telecom industry also reduced the benefits available on first recharge coupons. We note that this change has been made on a pan‐India basis and to better understand the same, below we highlight the case study of operators in Gujarat

Changes in First Recharge Coupons – Gujarat FRC ______________ Vodafone ______________ _______________ Idea _______________ _______________ Airtel _______________ Earlier Now Earlier Now Earlier Now

13 Local mob @ 30p/min and STD mob at 35p/min for 30 days; talktime (TT) Rs 0

Local mob @ 35p/min and STD mob at 40p/min for 30 days; TT Rs 0

All mob calls @ 30p/min for 30 days; TT Rs 10

Loc I2I ‐ 30 p/min ; Loc I2O Mob ‐ 40p/min & STD @ 35ps/min for 30 Days; TT Rs 10

TT 9; Loc mob @ 1.2p/2sec for 30 days

TT9, On‐net Loc mob @ 1.2p/2sec; Off‐net Loc mob @ 1.5p/2sec for 30 days

196‐203 FR 203: Talktime (TT) Rs 0, 600 Local mobile minutes for 30 days

FR 203: TT Rs 0, 515 Local mobile minutes for 30 days

FR 196: TT Rs 10, 600 Local mobile minutes for 30 days; Loc on‐net @ 30 p/min; Loc off‐net Mob @ ‐ 35p/min & STD Mob @ 35ps/mins.

FR 203: TT Rs 0, 500 Local mobile minutes for 30 days; Loc on‐net @ 30 p/min; Loc off‐net Mob @ ‐ 40p/min & STD Mob @ 35ps/mins.

FR 199: TT 9; 600 Local mobile minutes for 30 days

FR 199: TT 9; 450 Local mobile minutes for 30 days


We note that there have been changes in the several legs of the customer acquisition tariffs • For normal acquisition, i.e. in the plan vouchers without the FRC, the tariff is now

1.5p/s instead of 1.2p/s earlier. • In FRC’s too, several tariffs have changed

o Floor rates of FRC’s have increased across operators. o Benefits in various schemes, such as STD benefits, local call benefits and per

second pricing too have been reduced. These changes are summarized in the below table, where we summarise our FRC & acquisition tariff comparison.

Changes in plans – Case study: Gujarat Earlier Now Comment

Normal acquisition 1.2p/s 1.5p/s Without FRC, plan vouchers provide this call rate Minimum scheme value for 30p/min FRC Rs 14‐30 Rs 27‐48 Dominant operator (Vodafone) has the highest rate Local call rates (minutes scheme) 20p/min & 30p/min 30p/min & 40p/min STD call rate (minutes scheme) 30p/min & 35p/min 30p/min, 35p/min & 40p/min Rates for 30p/min schemes increased & for same FRC Value

35p/min or 40p/min scheme available Per second pricing 1.2p/s 1.2p/s, 1.5p/s & 1.6p/s Off‐net rates typically higher at 1.5p/s & 1.6p/s


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Rate increases rather public and also taken by new entrants While we have discussed the rate increases taken by incumbents in the earlier sections, we note that the trend isn’t limited to incumbents. Reliance Communciations has been vocal about tariff increases and the below is a timeline for tariff hikes that were publicly announced by the company. • 21st September 2012: 25% tariff increase from 1.2p/s to 1.5p/s – RCom mentioned

in media reports that the rate increase was for both the CDMA and GSM platforms and the same was implemented in four states including Bihar, MP, Gujarat & HP first (in September 2012) and then rolled out on a pan‐India basis by the end of October 2012.

RCom – 25% tariff increase from 1.2p/s – 1.5p/s mentioned in Q2FY13 results release


During the Q2FY13 results conference call, RCom had highlighted that the 1.2p/s to 1.5p/s price increase would be effected on its user base by mid‐Feb 2013, and had also guided for atleast 2‐3 tariff increases in the next 12‐18 months. The company also commented in subsequent quarters that the trend of price increases is ‘less likely to be derailed by smaller players by creating skirmishes on the street (Q3FY13 concall).’ • 6th May 2013: 20% further tariff increase – RCom announced 20‐30% increase in

tariffs of all commitment plans while cutting promotional and concessional offers by as much as 65%. The company added that there has been no fall in consumer demand in the previous tariff increase. Below are excerpts from the press release.

RCom – 20% further tariff increase

Base tariff hiked to 1.5p/s even by RCom. The company has also reduced benefits on promotional and concessional offers

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Even other new entrants such as Tata Teleserives too have mentioned that price hikes are likely. Tata Teleservices Maharashtra Limited (TTML) in its annual investor deck presented that they believe that voice RPM increase will occur from strengthening of tariffs and the same has already started happening in leading players. Below, we highlight the company’s observations. Tata Teleservices’ observations on tariff increases – March 2013


Additionally, even Aircel in a recent media interview commented that it is looking to increase voice rate per minute by 12% over the next one‐year.

Even Aircel and Tata Teleservices have made their intentions clear about increasing rates…and have also followed incumbents in tariff increases

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Data now at a critical mass – rapid growth to continue

Industry estimates for data services We estimate that the industry’s 3G subscribers will be ~96mn by FY15 from ~28mn in FY13. The sharp growth in 3G subscriber base will be driven by affordable 3G handsets and smartphones, decline in 3G tariffs and increase in consumer awareness.

Forecast of 3G subscribers 3G subscribers (mn) FY13 FY14E FY15E Bharti Airtel 6.4 14.3 30.0 Idea Cellular 5.1 11.1 15.2 Vodafone India 3.3 6.9 13.2 Reliance Communications 7.2 13.0 22.0 Aircel 1.0 1.8 2.9 Tata Teleservices 2.0 3.6 5.4 BSNL/MTNL 3.0 5.4 7.6 Total subscribers 28.0 56.1 96.3


The contribution of 3G revenues will increase significantly over the next 5 years and we expect Bharti with most 3G circles will be the market leader in the space. Bharti will also benefit from 4G revenue growth as the company has spectrum in 2.3GHz in 8 circles. ADD industry data revenue growth estimates 3G rev. as a % of total revenue FY13 FY14E FY15E FY16E FY17E FY18E

Bharti Airtel 1.2% 2.6% 5.9% 9.0% 12.7% 15.5%

Idea Cellular 1.9% 3.0% 5.2% 7.7% 9.1% 10.7%

Vodafone 0.8% 1.5% 3.3% 5.9% 8.4% 11.6%

Others 2.4% 3.9% 5.5% 6.9% 9.7% 14.2%

3G revenue as % of total revenue ‐ RHS 1.6% 2.6% 5.9% 9.0% 12.7% 15.5%


3G revenue growth will be very sharp for the industry and we believe FY15 will the year of data and 3G services. 3G revenue growth 3G revenue (Rs mn) FY13 FY14E FY15E FY16E FY17E FY18E

Bharti Airtel 5,258 12,472 31,887 52,800 82,500 110,250

Idea Cellular 4,224 7,775 15,808 26,468 34,898 45,047

Vodafone 2,888 6,381 15,567 31,277 49,487 76,654

Others 12,034 21,662 34,700 51,092 83,652 143,853

3G revenue ‐ Sector (Rs bn) 24.4 48.0 93.9 155.0 240.2 360.3

YoY (%) 97% 96% 65% 55% 50%


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3G economics Increasing data business will improve sector profitability The Increasing data revenue contribution (in particular 3G revenue) is also margin accretive as revealed by a brief comparison of business margins for 2G and 3G. We note that the key to higher 3G/data business margins is the fact that bulk of the 3G revenue is incremental in nature. Network opex of 3G sites are much lower than those needed for the 2G business, as 3G deployments are largely based on co‐located Node‐B’s which do not even attract incremental tenancy – hence network costs for 3G only include active electronics maintenance charges (which might even be volume/revenue‐linked) and incremental power charges. The sales, distribution and advertising expenses too are much lower for 3G, given that most of the new 3G subscribers are largely existing 2G subscribers who possess smartphones and uptrade. Advertising expenses for 3G are however higher given the need of telcos to educate consumers on the benefits for 3G and various applications.

Data business economics favourable % of revenue 2G 3G/Data Comments

Roaming & Access charges 16‐18% ‐ Access charges for 3G applicable only on 3G ICR circles. Network and operating charges 20‐25% 10‐15% Network costs far lower for 3G as most Node B's are co‐located with 2G BTS' Sales, distribution & advertising expenses 5‐10% 4‐7% Incremental SG&A for 3G is purely linked to advertising/product placement Personnel expenses 4‐6% 4‐6% License fees and Spectrum 10‐12% 10‐12% Total operating expenses 55‐70% 28‐40% EBIDTA 30‐45% 60‐72% Depreciation 10‐15% 10‐15% EBIT operating profit 20‐30% 45‐60%


Illustration Of The Costs And Benefits – Direct And Indirect – Associated With The Provision Of 3G Services

Service Launch

Incremental 3G capex+opexSpectrumLessening total capex +opex (courtesy of efficiency gains)

Initial coverage

Incremental 3G revenues

Cash flow

Source: Company reports; PhillipCapital India Research

We estimate that the telecom industry’s data revenue grew at 9% compounded quarterly growth rate (CQGR) in FY13 to Rs 30bn. This was driven by rapid proliferation of internet applications and user awareness campaigns by telcos.

We are here

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Data revenue (Rs bn) grew at 9% CQGR in FY13 Data revenue (Rs bn) growth to continue in FY13‐15

22.1 23.3 25.4

27.6 30.3

5%

9%

9%10%

0%

2%

4%

6%

8%

10%

12%

‐

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Data revenue ‐ Sector QoQ (%) ‐ RHS

106.6

155.8

230.7

46%

48%

45%

46%

46%

47%

47%

48%

48%

49%

‐

50.0

100.0

150.0

200.0

250.0

FY13 FY14E FY15E

Data revenue ‐ Sector QoQ (%) ‐ RHS

Source: TRAI, Company, PhillipCapital India Research Estimates Source: TRAI, Company, PhillipCapital India Research Estimates

Global comps reveal significant headroom for data revenue growth We believe that data proliferation is at its infancy in India and expect rapid data revenue growth from FY13‐15. Globally, we find that the contribution of data revenues to telecom revenue, even in developing markets such as Brazil and China, are substantially higher than that in India, indicating that there is ample headroom for growth. India lags behind in contribution of data to wireless revenue


Expect data contribution to increase from 7% in FY13 to 12% in FY15 We believe that the key factors underpinning data revenue growth are in place and the contribution of data revenue to overall wireless revenue can grow at a fast clip. Already in FY13, we estimate that the contribution of data to wireless revenue in the telecom sector has increased from 6% to 8%. We estimate that this to increase to ~12% in FY15 – a conservative estimate in the context of the data revenue contribution in developing market peers.

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Data revenue contribution grew rapidly FY13 …and is set to continue from FY13‐15

6.0% 6.3%6.8%

7.1%7.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%


7.0%

9.1%

11.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY13 FY14E FY15E

Source: TRAI, Company, PhillipCapital India Research Estimates Source: TRAI, Company, PhillipCapital India Research Estimates

…led by rapid 3G revenue growth The key driver of data revenue growth in our view is going to be 3G. Already in FY13, the sector’s 3G revenue grew at a fast clip (> 20% CQGR) and now stands at ~Rs 8bn/quarter. We expect the sector’s 3G revenue to grow at ~100% CAGR from FY13‐15 led by increased proliferation of affordable smart devices and aggressive promotions by operators.

3G revenue (Rs bn) has grown at a fast clip and we expect the same to continue from FY13‐15

4.1 5.0 6.3

7.9

21%

26%

25%

0%

5%

10%

15%

20%

25%

30%

‐1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Q4FY12 Q1FY13 Q2FY13 Q3FY13

3G revenue ‐ Sector (Rs bn) QoQ (%) ‐ RHS

23.2

47.1

94.3

1.5%

2.7%

4.9%

0%

1%

2%

3%

4%

5%

6%

‐

20.0

40.0

60.0

80.0

100.0

FY13 FY14E FY15E

3G revenue ‐ Sector (Rs bn)

3G revenue as % of total revenue ‐ RHS

Source: Company, PhillipCapital India Research Estimates Source: TRAI, Company, PhillipCapital India Research Estimates

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Aggressive push for data usage by several industry participants Operators are aggressively pushing data plans and 3G As highlighted earlier, our lofty expectations of 3G and data revenue growth are predicated on operators’ aggressively pushing data plans and improvements in the overall Smartphone ecosystem. Following are snapshots of a few of company advertisements observed recently: Vodafone India Internet advertisement


Not just incumbents, but even new entrants are doing their bit to promote data usage. The below advertisement of Aircel gives free 3G in the mornings to existing and new consumers Aircel 3G promotional advertisement

Source: Company, Media reports, PhillipCapital India Research

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Tata Docomo’s advertisement in Karnataka circle offering 1GB for Rs 250. We found this hoarding while travelling in Karnataka. Tata Docomo 3G advertisement


Data promotions are also visible in points of presence at the retail level. We observed the below data offers by Idea Cellular and Tata Docomo in Maharashtra and Gujarat

Idea and Tata Docomo data walls – Retail point of presence


Airtel – data offers advertised at a store in Karnataka; offering 200MB of data for Rs 25, valid for 7 days.

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Airtel Karnataka – Data offer


…with the focus on applications In addition, we find that, in addition to advertising data packs, companies are encouraging customers to use various data applications, viz. Facebook, videos on demand etc. Below is Idea Cellular’s free Facebook messenger access offer. Idea is providing free access to Facebook messenger to its prepaid users allowing a data download of upto 200MB and the offer is valid for 3 months. We believe that such trial packs can encourage sampling among consumers, eventually leading to increase in regular data users for telcos. Idea Cellular – Facebook offer


Below is Airtel’s Facebook pack for Rs 31, which gives Facebook usage of 150MB, free data of 50MB and is valid for 15 days. The company has also introduced daily variants of this pack, which cost Rs 3‐4 while offering 40MB/day of Facebook browsing in AP, Delhi, Maharashtra, UP(E) and UP(W).

32 of 84


Bharti Airtel – Facebook offer


Below is Bharti Airtel’s out of home media advertisement for on demand video downloads. The company aims to simplify internet video downloads by getting consumers to call on a phone number, while charging Rs 1/video. We believe that such advertisements can encourage data usage as most users aren’t aware of the value proposition of data – for instance, a user browsing 1 hour of youtube might end up consuming far more than one who browses news/emails/facebook/twitter for a similar time. We believe that such ad campaigns encourage users to use data without fearing exhorbitant usage rates while clearly defining the price for a specific benefit, i.e. one video for one rupee. Bharti Airtel – Videos on demand for Rs 1


33 of 84


Data usage monitoring has been simplified In addition, companies are also making it easy for users to monitor their data usage and contain bill shock. Users are educated of options to ‘top up’ their existing data commitment plans, when they near the limit so that they are saved from ‘bill‐shocks’ which could arise if usage is continued at pay as you go rates. Note that pay as you go 3G rates, even after the rate cut are 1‐3p/10KB (i.e. Rs 1‐3/MB), while commitment plans offer rates as low as 20‐30p/MB.

Data use can be gauged by sending a simple text Users notified when they near their their data quota


34 of 84


Additionally, telcos have also provided tools for choosing data packs We also note that telcos have created data usage calculators helping consumers decide their data packages based on their estimated usage. Below are snapshots of the same Idea Cellular – Data usage calculator

Vodafone India – Data usage calculator


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And have entered into tie‐ups for internet proliferation Below is Bharti Airtel and Google have partnered to provide free internet access to Airtel’s consumers. Through this arrangement, even Airtel users who currently don’t consume data, can (1) search on Google and browse the internet for free, (2) send and read emails on Gmail for free, and (3) connect with the contacts on Google Plus. The data limit for free usage per customer is 1GB/month. Bharti Airtel – tieup with Google providing free internet access


36 of 84


Quality 3G smartphones available at US$ 100 spot Telcos have time and again highlighted that the sweet spot for handset offtake appears to be the sub US$ 100 price point. We note that there are several handset companies that have jumped in the fray, which aggressively target the first time smartphone user. Smartphones are being aggressively pushed by (1) Indian and MNC Smartphone manufacturers, (2) telcos, on their own and through reverse bundling offerings, (3) retail stores

I Ball – Kareena Kapoor (leading Indian actor) advertisement Micromax – Smartphone advertisemen

Indian vendors such as Karbonn, Micromax, iball etc, are aggressively pushing budget and mid‐end smartphones.

Byond – Bipasha Basu (leading Indian actor) Intex smartphones endorsed by Farhan Akhtar smartphone endorsement (Renowned Indian Film maker and actor)

Additionally, even global handset makers such as Apple, Samsung etc, have come out with innovative pricing models allowing consumers to possess handsets through equated monthly installments and give good value on exchange of old handsets. Players like Sony are banking on celebrity endorsements to promote their smartphones.

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Sony Smartphones endorsed by Kartina Kaif Airtel data bundling offer Apple iPhone (leading Indian actor)

EMI ads – Samsung Cash back advertisement – Apple iPhone

Reverse bundling of data offers – Airtel, Vodafone and Idea Cellular. Idea also promotes its smartphones through celebs.

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Data bundling – Karbonn mobile with Airtel mobiles

Vodafone – Samsung S4 All in one plan Idea branded smartphones endorsed by Mahesh Babu (leading Telugu cinema actor)


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Offer by The Mobile Store (a mobile retailer) Smartphone offers by Indiatimes Shopping on Samsung mobiles (an online & teleshopping venture)

Smartphone offers by Spice Hotspot (a mobile retailer)


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Relative valuation

PEER VALUATION

Country MCap

(US$ bn) EV/EBITDA EBITDA growth (%) _____ROE (%)_____ _____P/E (x) _____ __EPS growth (%)__ FY14E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E

AIS Thailand 28.2 11.2 15% 14% 92% 100% 22.4 19.1 17% 16%Axiata Group Malaysia 18.1 7.8 7% 6% 14% 15% 20.8 19.0 10% 9%China Mobile China 212.3 3.6 2% 3% 15% 14% 13.0 13.5 ‐4% 0%China Tel China 38.9 3.0 8% 8% 8% 8% 16.6 13.7 20% 19%China Unicom China 33.1 3.5 11% 10% 7% 8% 23.5 17.2 37% 30%Globe Malaysia 5.0 6.9 7% 7% 27% 30% 20.8 17.7 21% 16%Maxis Behrad Malaysia 16.3 12.5 3% 3% 40% 46% 24.1 22.6 6% 4%Orascom Telecom Egypt 3.3 3.0 3% ‐2% 13% 17% 7.6 4.5 64% ‐58%PLDT Malaysia 14.4 8.1 5% 2% 26% 27% 16.2 15.3 6% 5%PT Telkom Indonesia 22.6 5.3 7% 6% 25% 25% 15.1 13.8 9% 9%DTAC Thailand 9.0 8.3 18% 17% 42% 50% 22.3 18.4 21% 25%Telecom Egypt Egypt 3.3 4.5 ‐3% ‐3% 8% 8% 9.4 9.5 ‐1% ‐1%Telekom Malaysia Malaysia 5.9 6.3 5% 4% 12% 13% 22.3 22.0 2% 9%True Corp Thailand 3.9 9.8 11% 6% ‐79% 83% NM NM NM NMTurkcell Turkey 13.0 5.6 8% 5% 17% 17% 11.2 10.6 8% ‐1%XL Axiata Indonesia 3.9 5.0 10% 8% 17% 18% 16.0 13.5 16% 21%Average of comparable peers 6.8 7% 6% 45% 55% 17.7 15.7 15% 7%India Bharti India 21.3 6.1 16% 13% 7% 11% 30.4 16.9 86% 80%IDEA India 8.4 7.3 30% 22% 12% 15% 25.2 17.3 96% 46%RCOM India 5.0 6.3 36% 2% 6% 7% 15.7 12.5 195% 26%

Source: Company, Bloomberg, PhillipCapital India Research Estimates

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Companies Section

– 42 of 84 –

Idea Cellular Limited Nimble and astute

TELECOM: Company Update 19 July 2013

PhillipCapital (India) Pvt. Ltd.

With an earnings and EBIDTA CAGR of 69% and 26% respectively over FY13‐15E, Idea Cellular will be the biggest beneficiary of the improving trends in the Indian telecom sector. Idea Cellular will see a significant improvement in EBIDTA margins and capital efficiency which will translate to a further re‐rating of the stock. Increase in sector FDI limit to 100% will also help the sustenance of valuations at elevated levels as Idea Cellular will continued to be viewed as an acquisition candidate. We upgrade our target price to Rs 190 (based on DCF methodology) and rate Idea Cellular as our top sector pick. Our key reasons are as follows: Revenue and minutes market share gains to continue in FY14E and FY15E: Idea Cellular has consistently gained market in the last 5 years and we expect the gains trend to continue in FY14E and FY15E on account of market consolidation and Idea’s strong execution in both the new circles and established circles. Idea Cellular will continue to remain the fastest growing incumbent operators. We believe Idea will register strong market share gains in new circles. We expect Idea Cellular grow minutes at 11% YoY in FY14E to 593bn minutes and 10% in FY15E to 652bn. Our minutes growth estimates are not aggressive considering the industry is consolidating and the incumbents are likely to grow at a significantly improved pace. Sharpest EBIDTA margin expansion in the last 9 years in FY14E: Building for an RPM improvement of 10.6% and voice RPM improvement of 5.2% over FY13‐15E, we estimate an EBIDTA margin expansion of 320bps for Idea Cellular in FY14E and a further 150bps expansion in FY15E. The margin expansion will be led by strong revenue growth of 16.6% YoY in FY14E and 15.8% YoY in FY15E while the total costs will grow at a much lower pace on account of cost savings in subscriber acquisition expenses driven by lower churn. Data services margin accretion will be significant: Data services pick up has lagged expectations but we believe that the signs for pick up in data services are now strong and sharp growth of 93% CAGR in 3G data services over FY13‐15E. We model for 3G data services from Rs 4.2bn in FY13 to Rs 15.8bn in FY15E. We expect a margin accretion of 60bps and 160bps in FY14E and FY15E respectively as compared to a negative contribution of 120bps (estimated contribution) in FY13. Valuation, Revision of estimates; Upgrade target price: We have revised our estimates upwards based on revision of Revenue Per Minute. Idea Cellular currently trades at 7.1x and 5.5x on EV/EBIDTA on FY14E and FY15E EBIDTA respectively. We value the company on DCF based methodology at Rs 190 which implies an EV/EBIDTA of 7.1x (ex‐spectrum debt) on FY15E EBIDTA and an upside of 26% from the current levels. We have a conviction Buy rating on the stock.

Buy IDEA IN | CMP RS 151

TARGET RS 190 (+27%) Company Data

O/S SHARES (MN) : 3316MARKET CAP (RSBN) : 501MARKET CAP (USDBN) : 8.452 ‐ WK HI/LO (RS) : 164 / 72LIQUIDITY 3M (USDMN) : 12.1FACE VALUE (RS) : 10

Share Holding Pattern, %

PROMOTERS : 45.9FII / NRI : 46.3FI / MF : 5.7NON PROMOTER CORP. HOLDINGS : 0.5PUBLIC & OTHERS : 1.7

Price Performance, % 1mth 3mth 1yr

ABS 6.7 35.5 80.3REL TO BSE 2.0 29.7 63.1

Price Vs. Sensex (Rebased values)

0

50

100

150

200

250

Apr‐10 Feb‐11 Dec‐11 Oct‐12

Idea BSE Sensex

Source: Bloomberg, Phillip Capital Research

Other Key Ratios

FY13 FY14E FY15E

Net Sales 224,578 261,955 303,453EBITDA 60,046 78,349 95,294Net Profit 10,110 19,849 28,912EPS, Rs 3.1 6.0 8.7PER, X 49.4 25.2 17.3EV/EBIDTA, % 9.6 7.1 5.5EV/Net Sales, x 3.5 3.1 2.6ROE, % 7.0 12.2 15.2Debt/Equity, % 81.9 70.7 57.8Source: Phillip Capital India Research Naveen Kulkarni, CFA, FRM (+9122 6667 9947) [email protected] Vivekanand Subbaraman (+9122 6667 9766) [email protected]

– 43 of 84 –

19 July 2013 / INDIA EQUITY RESEARCH / IDEA CELLULAR COMPANY UPDATE

Focus charts‐ The story in pictures Sharp improvement in operating metrics…

33%

16%

26%

13%

32% 31%

49%

41%

‐17% ‐13% ‐43% ‐7%

61% 6%

‐10%

0%

10%

20%

30%

40%

50%


Incremental EBITDA/Incremental revenue Relative to market*

Idea to continue market outperformance as incremental EBITDA is at higher margins... …led by RPM improvements (Rs)

0.82

6

0.69

8

0.57

1

0.46

6

0.36

7

0.36

6

0.35

0

0.36

1

0.36

8

0.37

0

0.37

2

0.37

4

‐

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1.000

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14EFY15EFY16EFY17EFY18E

Blended RPM Voice RPM

Source: Company, Bloomberg, PhillipCapital India Research Source: Company, PhillipCapital India Research

* ‐ implies the stock price performance of Idea Cellular’s relative to the BSE SENSEX

0.50

9

0.31

9

0.26

1

0.16

1

0.14

0

0.10

5

0.11

2

0.11

3

0.13

2

0.14

6

0.16

1

0.17

2

0.18

1

-

0.100

0.200

0.300

0.400

0.500

0.600 EBITDA/min (Rs/min) set to improve...

0.31

9

0.16

0 0.19

5

0.06

3

0.08

7

0.03

2

0.14

4

0.11

6

0.30

0

0.28

7 0.34

0

0.32

2

0.33

1

-

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

...as incremental EBITDA/incremental min (Rs/min) ratio picks up

Source: Company, PhillipCapital India Research Source: Company, PhillipCapital India Research

– 44 of 84 –


…leading to improvement in return ratios

Capex/sales to witness a declining trend

92%

76%

40%

63%

23%28%

15% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


...accompanied by strong capex productivity

13%7%

12%4%

29%

15%

47%

39%

‐17% ‐13% ‐43% ‐7%

61% 6%

‐10%

0%

10%

20%

30%

40%

50%


Incremental EBITDA/Capex Relative to market


ROE to improve

7.8% 8.4%7.3%

5.5%7.0%

12.2%

15.2%

17.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%


As will ROIC

11.3%

7.0% 6.7% 7.1% 7.1%

10.9%

14.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY09 FY10 FY11 FY12 FY13 FY14E FY15E


– 45 of 84 –


…and valuations to follow.

1 year forward band charts

16x

24x

32x

40x

0

40

80

120

160

200

240

280

320

360

400 (Rs)P/E

4x

8x

12x

16x

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000 (Rs mn)EV/EBITDA

Source: Company, Bloomberg, PhillipCapital India Research Source: Company, Bloomberg, PhillipCapital India Research


1x

2x

3x

4x

0

200000

400000

600000

800000

1000000

1200000

1400000 (Rs mn) EV/Sales

1x

2x

3x

4x

0

40

80

120

160

200

240

280 (Rs) P/BV

Source: Company, Bloomberg, PhillipCapital India Research Source: Company, Bloomberg, PhillipCapital India Research

– 46 of 84 –


All‐round margin accretive revenue growth We expect robust revenue growth over the next two years driven by the following factors: • Robust minutes growth led by industry consolidation, improvement in market share

new circles and penetration in rural markets – we expect minutes growth to lead to continuing revenue addition for Idea Cellular, albeit at a declining pace.

• Increase in voice tariffs translating to improvement in voice RPM. Improvement in

RPM translates to a significant improvement in EBIDTA margins and cash flow growth – we expect voice RPM improvement of 1.1paise/min in FY14, largely due to reduction of discounting and other tariff adjustments done by the industry. Going ahead, we believe that pricing improvements and consequent revenue addition is likely to be more gradual.

• Growth of 3G and data revenues. Sharp rise in 3G and data revenues are EBIDTA

margin accretive – Importantly, we note that while the pace of data revenue growth is already rapid, we are likely to see strong revenue addition continuing at an increased pace from FY14‐16.

Idea Cellular ‐ revenue addition derivation (Rs mn) FY11 FY12 FY13E FY14E FY15E FY16E FY17E

Revenue 155,032 195,412 224,578 261,955 303,453 344,590 382,683Growth (%) 25% 26% 15% 17% 16% 14% 11%Revenue addition = (1) + (2) +(3) 30,561 40,379 29,166 37,377 41,498 41,137 38,094Growth (%) 32% 32% ‐28% 28% 11% ‐1% ‐7%Due to volume (1) 55,715 33,207 28,718 20,828 20,789 19,603 17,888Minutes (mn) 362,565 453,123 532,092 593,000 651,961 706,443 755,899Growth (%) 49% 25% 17% 11% 10% 8% 7%Minutes addition (mn) 119,599 90,558 78,969 60,908 58,961 54,482 49,456Growth (%) 76% ‐24% ‐13% ‐23% ‐3% ‐8% ‐9%Due to pricing growth (2) (35,952) (1,374) (11,548) 6,301 4,710 1,331 1,286Voice RPM (Rs) 0.367 0.364 0.342 0.353 0.360 0.362 0.363Growth (%) ‐1% ‐6% 3% 2% 1% 0%Change in voice‐RPM (Rs) (0.099) (0.003) (0.022) 0.011 0.007 0.002 0.002Others (3) 10,798 8,547 11,996 10,249 15,999 20,202 18,920Growth (%) ‐21% 40% ‐15% 56% 26% ‐6%O/w: incremental 3G revenue 1,179 2,944 3,552 8,033 10,660 8,430


In the last few years revenue growth was accompanied by significant decline in pricing which led to margin compression on account of sharp decrease in gross realizations. While data services have continued to grow at a brisk pace, the pick‐up in the margin accretive 3G data will significantly change the growth profile for data services growth rate over the long‐term.

– 47 of 84 –


Market share gains ensure sustenance of growth Idea Cellular has been growing significantly faster than the market in the last 5 years on account of its strong execution and expansion into new circles.

Idea – Market share movement

FY09 FY10 FY11 FY12 FY13 Q1F12 Q2F12 Q3F12 Q4F12 Q1F13 Q2F13 Q3F13 Q4F13

RMS ↑ since

Q1F12

Total 11.1% 12.4% 13.2% 14.3% 15.0% 13.9% 14.0% 14.4% 15.0% 15.0% 14.4% 14.8% 15.7% 181bp 128bp 80bp 113bp 67bp 84bp 116bp 105bp 145bp 118bp 43bp 46bp 63bpEst. circles 16.1% 17.2% 17.7% 18.8% 19.5% 18.3% 18.5% 18.8% 19.7% 19.4% 18.7% 19.3% 20.4% 206bp 110bp 56bp 111bp 62bp 67bp 115bp 106bp 154bp 113bp 23bp 47bp 68bpNew circles 0.4% 2.3% 3.8% 4.8% 5.5% 4.5% 4.5% 4.8% 5.3% 5.6% 5.3% 5.4% 5.9% 143bp 189bp 144bp 102bp 75bp 121bp 103bp 82bp 104bp 107bp 77bp 55bp 65bpKerala 25.0% 28.5% 29.9% 32.3% 34.5% 31.2% 32.0% 32.2% 33.8% 33.2% 33.0% 34.3% 37.7% 645bpYoY RMS ch. 346bp 144bp 242bp 221bp 179bp 213bp 229bp 341bp 199bp 107bp 211bp 385bpHaryana 19.0% 20.3% 19.7% 22.4% 23.8% 21.0% 21.8% 22.8% 23.7% 23.8% 23.1% 22.7% 25.7% 463bpYoY RMS ch. 126bp ‐59bp 265bp 143bp 112bp 212bp 328bp 393bp 276bp 128bp ‐6bp 191bpPunjab 17.9% 17.8% 19.1% 20.0% 21.3% 19.3% 19.6% 20.1% 20.8% 21.0% 21.2% 20.8% 22.3% 303bpYoY RMS ch. ‐11bp 132bp 84bp 136bp 44bp 64bp 57bp 164bp 172bp 156bp 68bp 158bpWest Bengal 0.0% 0.4% 2.3% 3.6% 4.9% 3.2% 3.3% 3.6% 4.1% 4.6% 4.4% 4.6% 6.1% 294bpYoY RMS ch. 42bp 188bp 125bp 138bp 151bp 114bp 80bp 161bp 144bp 103bp 100bp 205bpAP 17.0% 16.8% 16.3% 17.6% 18.6% 17.0% 17.3% 17.5% 18.4% 17.7% 17.9% 18.9% 19.8% 278bpYoY RMS ch. ‐16bp ‐48bp 122bp 102bp 65bp 102bp 124bp 191bp 74bp 68bp 136bp 133bpKolkata 0.0% 0.5% 2.2% 3.6% 4.7% 2.9% 3.3% 3.8% 4.5% 4.5% 4.4% 4.3% 5.6% 263bpYoY RMS ch. 51bp 170bp 142bp 105bp 128bp 135bp 132bp 170bp 156bp 106bp 54bp 110bpGujarat 16.6% 18.0% 17.4% 17.5% 18.6% 17.0% 17.4% 17.1% 18.4% 18.6% 17.9% 18.4% 19.6% 257bpYoY RMS ch. 140bp ‐63bp 9bp 116bp ‐79bp 34bp ‐18bp 97bp 163bp 55bp 133bp 114bpRajasthan 5.7% 6.5% 8.5% 10.5% 11.4% 9.7% 10.3% 10.7% 11.3% 11.6% 11.1% 11.0% 11.8% 212bpYoY RMS ch. 80bp 196bp 205bp 84bp 211bp 236bp 184bp 193bp 184bp 76bp 29bp 55bpMumbai 1.2% 4.6% 6.5% 7.6% 8.6% 7.0% 7.2% 7.8% 8.3% 8.5% 8.4% 8.5% 9.0% 201bpYoY RMS ch. 337bp 188bp 110bp 101bp 111bp 111bp 84bp 137bp 143bp 114bp 74bp 76bpMP 28.0% 28.7% 29.9% 31.7% 33.7% 31.2% 30.9% 32.3% 32.1% 35.5% 32.3% 33.7% 33.2% 201bpYoY RMS ch. 74bp 117bp 177bp 201bp 0bp 172bp 281bp 237bp 425bp 138bp 138bp 117bpDelhi 10.0% 9.9% 9.8% 10.6% 11.1% 10.1% 10.3% 10.7% 11.1% 11.2% 10.7% 10.9% 11.6% 147bpYoY RMS ch. ‐7bp ‐10bp 75bp 51bp 43bp 80bp 110bp 64bp 105bp 41bp 16bp 47bpKarnataka 6.4% 6.3% 7.4% 9.0% 9.5% 8.5% 8.6% 8.8% 10.0% 9.6% 9.1% 9.4% 10.0% 145bpYoY RMS ch. ‐2bp 110bp 156bp 52bp 190bp 154bp 106bp 178bp 110bp 46bp 59bp ‐5bpBihar 1.2% 6.4% 8.6% 9.4% 10.3% 9.4% 8.9% 9.1% 10.0% 10.6% 9.9% 9.9% 10.6% 124bpYoY RMS ch. 526bp 222bp 75bp 89bp 140bp 58bp 11bp 91bp 124bp 94bp 77bp 65bpHP 5.0% 6.6% 7.3% 7.9% 9.0% 7.3% 7.6% 7.9% 8.7% 9.5% 9.0% 9.1% 8.5% 117bpYoY RMS ch. 157bp 74bp 57bp 112bp ‐11bp 22bp 30bp 184bp 220bp 144bp 122bp ‐27bpTamil Nadu 0.0% 0.6% 1.2% 2.3% 2.8% 1.9% 2.2% 2.5% 2.7% 2.8% 2.8% 2.7% 2.9% 101bpYoY RMS ch. 57bp 65bp 112bp 45bp 107bp 128bp 117bp 94bp 85bp 52bp 20bp 26bpUP (W) 25.2% 27.7% 27.4% 28.0% 26.9% 27.3% 28.1% 27.7% 29.0% 26.7% 25.5% 27.0% 28.3% 101bpYoY RMS ch. 245bp ‐28bp 64bp ‐112bp ‐44bp 97bp 19bp 180bp ‐64bp ‐253bp ‐67bp ‐67bpOdisha 0.0% 1.9% 3.0% 3.4% 3.9% 3.3% 3.2% 3.3% 3.6% 3.8% 3.7% 3.9% 4.2% 97bpYoY RMS ch. 186bp 110bp 40bp 56bp 78bp 29bp 6bp 47bp 55bp 53bp 61bp 58bpU.P.(E) 7.1% 9.3% 10.8% 12.3% 12.6% 11.9% 11.8% 12.3% 13.3% 13.1% 12.3% 12.2% 12.8% 87bpYoY RMS ch. 223bp 149bp 150bp 27bp 159bp 152bp 108bp 180bp 116bp 52bp ‐2bp ‐56bpJ&K 0.0% 0.3% 1.4% 2.3% 3.1% 2.0% 2.2% 2.5% 2.7% 3.2% 3.0% 3.3% 2.8% 76bpYoY RMS ch. 26bp 115bp 94bp 70bp 93bp 77bp 112bp 89bp 124bp 86bp 74bp 9bpAssam 0.0% 0.2% 1.5% 1.9% 2.3% 1.9% 1.9% 1.9% 1.9% 2.1% 2.3% 2.4% 2.5% 54bpYoY RMS ch. 17bp 130bp 43bp 42bp 96bp 57bp 25bp 5bp 19bp 38bp 54bp 54bpNorth East 0.0% 0.0% 1.3% 2.5% 2.9% 2.5% 2.5% 2.4% 2.4% 2.6% 2.8% 3.1% 3.0% 47bpYoY RMS ch. 5bp 125bp 118bp 42bp 189bp 158bp 105bp 35bp 12bp 29bp 64bp 55bpMaharashtra 26.8% 28.5% 29.0% 28.4% 27.6% 28.9% 28.1% 28.4% 28.3% 27.5% 26.3% 27.3% 29.2% 32bpYoY RMS ch. 172bp 52bp ‐61bp ‐83bp ‐102bp ‐42bp ‐18bp ‐84bp ‐136bp ‐180bp ‐114bp 89bp


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Idea Cellular has gained market share in an astounding 20 of its 22 circles in India with the strongest gains in new circles. We believe that the market share gains trend will continue in the challenger circles on account of market consolidation and strong execution of Idea Cellular. While the company has gained market share in challenger circles but the company has also managed to improve its position in most of the established circles. Idea Cellular has gained 60bps market share in established circles as compared to 80bps in the new circles in FY13. Idea Cellular’s strongest market share has happened in both established and challenger circles of Kerala, Bihar and Mumbai. Kerala is an established circle for Idea Cellular while Bihar and Mumbai are new circles for Idea Cellular. We believe that continued market share gains in the new circles will continue to provide volume growth visibility while consolidation activity will help Idea Cellular in improving minutes market share in established circles which will help the company to grow minutes at a reasonable pace notwithstanding the increase in tariffs.

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Significant step‐up in EBIDTA growth We expect significant margin improvement over FY13‐15E on account of sharp revenue growth in improvement in cost structure. As highlighted in the earlier sections revenue growth will be robust on account of improvement in pricing and industry consolidation translating higher minutes growth for the incumbents but the cost structure will also rationalize on account of decrease in customer acquisition costs.

Idea Cellular P&L FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

Revenue 124,471 155,032 195,412 224,578 261,955 303,453 344,590 382,683 420,504YoY 23% 25% 26% 15% 17% 16% 14% 11% 10%Cost of Trading Goods Sold 305 412 1,414 2,318 2,550 2,805 3,086 3,394 3,734% of Revenue 0.2% 0.3% 0.7% 1.0% 1.0% 0.9% 0.9% 0.9% 0.9%YoY 106% 35% 243% 64% 10% 10% 10% 10% 10%Personal Expenditure 6,451 8,056 9,499 11,225 12,836 14,741 16,315 17,960 19,765As a % of Revenues 5.2% 5.2% 4.9% 5.0% 4.9% 4.9% 4.7% 4.7% 4.7%Growth YoY (%) 23% 25% 18% 18% 14% 15% 11% 10% 10%Network Operating expenditure 31,270 42,057 48,608 55,361 63,105 71,879 80,488 89,780 99,381As a % of Revenues 25.1% 27.1% 24.9% 24.7% 24.1% 23.7% 23.4% 23.5% 23.6%Growth YoY (%) 48% 34% 16% 14% 14% 14% 12% 12% 11%Licence and WPC charges 13,468 17,728 23,232 24,753 28,029 32,469 36,871 40,947 44,994As a % of Revenues 10.8% 11.4% 11.9% 11.0% 10.7% 10.7% 10.7% 10.7% 10.7%Growth YoY (%) 20% 32% 31% 7% 13% 16% 14% 11% 10%Roaming and access charges 18,001 24,755 32,798 40,145 45,645 51,269 56,455 60,831 65,035As a % of Revenues 14.5% 16.0% 16.8% 17.9% 17.4% 16.9% 16.4% 15.9% 15.5%Growth YoY (%) ‐2% 38% 32% 22% 14% 12% 10% 8% 7%

Subscriber acquisition and servicing expenditure 11,573 15,885 19,869 20,307 19,166 20,900 21,823 22,679 23,477As a % of Revenues 9.3% 10.2% 10.2% 9.0% 7.3% 6.9% 6.3% 5.9% 5.6%

Growth YoY (%) 40% 37% 25% 2% ‐6% 9% 4% 4% 4%Advertisement and Business promotion 4,245 3,858 4,281 4,881 5,857 6,911 7,948 8,901 9,791As a % of Revenues 3.4% 2.5% 2.2% 2.2% 2.2% 2.3% 2.3% 2.3% 2.3%Growth YoY (%) ‐7% ‐9% 11% 14% 20% 18% 15% 12% 10%Administration and other expenses 5,087 4,374 4,786 5,542 6,417 7,184 7,810 8,490 9,231As a % of Revenues 4.1% 2.8% 2.4% 2.5% 2.4% 2.4% 2.3% 2.2% 2.2%Growth YoY (%) 22% ‐14% 9% 16% 16% 12% 9% 9% 9%Total operating expenses 90,399 117,124 144,487 164,531 183,606 208,159 230,794 252,983 275,407As a % of Revenues 72.6% 75.5% 73.9% 73.3% 70.1% 68.6% 67.0% 66.1% 65.5%Growth YoY (%) 24% 30% 23% 14% 12% 13% 11% 10% 9%EBIDTA 34,071 37,908 50,924 60,046 78,349 95,294 113,795 129,700 145,097As a % of Revenues 27.4% 24.5% 26.1% 26.7% 29.9% 31.4% 33.0% 33.9% 34.5%Growth YoY (%) 21% 11% 34% 18% 30% 22% 19% 14% 12%


Operating leverage on network costs: Lower than FY13 minutes growth in FY14E will translate to slower than revenue growth of network costs. Energy charges will increase by ~15% YoY but other network costs on account of capacity addition will grow significantly slower than revenues. Also it is important to note that Idea Cellular has significantly enhanced its 3G network coverage. Idea has 17,140 Node Bs in its 3G circles translating to 31% of 2G BTS which is a clear indicator of coverage phase is largely past and considering the stage of 3G subscriber base 3G network coverage growth will be significantly slower than FY13. Other costs will also grow slower or in‐line with revenue: We do not expect any significant negative surprises in other costs and the company could see some operating leverage benefits in other costs also.

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Savings in customer acquisition expenses add xx bps in FY14E: Customer acquisition costs will decline on account of decrease in industry churn which will translate to lower gross additions. We note that the typical customer acquisition cost per gross addition is around Rs 100 and the variable component is ~Rs 70 which includes the SIM cost and channel commission. We estimate lower gross additions of ~30mn in FY14E which could translate to potential saving of Rs 2.1bn but taking a conservative estimate we have build for savings of Rs 1.1bn considering that the company will have to increase manpower to adhere to the new customer acquisition norms.

Subscriber acqusition and servicing expenditure to result in significant operating leverage

0.7 0.8 1.3 2.0 3.5 5.6 6.4 8.3 11.6 15.9 19.9 20.3 19.2 20.9 21.8 22.7 23.5

9.6%

8.2%

9.8%8.7%

11.7%12.9%

9.6%

8.2%9.3%

10.2% 10.2%9.0%

7.3% 6.9%6.3% 5.9% 5.6%

‐

5.0

10.0

15.0

20.0

25.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Subscriber acquisition and servicing expenditure (Rs bn) ‐ LHS % of revenue ‐ RHS


Margins and profitability is highly sensitive to SG&A spending… Idea Cellular (snapshot of churn reductionimpact) ____________________FY14E____________________ ____________________FY15E____________________ ____@ 4.5% churn____ ____@ 4.0% churn____ ____@ 4.5% churn____ ____@ 4.0% churn____ SAC in‐line SAC reduced# SAC in‐line SAC reduced# SAC in‐line SAC reduced# SAC in‐line SAC reduced#

Decline in Subs. acq. And servicing spend 5.4% 17.5% 10.8% 21.7% 5.3% 16.9% 10.6% 21.0%EBITDA improvement 1.3% 4.3% 2.6% 5.3% 1.2% 3.7% 2.3% 4.6%EBITDA margin improvement 39 bps 128 bps 79 bps 158 bps 36 bps 116 bps 73 bps 144 bpsPAT improvement 3.4% 11.1% 6.9% 13.8% 2.6% 8.3% 5.2% 10.3%PAT margin improvement 26 bps 84 bps 52 bps 105 bps 25 bps 79 bps 49 bps 98 bps

# ‐ SAC has been taken at pre‐competition levels of Rs 80/gross add


Subscriber acqusition cost/gross add can revert to pre‐competition levels

292 258 221 116 79 81 85 106 110 110 105 99 94‐

50

100

150

200

250

300

350

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

SAC/gross add (Rs)


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Strong quarterly growth trends We also expect consistent and strong quarterly growth trend for Idea Cellular. The company has both near term and long‐term earning triggers which provide significant scope for re‐rating. Idea Cellular Quarterly P&L (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14E Q2FY14E Q3FY14E Q4FY14E

Minutes (mn) 130,926 125,600 132,200 143,366 149,101 143,137 147,431 153,332QoQ (%) 5.3% ‐4.1% 5.3% 8.4% 4.0% ‐4.0% 3.0% 4.0%YoY (%) 20.5% 18.2% 16.0% 15.3% 13.9% 14.0% 11.5% 7.0%RPM (Rs) 0.412 0.413 0.411 0.412 0.424 0.429 0.433 0.442QoQ (%) ‐2.4% 0.2% ‐0.5% 0.2% 3.0% 1.0% 1.0% 2.1%YoY (%) 0.5% ‐3.3% ‐5.1% ‐2.4% 3.0% 3.8% 5.3% 7.3%Voice RPM (Rs) 0.352 0.349 0.349 0.349 0.355 0.357 0.359 0.365QoQ (%) ‐2.6% ‐1.0% 0.2% 0.0% 1.7% 0.4% 0.8% 1.5%YoY (%) ‐2.3% ‐6.0% ‐6.5% ‐3.4% 0.8% 2.3% 2.8% 4.4%Revenue 55,037 53,140 55,787 60,614 64,537 62,687 65,352 69,384QoQ (%) 2.5% ‐3.4% 5.0% 8.7% 6.5% ‐2.9% 4.3% 6.2%YoY (%) 21.7% 15.0% 10.9% 12.9% 17.3% 18.0% 17.1% 14.5%Operating expenses 40,682 38,915 41,052 43,883 45,534 44,221 46,075 47,777QoQ (%) 1.4% ‐4.3% 5.5% 6.9% 3.8% ‐2.9% 4.2% 3.7%YoY (%) 22.7% 13.3% 11.4% 9.4% 11.9% 13.6% 12.2% 8.9%EBITDA 14,355 14,225 14,735 16,731 19,003 18,466 19,277 21,607QoQ (%) 5.8% ‐0.9% 3.6% 13.5% 13.6% ‐2.8% 4.4% 12.1%YoY (%) 19.2% 19.9% 9.6% 23.3% 32.4% 29.8% 30.8% 29.1%EBITDA margin (%) 26.1% 26.8% 26.4% 27.6% 29.4% 29.5% 29.5% 31.1%EBIT 6,031 5,700 5,899 7,639 9,820 9,100 9,630 11,494QoQ (%) 5.3% ‐5.5% 3.5% 29.5% 28.6% ‐7.3% 5.8% 19.4%YoY (%) 20.3% 26.7% 0.5% 33.4% 62.8% 59.7% 63.3% 50.5%EBIT margin (%) 11.0% 10.7% 10.6% 12.6% 15.2% 14.5% 14.7% 16.6%PAT 2,341 2,400 2,287 3,082 4,903 4,361 4,711 5,876QoQ (%) ‐2.0% 2.5% ‐4.7% 34.8% 59.1% ‐11.0% 8.0% 24.7%YoY (%) 32.1% 127.0% 13.7% 29.0% 109.4% 81.7% 106.1% 90.7%PAT margin (%) 4.3% 4.5% 4.1% 5.1% 7.6% 7.0% 7.2% 8.5%EPS (Rs) 0.71 0.73 0.69 0.93 1.48 1.32 1.42 1.78

Source: Company, PhillipCapital India Research • Strong opening quarter for FY14: We expect a significant EBIDTA margin and

revenue surprise in Q1FYFY14. We have modeled for a significant voice RPM improvement of 1.7% QoQ and minutes growth of 4% in Q1FY14 which will translate to an absolute revenue addition of Rs 3.9bn. We have estimated for an EBIDTA margin improvement of 180bps QoQ.

• Q2FY14 likely to be subdued on minutes addition but EBIDTA margins expected be

robust: Q2 is generally the slowest quarter of the year and we have estimated a volume de‐growth of 4% in line with prior‐period trend. While volume growth is likely to be sluggish we expect pricing to improve marginally on account of carry forward effect of price hikes taken at the end of Q1FY14. The company is also likely to manage sales and marketing expenses which will translate to robust EBIDTA margins.

• Q3 and Q4 will again deliver sharp growth numbers: It is expected that the next

round of price hikes will be closer to the festival season in October 2014. This will help the company in registering robust revenue growth in Q3FY14 and further in Q4FY14.

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EBIDTA accretive data services growth Data Services We are seeing strong traction for 3G data services in the recent quarters. As highlighted in the earlier sections that Idea is largely past the coverage phase for 3G services, revenue growth will be margin accretive. We have estimated for margin contributions to improve from ‐1.9% in FY13 to 0.6% in FY14. Thus, 3G can potentially swing EBIDTA margins by 250bps over the next two years.

3G business margins calculations (Rs mn) FY12 FY13 FY14E FY15E FY16E FY17E FY18E FY19E FY20E

3G subscribers 2.6 5.1 6.7 16.1 20.2 25.4 30.7 39.4 48.5ARPU (Rs) 70 91 110 116 121 127 134 140 1473G revenue 4,224 7,775 15,808 26,468 34,898 45,047 59,065 77,727Incremental 3G NOC 5,179 6,616 7,982 9,130 10,221 10,981 11,372 11,674No. of sites 12,825 17,140 21,140 24,140 27,140 29,140 30,140 30,640 31,140Average cost of running a site (Rs/mo) 28,805 28,805 29,381 29,675 30,268 30,874 31,182 31,4943G ICR cost 1,650 2,344 3,554 4,753 5,510 6,311 7,293 8,4453G ad spends + manpower + admin 1,720 2,004 2,311 2,617 2,906 3,183 3,486 3,819Ad spends 1,220 1,464 1,728 1,987 2,225 2,448 2,693 2,962Other expenses 500 540 583 630 680 735 793 857Total 3G Opex 8,549 10,964 13,847 16,500 18,636 20,474 22,150 23,9383G EBITDA (4,325) (3,188) 1,961 9,968 16,262 24,573 36,915 53,789EBITDA margin (%) ‐102% ‐41% 12% 38% 47% 55% 62% 69%

Contribution margin to consol. EBITDA (%) ‐1.9% ‐1.2% 0.6% 2.9% 4.2% 5.8% 8.2% 11.1%


We believe that data services will be a key revenue growth driver for Idea Cellular. Idea’s data revenue grew at a compounded quarterly growth rate of 17% through FY13; driven by 3G data revenue growth of 24% CQGR. The company is rapidly adding data subscribers owing to: • High decibel promo campaigns by operators – along with advertising targeting

specific applications, viz. video on demand, Facebook packs etc. • Aggressively priced smartphones along with cash‐back and EMI schemes, viz. Apple,

Samsung etc. We believe that Idea Cellular in the initial rollout phase itself has created significant capacity allowing it to accommodate non‐linear data throughput increases in the next 2‐3 years. We believe the current 3G network (FY13E) can easily accommodate around ~8‐10mn subscribers depending on the peak usage. Thus incremental network expenses will significantly lag the 3G revenue growth. We estimate that 3G services will achieve EBIDTA breakeven in FY15 and will start contributing to consolidated EBIDTA margin immensely. Our estimates for 3G revenues are conservative and technology diffusion after reaching an inflection point is much more rapid. We estimate 3G revenue growth in FY15 is likely to be very sharp but considering the current growth trends the growth rate earlier‐than‐anticipated pickup in growth trends is a probable scenario. As highlighted in the earlier sections that Idea is largely past the coverage phase for 3G services, revenue growth will be margin accretive. We have estimated for margin contributions to improve from ‐1.9% in FY13 to 0.6% in FY14. Thus, 3G can potentially swing EBIDTA margins by 250bps over the next two years.

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Data Services showing strong signs of pickup We believe that data services are likely to strongly pickup for Idea Cellular. Idea is likely to benefit from the J curve of data offtake as the handset, network and content ecosystem fall in place. We estimate 45% of Idea’s users to consume data including 14% of its customers who will opt for 3G. We believe that data revenues can jump 5x from FY13‐18 led by sharp pick up in 3G revenue.

1319

31

47

62

76

5.6%7.4%

10.4%

13.7%

16.1%18.0%

‐

10

20

30

40

50

60

70

80


0%

5%

10%

15%

20%

3G data revenue (Rs bn)

2G data revenue (Rs bn)

Data contribution to revenue ‐ RHS

Strong data revenue growth...

2633

51

64

788445%

53%56%

22%25%

37%

‐102030405060708090

100110


0%

10%

20%

30%

40%

50%

60%

3G data users(mn)2G data users (mn)Data users as a % of total subs. ‐ RHS

…led by increased data


Quarterly trends indicate potential for data revenue to surprise positively We are already seeing strong traction for 3G data services in the recent quarters. This has come through as a result of rapid increase in data users; Idea added ~9.5mn data users in FY13 (FY13 net subscriber adds were only 8.9mn). The company has seen a surge in addition of users in H2FY13 lead by proliferation of internet enabled handsets, modest data pricing and high decibel promotional campaigns.

15.2 15.217.7

21.1

3.1 3.7

4.1

5.1

18.3 18.9

21.8

26.2

‐

5

10

15

20

25

30


2G 3G

Evolution of data subscribers (in mn)

982

20

2,436

3,465

500 600400

1,000

‐

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


2G 3G

Rapid subscriber addition seen in the past 2 quarters ('000s)


The growth in 3G and data subscribers is now reaching a significant scale as total data users now comprise 22% of the company’s active subscriber base. In FY13, we find that the rate of growth of 3G subscribers is outpacing 2G data subscriber addition, which in turn is growing faster than active subscribers for Idea (3G subscriber growth > data subscribers > active subscriber growth). Thus, we note that data adoption is rapidly

– 54 of 84 –


picking up and addition of 3G data users is happening at a very fast pace. We expect this trend to continue in an accelerated fashion in the years to come as Idea’s smartphone penetration now stands at 8%, which is a key tipping point (observed in markets such as Philippines, Thailand and Hong Kong). Along with subscriber addition, the encouraging trend observed in data users is their ARPU contribution and increases in the same. Incremental ARPU of data consumers is 30% of the total subscriber ARPU, as reported by Idea in its Q4FY13 results. We also observe that subscriber ARPU has increased by 7% from Q1‐Q4FY13, while during the same period, data ARPU has increased by 17%, led by higher usage and stable pricing.

Increasing proportion of active subscribers are data users

14.0% 13.9% 15.8%17.7%

2.9% 3.4%3.7%

4.3%16.9% 17.3%

19.4%

22.0%

0%

5%

10%

15%

20%

25%


2G users 3G users

39 44 42 4447 50 52 55

88 8797 105

170 168 175 182

‐

40

80

120

160

200


2G ARPU Blended data ARPU

3G ARPU Subscriber ARPU

ARPU increases witnessed in 2G and 3G (Rs/mo)


Network data usage is increasing sharply and data volume has picked up 59% from Q1FY13 to Q4FY13 to 11,421mn MB. This has been supported by increased network rollout: during FY13, Idea added 4,315 3G Node B’s and the company’s 3G site count now stands at 17,140. After seeing a decline, data realization too is picking up now as telcos have made concerted efforts to increase prices of 2G data, while keeping 3G prices stable. Along with this, per customer data usage is moving up and has now stabilized at 163MB per data user.

– 55 of 84 –


7,1758,744

10,04011,421

‐

2,000

4,000

6,000

8,000

10,000

12,000


‐

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Total data volume (mn MB) Cell sites ‐ RHS

Data throughput rapidly increasing with 3G deployments

140

157

167

163

125

130

135

140

145

150

155

160

165

170


29

30

31

32

33

34

35Data usage per sub (MB) Data Realisation (Paisa/MB)

Data usage per sub and per MB realisation


Q4FY13 data revenue for Idea Cellular stood at Rs 4.0bn; contributing 6.6% to the company’s revenue, up from Rs 2.5bn in Q1FY13. Data revenue includes a 36% contribution of 3G revenue of ~ Rs 1.5bn. We note that the contribution of data revenue for the company has increased from 4.5% in Q1FY13 to 6.6% in Q4FY13.

2,4922,888 3,200

4,023

4.5%

5.4%5.7%

6.6%

‐

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Data revenue (Rs mn) Data as a % of service revenue ‐ R

Revenue contribution of data is fast increasing

30% 31% 35% 36%

70% 69% 65% 64%

0%

20%

40%

60%

80%

100%


3G revenue 2G data revenue

Data revenue growing at a fast clip (Rs mn)

2,492 2,888 3,200 4,02316% 11% 26%


– 56 of 84 –


Fair Value Calculation We look at Idea Cellular with a 7‐year horizon to clock revenue CAGR of 11%. Idea Cellular is currently in a high‐growth phase and the company will post robust revenue growth over the next two years. Our revenue estimates for 3G services are conservative, but this segment has the potential to surprise us positively.

Derivation of Enterprise value 2020 (excluding intermediate FCF) _____________Segmental Growth Profile_____________ _____________EV 2020 calculation_____________

Sales FY13 Sales CAGR (7‐year %) Sales FY20E

EBIT margin(%) EBIT (N)

Yield required (%) P/E EV/EBIT EV (2020)

Wireless services 224,578 11.6 484,832 21.0 101,815 6.0 16.7 11.7 1,187,839 Tower business services 21,765 10.0 42,503 40.0 17,001 8.5 11.8 8.2 140,010 Intersegment 21,765 10.0 42,503 20.0 8,501 8.5 11.8 8.2 70,005 Total 224,578 11.6 484,832 22.8 110,315 6.1 16.3 11.4 1,257,844


Below we outline the derivation of our DCF valuation showcasing the multiples we assign to the businesses. We also roll‐forward our DCF vis‐à‐vis our prior computation to arrive at an September 2014 target price of Rs 190. We consider Rs 200bn (Rs 60/share) as the NPV hit from regulatory eventualities. Intermediate cash flow generation Cash Flows (Rs mn) FY14E FY15E FY16E FY17E FY18E FY19E FY20E

EBIT 40,040 53,661 68,937 83,764 98,238 110,603 125,649NOPLAT 26,430 35,422 45,505 55,292 64,847 73,009 82,941Depreciation 38,309 41,633 44,858 45,936 46,859 47,651 48,393Capex 38,817 43,166 45,493 46,750 46,505 46,651 47,206FCF 25,923 33,889 44,870 54,478 65,200 74,009 84,129% conversion 65 63 65 65 66 67 67Discount factor 1.0 0.9 0.8 0.7 0.6 0.6 0.5PV 25,923 30,258 35,770 38,777 41,436 41,994 42,622NPV 25,923 56,180 91,951 130,727 172,163 214,158 256,780

Source: Company, PhillipCapital India Research Derivation of Fundamental Value Rs mn/ Rs per share Value

Enterprise value‐2020 1,257,844NPV Intermediate FCF 256,780Net cash‐ end of FY2014 (116,091)Return requirement 12%EV value end of FY2014 894,043Target value end of FY2014 777,952Target value per share (end March 2014) 236Regulatory risks captured (Rs mn) 199,175Value/share (Rs/share) (60)Adj. target value per share (end of Sep 2014) 189


– 57 of 84 –


Key regulatory and other risks We highlight the following risks for Idea Cellular • Court case on 3G ICR ‐ Bharti Airtel, Idea Cellular and Vodafone India had entered

into 3G intra‐circle roaming pacts (ICR) these operators to provide 3G services to their customers on a pan‐India basis (ex Odisha and Punjab). The 3G ICR pacts had been challenged by the DoT and Reliance Communications in the Supreme Court. In response to the petition by the these parties, the Supreme Court has now stayed any punitive action against Bharti, Idea and Vodafone, but at the same time, the court has also stopped these operators to provide 3G services to new customers through 3G ICR. The matter will be heard again in July 2013 and till this period, Idea Cellular will not be able to add 3G customers in 10 circles, viz. Delhi, Mumbai, Kolkata, Karnataka, Tamil Nadu, Rajasthan, West Bengal, Bihar, Assam and the North East circles. While the 3G revenue stream contribution from these circles isn't known, we can estimate this on the basis of the overall revenue contribution of these circles for Idea. Most of these circles are new circles for Idea Cellular and its market position too is weak, implying that it isn't able to attract quality subscribers who would opt for 3G. These circles account for roughly 1/6th of Idea's revenue and we believe that the 3G data revenue, which will not grow owing to new subscriber addition is to this extent. Our management discussions have indicated that the 3G revenue from the ICR circles is largely revenue neutral and hence, any potential negative outcome of this case will not have any immediate financial impact. However, we point out that such a scenario exposes the company to, (1) risk of high quality customers leaving the network in these circles and choosing other operators who have 3G services in the respective circles, (2) an incremental spectrum capex that the company would have to incur in order to provide 3G services in these circles.

• Other regulatory payouts in the form of one‐time licences fees and spectrum refarming ‐ The company along with other participants in the sector is exposed to the risk of adverse regulatory outcome pertaining to (1) one‐time fee on excess spectrum, (2) licence renewal and spectrum refarming. We summarise these risks in the following table:

Summary of regulatory risks Issue __________Idea__________ Rs mn. Rs/sh

One‐time fee on excess spectrum (900/1800MHz) 19,630 5.9Renewal of spectrum (900MHz)/Spectrum refarming 110,668 33.4Renewal of 1800MHz spectrum (including excess spectrum) 77,884 23.5Impact of 8% licence fee on Tower Cos. 13,124 4.0TOTAL impact 221,306 66.9

Source: Company, PhillipCapital India Research However, we highlight that the potential regulatory payout could reduce on account of lack of demand of spectrum at elevated prices. The prices of spectrum in the 800MHz and 1800MHz band has been cut by 50% after the November 2012 auctions, which didn't see any participation in four circles accounting for ~50% of the pan‐India base price for spectrum bidding. • Idea also has other legal cases including:

o High Court case on the Spice Merger. Note that this has also resulted in the company not receiving 3G spectrum in Punjab circle.

o Tax cases on the demerger of telecom licence and assets of Bihar circle from Aditya Birla Telecom Limited (ABTL), a 100% subsidiary to Idea Cellular.

– 58 of 84 –


Recommendation Chart

Buy ( TP 190)

Buy (TP 87)

Buy (TP 115)

Buy (TP 110) Buy

(TP 105)

Sell (TP 67)

Neutral (TP 115)

Buy (TP 142)

0

20

40

60

80

100

120

140

160

180

1/3/2011 5/30/2011 10/21/2011 3/16/2012 8/7/2012 1/3/2013 5/29/2013

Source: PhillipCapital India Research

– 59 of 84 –


Financials

Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E

Net sales 195,412 224,578 261,955 303,453Growth, % 26 15 17 16Total income 195,412 224,578 261,955 303,453Other Operating expenses ‐144,487 ‐164,531 ‐183,606 ‐208,159EBITDA (Core) 50,924 60,046 78,349 95,294Growth, % 34.3 17.9 30.5 21.6Margin, % 26.1 26.7 29.9 31.4Depreciation ‐29,813 ‐34,778 ‐38,309 ‐41,633EBIT 21,111 25,269 40,040 53,661Growth, % 51.5 19.7 58.5 34.0Margin, % 10.8 11.3 15.3 17.7Interest paid ‐10,557 ‐9,494 ‐9,971 ‐9,862Pre‐tax profit 10,553 15,774 30,069 43,799Tax provided ‐3,323 ‐5,664 ‐10,220 ‐14,887Profit after tax 7,231 10,110 19,849 28,912Net Profit 7,231 10,110 19,849 28,912Growth, % (19.6) 39.8 96.3 45.7Net Profit (adjusted) 7,231 10,110 19,849 28,912Unadj. shares (m) 3,309 3,309 3,309 3,309Wtd avg shares (m) 3,309 3,309 3,309 3,309

Balance Sheet Y/E Mar, Rs mn FY12 FY13 FY14E FY15E

Cash & bank 1,521 1,429 16,936 41,908Marketable securities at cost 23,539 40,748 40,748 40,748Debtors 8,227 9,601 9,954 11,531Inventory 926 726 1,310 1,517Loans & advances 15,386 10,859 18,337 21,242Other current assets 18 9 262 303Total current assets 49,615 63,372 87,546 117,250Gross fixed assets 410,978 471,281 510,098 553,264Less: Depreciation ‐141,040 ‐179,681 ‐214,127 ‐255,760Add: Capital WIP 6,799 8,811 8,811 8,811Net fixed assets 276,736 300,411 304,782 306,315Total assets 326,352 363,783 392,328 423,565 Current liabilities 88,122 79,250 91,946 100,443Total current liabilities 88,122 79,250 91,946 100,443Non‐current liabilities 107,727 140,315 137,490 132,490Total liabilities 195,850 219,565 229,436 232,932Paid‐up capital 33,088 33,143 33,143 33,143Reserves & surplus 97,414 111,073 129,750 157,489Shareholders’ equity 130,502 144,216 162,893 190,632Total equity & liabilities 326,352 363,781 392,328 423,565


Cash Flow Y/E Mar, Rs mn FY12 FY13 FY14E FY15E

Pre‐tax profit 10,553 15,774 30,069 43,799Depreciation 29,813 34,778 38,309 41,633Chg in working capital ‐1,242 ‐5,511 4,028 3,766Total tax paid 2,028 4,098 ‐10,220 ‐14,887Cash flow from operating activities 41,152 49,139 62,186 74,311Capital expenditure ‐45,634 ‐58,452 ‐42,680 ‐43,166Chg in marketable securities ‐4,121 ‐17,209 0 0Cash flow from investing activities ‐49,755 ‐75,662 ‐42,680 ‐43,166Equity raised/(repaid) 7,503 13,714 0 0Debt raised/(repaid) 5,274 22,825 ‐2,825 ‐5,000Cash flow from financing activities 12,777 36,540 ‐2,825 ‐5,000Net chg in cash 4,174 10,017 16,681 26,145

Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E

Per Share data EPS (INR) 2.2 3.1 6.0 8.7Growth, % (19.6) 39.8 96.3 45.7Book NAV/share (INR) 39.4 43.6 49.2 57.6FDEPS (INR) 2.2 3.1 6.0 8.7CEPS (INR) 11.2 13.6 17.6 21.3CFPS (INR) 12.4 14.9 18.8 22.5Return ratios Return on assets (%) 4.4 4.7 6.9 8.6Return on equity (%) 5.5 7.0 12.2 15.2Return on capital employed (%) 6.1 6.2 9.0 11.3Turnover ratios Asset turnover (x) 1.0 1.0 1.1 1.3Sales/Total assets (x) 0.6 0.7 0.7 0.7Sales/Net FA (x) 0.7 0.8 0.9 1.0Working capital/Sales (x) (0.3) (0.3) (0.2) (0.2)Fixed capital/Sales (x) 2.1 2.1 1.9 1.8Working capital days (118.7) (94.4) (86.5) (79.2)Liquidity ratios Current ratio (x) 0.6 0.8 1.0 1.2Quick ratio (x) 0.6 0.8 0.9 1.2Interest cover (x) 2.0 2.7 4.0 5.4Total debt/Equity (%) 73.0 81.9 70.7 57.8Net debt/Equity (%) 71.8 80.9 60.3 35.8Valuation PER (x) 69.1 49.4 25.2 17.3Price/Book (x) 3.8 3.5 3.1 2.6EV/Net sales (x) 2.9 2.6 2.1 1.7EV/EBITDA (x) 11.2 9.6 7.1 5.5EV/EBIT (x) 27.0 22.8 13.9 9.8

– 60 of 84 –

Bharti Airtel Limited This Elephant can dance

TELECOM: Company Coverage 19 July 2013


We believe Bharti Airtel presents significant upside from the current levels as it will see significant improvement in the domestic business which will translate to significant improvement in cash flows over FY13‐15E. While we expect challenges to persist for the African business but we believe that the current market price largely factors the negatives from the African business. We rate Bharti Airtel as our conviction Buy in the sector. Our key arguments are as follows: Strong domestic revenue growth ahead of the sector: Bharti has lost significant revenue market share to both new entrants and incumbent operators in the last 5 years. We expect a reversal of this trend on account of market consolidation which will help Bharti Airtel to register strong revenue growth in the forthcoming quarters. We expect Bharti to gain market share in FY14E as compared to market share losses over FY08‐12. We expect market share to stabilize from FY15E onwards. Market share improvement and stabilization will provide impetus to valuations and revenue growth profile. RPM improvement will help in improving margin profile; Expect robust EBIDTA growth of 14% CAGR for Indian operations over FY13‐15E: Bharti is the market leader and generates the highest in the industry minutes traffic. Voice RPM improvement will translate to significant improvement in EBIDTA margin. We estimate an EBIDTA margin improvement of 190bps and 60bps in FY14E and FY15E on account of higher RPM and declining subscriber acquisition expenses. The sharp improvement in EBIDTA growth will translate to a significant improvement in Free Cash Flows for the company. Strong FCF generation over FY13‐15E on account of India business: We expect a strong FCF generation of Rs 108bn and Rs 121 bn in FY14E and FY15E respectively implying a growth of 39% over FY13‐15E. Africa business will continue to remain challenging: We do not expect inspiring growth from the Africa business. Notwithstanding the management’s guidance for improvement in business in FY14E, we remain skeptical of the growth prospects in the near term as growth in major African countries has slowed down significantly and vigorous competitive activity is eroding the margins. Hence, we build for an uninspiring revenue and EBIDTA growth of xx% and xx% respectively for the African business. Revision of estimates, Valuation and Conviction Buy rating: We have revised our India business estimates upwards building for improvement in voice RPM in FY14 and FY15 but we have downgraded our estimates for Africa as the business environment continues to remain challenging. Bharti currently trades at 6.1x and 5.1x EV/EBIDTA on FY14E and FY15E EBIDTA. We value the company using DCF based methodology at Rs 430 which implies an EV/EBIDTA of 6.5x (ex‐spectrum payouts) on FY15E EBIDTA and an upside of 32% from the current levels.

Buy BHARTI IN | CMP RS 323


O/S SHARES (MN) : 3997MARKET CAP (RSBN) : 1289MARKET CAP (USDBN) : 2252 ‐ WK HI/LO (RS) : 370 / 239LIQUIDITY 3M (USDMN) : 22.4FACE VALUE (RS) : 5




ABS 10.9 8.0 ‐0.3REL TO BSE 6.1 2.2 ‐17.4


50

70

90

110

130

150

Apr‐10 Feb‐11 Dec‐11 Oct‐12Bharti BSE Sensex


Other Key Ratios

FY13 FY14E FY15E

Net Sales 803,590 905,522 999,489EBITDA 248,704 288,723 325,053Net Profit 22,833 42,461 76,622EPS, Rs 5.7 10.6 19.2PER, X 56.6 30.4 16.9EV/EBIDTA, % 8.1 6.1 5.2EV/Net Sales, x 2.5 2.0 1.7ROE, % 4.2 7.1 11.0Debt/Equity, % 134.1 106.4 85.4Source: Phillip Capital India Research Naveen Kulkarni (+9122 6667 9947) [email protected] Vivekanand Subbaraman (+9122 6667 9766) [email protected]

– 61 of 84 –

19 July 2013 / INDIA EQUITY RESEARCH / BHARTI AIRTEL COMPANY UPDATE

Focus charts – Story in pictures Improving operational metrics

23%

47%44%

37%

45% 46%

38%33%

-3%

33%

3%

34%40%

-14%

434% 14% 20% 85%

-26%

16%

-75%

9% 5%

-22%-10%

0%

10%

20%

30%

40%

50%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Incremental EBITDA/Incremental revenue Relative to market*

Bharti has outperformed when incremental EBITDA margins have exceeded existing margins

Source: Company, Bloomberg, PhillipCapital India Research

* ‐ implies the stock price performance of Bharti Airtel relative to the BSE SENSEX

0.82

6

0.68

3

0.57

6

0.47

3

0.38

3

0.36

7

0.35

3

0.36

4

0.37

1

0.37

3

0.37

5

0.37

7

‐

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

1.000

…led by RPM improvements (Rs)

Blended RPM Voice RPM

0.10

9

(0.0

08)

0.18

9

0.01

6

0.36

8

0.40

7

0.42

9

0.42

1

0.43

2

(0.050)-

0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 0.500

...as incremental EBITDA/incremental min (Rs/min) ratio picks up


– 62 of 84 –


….resulting in capital productivity and return ratio gains

51%

38%

20%23%

12%

17%14% 15%

0%

10%

20%

30%

40%

50%

60%


Capex/sales continues to decline...

28% 27%

19%

-1%

30%

1%

34%

25%

-26%

16%

-75%

9% 5%

-22%

-10%

0%

10%

20%

30%

40%

50%


…backed by strong capex productivity

Incremental EBITDA/Capex Relative to market*


* ‐ implies the stock price performance of Bharti Airtel relative to the BSE SENSEX

40.2%

7.3%5.5% 7.0%

12.2%15.2%

17.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

ROE to improve

38.8%

9.4%

5.8%3.5%

6.3%9.1% 10.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

As will ROIC


– 63 of 84 –


….and valuations to follow


12x

16x

20x

24x

0

100

200

300

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500

600 (Rs) P/E

6x

9x

12x

15x

0

1000000

2000000

3000000

4000000

5000000

6000000 (Rs mn) EV/EBITDA



3x

4x

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0

1000000

2000000

3000000

4000000

5000000

6000000

7000000 (Rs mn) EV/Sales

2x

4x

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‐300

0

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600

900

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– 64 of 84 –


Domestic wireless revenue growth firing on all cylinders We expect FY14 and FY15 to be revival years for Bharti’s wireless India business. We expected a much stronger pick up in revenue growth rate for the wireless business and estimate a revenue addition of Rs 47.7 which is significantly higher than the last 3 years. We believe our estimates are not very aggressive considering the market is in a consolidation mode and pricing environment has improved considerably. Our estimates are based on the following: Robust minutes growth at higher Revenue Per Minute‐ We expect better‐than‐industry‐average minutes growth in FY14 at 8% accompanied by an voice RPM improvement of 3% YoY. We believe that depending on the decline in competitive activity the RPM improvement can surprise positively. Data services revenue growth has immense potential‐ Data revenues are also margin accretive especially in the capacity utilization space. We expect sharp growth in data revenues led by 3G data. We estimate additional Rs 6.3bn and Rs 12.1bn additional 3G data revenues in FY14E and FY15E respectively.

Bharti Airtel – India Wireless business – revenue addition derivation (Rs mn) FY11 FY12 FY13E FY14E FY15E FY16E FY17E

Total India & SA revenue (a)+(b)+(c)+(d)+(e) 464,089 518,934 569,548 624,722 686,769 750,965 813,052Growth (%) 11% 12% 10% 10% 10% 9% 8%Revenue addition 45,617 54,845 50,614 55,174 62,047 64,195 62,088Growth (%) 909% 20% ‐8% 9% 12% 3% ‐3%India Wireless Revenue (a) 349,509 387,262 411,478 459,232 505,923 553,698 598,636Growth (%) 8% 11% 6% 12% 10% 9% 8%Revenue addition = (1) + (2) + (3) 26,699 37,753 24,216 47,754 46,691 47,775 44,938Growth (%) 36% 41% ‐36% 97% ‐2% 2% ‐6%Due to volume (1) 86,027 36,855 28,967 28,580 22,880 22,565 21,015Minutes (mn) 792,132 888,485 967,520 1,048,454 1,111,361 1,172,186 1,228,537Growth (%) 30% 12% 9% 8% 6% 5% 5%Minutes addition (mn) 181,702 96,353 79,035 80,934 62,907 60,825 56,351Growth (%) 167% ‐47% ‐18% 2% ‐22% ‐3% ‐7%Due to pricing growth (2) (72,046) (14,205) (12,956) 11,107 8,084 2,278 2,155Voice RPM (Rs) 0.383 0.367 0.353 0.364 0.371 0.373 0.375Growth (%) ‐19% ‐4% ‐4% 3% 2% 1% 0%Change in voice‐RPM (Rs) (0.091) (0.016) (0.013) 0.011 0.007 0.002 0.002Others (3) 12,718 15,103 8,204 8,067 15,726 22,932 21,767Growth (%) 19% ‐46% ‐2% 95% 46% ‐5%O/w: incremental 3G revenue 3,032 3,967 6,395 12,164 16,224 13,835South Asia wireless revenue (b) 13,891 15,829 22,895 23,950 25,387 26,910 28,794Growth (%) 14% 45% 5% 6% 6% 7%Revenue addition 1,938 7,066 1,054 1,437 1,523 1,884Growth (%) 265% ‐85% 36% 6% 24%Passive Infra (c) 85,555 95,109 103,154 111,896 122,512 133,077 143,270Growth (%) 22% 11% 8% 8% 9% 9% 8%Revenue addition 15,473 9,554 8,045 8,742 10,616 10,565 10,193Growth (%) ‐43% ‐38% ‐16% 9% 21% 0% ‐4%Telemedia (d) 36,324 37,271 38,157 42,262 46,065 49,751 53,233Growth (%) 6% 3% 2% 11% 9% 8% 7%Revenue addition 2,170 947 886 4,104 3,804 3,685 3,483Growth (%) 241% ‐56% ‐6% 363% ‐7% ‐3% ‐6%Others incl. DTH (e) 10,317 16,018 19,745 22,849 25,819 28,918 32,388Growth (%) 76% 55% 23% 16% 13% 12% 12%Revenue addition 4,457 5,701 3,727 3,104 2,970 3,098 3,470Growth (%) ‐24% 28% ‐35% ‐17% ‐4% 4% 12%


– 65 of 84 –


Market share stabilization improves revenue growth visibility Bharti Airtel has lost significant revenue market share (RMS loss ~270bps) in the last 5 years on account of hyper competition in the market and lapses in execution in certain circles. Bharti has lost market share in 18 of the 22 circles from FY09‐FY13.

Revenue market share movement of Bharti Airtel (Gross revenue)

FY09 FY10 FY11 FY12 FY13 Q1F12 Q2F12 Q3F12 Q4F12 Q1F13 Q2F13 Q3F13 Q4F13

RMS ↑ since

Q1F12

Total 32.6% 32.7% 31.3% 29.9% 30.4% 30.8% 30.0% 29.7% 29.2% 30.3% 31.0% 30.4% 29.9% ‐84bpYoY RMS change 10bp ‐142bp ‐142bp 49bp ‐168 bps ‐157 bps ‐158 bps ‐92 bps ‐46 bps 98 bps 67 bps 73 bpsOdisha 43.9% 40.9% 37.3% 36.6% 38.5% 36.5% 36.0% 36.1% 37.5% 37.6% 38.5% 38.8% 39.0% 249bpYoY RMS change ‐291bp ‐364bp ‐75bp 191bp ‐278 bps ‐197 bps ‐66 bps 199 bps 108 bps 247 bps 269 bps 148 bpsWest Bengal 27.6% 28.7% 26.4% 25.7% 27.1% 26.1% 25.7% 25.3% 25.6% 27.2% 26.2% 26.6% 28.4% 235bpYoY RMS change 105bp ‐227bp ‐72bp 146bp ‐301 bps ‐237 bps ‐181 bps 299 bps 117 bps 50 bps 132 bps 279 bpsUP (W) 17.3% 18.2% 18.6% 17.3% 19.3% 17.5% 16.9% 17.1% 17.9% 19.1% 19.1% 19.5% 19.7% 223bpYoY RMS change 85bp 36bp ‐123bp 201bp ‐104 bps ‐184 bps ‐193 bps ‐17 bps 162 bps 218 bps 242 bps 181 bpsMumbai 21.9% 19.9% 19.2% 18.5% 20.1% 18.5% 18.7% 18.7% 18.3% 19.8% 20.6% 19.7% 20.2% 176bpYoY RMS change ‐202bp ‐65bp ‐66bp 153bp ‐175 bps ‐58 bps ‐74 bps 31 bps 135 bps 182 bps 105 bps 190 bpsKerala 20.2% 19.9% 18.2% 16.5% 17.1% 17.1% 16.5% 16.2% 16.2% 16.3% 17.4% 16.5% 18.1% 98bpYoY RMS change ‐29bp ‐162bp ‐176bp 59bp ‐198 bps ‐229 bps ‐170 bps ‐110 bps ‐78 bps 90 bps 36 bps 185 bpsNorth East 35.0% 37.8% 36.7% 37.2% 39.8% 36.4% 36.6% 37.7% 38.0% 40.7% 40.0% 41.7% 37.2% 74bpYoY RMS change 283bp ‐105bp 45bp 256bp 16 bps 66 bps 171 bps ‐71 bps 422 bps 343 bps 409 bps ‐78 bpsMaharashtra 23.8% 22.0% 20.1% 19.3% 20.1% 20.1% 19.8% 19.3% 18.3% 19.5% 20.9% 19.4% 20.8% 66bpYoY RMS change ‐177bp ‐195bp ‐77bp 83bp ‐70 bps ‐73 bps ‐67 bps ‐96 bps ‐54 bps 110 bps 11 bps 250 bpsGujarat 20.0% 20.9% 19.4% 17.0% 18.1% 17.6% 17.2% 16.4% 16.9% 17.3% 19.1% 17.8% 18.2% 52bpYoY RMS change 93bp ‐154bp ‐238bp 108bp ‐328 bps ‐267 bps ‐243 bps ‐132 bps ‐39 bps 191 bps 142 bps 131 bpsHaryana 20.7% 19.1% 17.8% 17.6% 18.3% 17.9% 17.7% 17.4% 17.4% 18.3% 18.9% 17.8% 18.4% 49bpYoY RMS change ‐157bp ‐131bp ‐21bp 76bp 12 bps ‐2 bps ‐45 bps ‐46 bps 36 bps 118 bps 40 bps 109 bpsBihar 49.4% 47.8% 45.5% 43.6% 43.9% 44.2% 43.3% 43.5% 43.5% 44.3% 43.6% 43.5% 44.3% 9bpYoY RMS change ‐159bp ‐225bp ‐190bp 29bp ‐262 bps ‐217 bps ‐181 bps ‐111 bps 5 bps 27 bps ‐4 bps 83 bpsAssam 32.8% 34.3% 33.0% 31.4% 32.4% 32.2% 31.0% 31.1% 31.2% 33.1% 32.0% 32.6% 32.1% ‐11bpYoY RMS change 156bp ‐136bp ‐159bp 105bp ‐162 bps ‐132 bps ‐120 bps ‐224 bps 93 bps 95 bps 146 bps 85 bpsPunjab 36.5% 38.6% 36.5% 35.7% 35.2% 36.1% 36.3% 35.3% 35.4% 34.8% 35.9% 34.4% 35.8% ‐22bpYoY RMS change 207bp ‐203bp ‐81bp ‐50bp ‐116 bps 27 bps ‐79 bps ‐150 bps ‐128 bps ‐34 bps ‐85 bps 47 bpsU.P.(E) 27.7% 28.7% 29.1% 28.3% 28.4% 28.7% 27.8% 27.6% 29.0% 28.7% 28.0% 28.3% 28.5% ‐23bpYoY RMS change 104bp 36bp ‐76bp 6bp ‐52 bps ‐98 bps ‐185 bps 24 bps ‐1 bps 15 bps 65 bps ‐55 bpsKolkata 30.5% 30.1% 27.0% 26.7% 26.8% 27.0% 26.7% 26.5% 26.5% 27.0% 27.4% 26.4% 26.6% ‐45bpYoY RMS change ‐42bp ‐308bp ‐36bp 14bp ‐163 bps ‐118 bps ‐195 bps 321 bps 3 bps 63 bps ‐16 bps 3 bpsDelhi 38.3% 37.7% 35.9% 35.3% 35.9% 36.2% 35.2% 35.1% 34.7% 36.2% 36.9% 36.0% 34.4% ‐179bpYoY RMS change ‐58bp ‐181bp ‐61bp 58bp ‐126 bps ‐109 bps ‐148 bps 139 bps ‐2 bps 171 bps 91 bps ‐31 bpsTamil Nadu 32.3% 34.2% 32.0% 31.4% 31.9% 31.8% 31.2% 31.5% 31.1% 31.7% 32.9% 33.3% 29.9% ‐189bpYoY RMS change 192bp ‐222bp ‐59bp 57bp ‐151 bps ‐85 bps ‐91 bps 88 bps ‐11 bps 172 bps 183 bps ‐117 bpsKarnataka 51.8% 52.0% 48.6% 45.0% 45.5% 46.8% 45.8% 45.4% 41.9% 44.6% 46.8% 46.3% 44.2% ‐268bpYoY RMS change 20bp ‐344bp ‐360bp 50bp ‐368 bps ‐267 bps ‐238 bps ‐563 bps ‐228 bps 97 bps 96 bps 221 bpsAP 37.9% 39.7% 39.7% 39.2% 38.7% 40.4% 39.5% 39.3% 37.8% 38.6% 40.6% 38.2% 37.5% ‐291bpYoY RMS change 177bp 1bp ‐46bp ‐52bp ‐5 bps ‐23 bps 20 bps ‐171 bps ‐173 bps 107 bps ‐114 bps ‐32 bpsRajasthan 40.8% 44.9% 45.5% 42.0% 39.9% 44.6% 42.4% 41.5% 39.8% 40.1% 39.8% 40.2% 39.5% ‐502bpYoY RMS change 409bp 67bp ‐356bp ‐208bp ‐152 bps ‐299 bps ‐386 bps ‐558 bps ‐445 bps ‐261 bps ‐135 bps ‐21 bpsMP 32.8% 30.3% 29.0% 25.3% 24.3% 28.2% 25.9% 24.6% 23.1% 25.7% 24.6% 24.0% 22.9% ‐537bpYoY RMS change ‐254bp ‐129bp ‐365bp ‐108bp ‐251 bps ‐334 bps ‐400 bps ‐462 bps ‐247 bps ‐124 bps ‐54 bps ‐21 bpsHP 46.6% 45.0% 40.7% 40.1% 39.4% 40.0% 40.6% 40.7% 39.2% 42.7% 41.1% 40.6% 34.0% ‐608bpYoY RMS change ‐161bp ‐429bp ‐53bp ‐78bp ‐318 bps ‐69 bps 18 bps 133 bps 268 bps 55 bps ‐11 bps ‐529 bpsJ&K 60.4% 46.6% 42.7% 39.2% 38.0% 39.8% 38.5% 41.3% 37.2% 42.3% 39.6% 41.4% 30.8% ‐900bpYoY RMS change ‐1380bp ‐389bp ‐357bp ‐117bp 52 bps ‐770 bps ‐421 bps ‐345 bps 256 bps 104 bps 13 bps ‐643 bps


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Market share losses have been the highest in the circles of J&K, HP, Karnataka and Odisha but FY13 saw reversal of some of the market share losses. As compared to the last 5 years trend of market share loss of 18 circles, Bharti gained market share in 16 circles in FY13 (not adjusted for one time gain of SMS termination revenue). We believe the worst is behind for Bharti’s domestic operations and revenue growth is likely to be ahead of the market in FY14E as the industry undergoes consolidation and Bharti’s execution picks up. We expect EMS gains in FY14E and stability of market share from FY15E onwards. Market share improvement and visibility provides better revenue growth visibility and stability of EBIDTA margins over the long‐term which will help valuations over the medium to long‐term.

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Sharp improvement in EBIDTA margins in the domestic business We expect an EBIDTA margin improvement of 190bps YoY in FY14E and 60bps YoY in FY15E. The sharp margin improvement will be on account robust revenue growth and cost savings. Our cost estimations are conservative and the company can surprise positively on better‐than‐expected cost measures especially on network operating expenses and Administration expenses.

Bharti Airtel India & SL – P&L FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

Revenue 373,521 418,472 464,089 518,934 569,548 624,722 686,769 750,965 813,052 875,476YoY 12% 11% 12% 10% 10% 10% 9% 8% 8%Access charges 52,909 44,806 51,186 59,532 75,859 77,492 82,540 87,544 92,355 97,343% of Revenue 14.2% 10.7% 11.0% 11.5% 13.3% 12.4% 12.0% 11.7% 11.4% 11.1%YoY ‐15% 14% 16% 27% 2% 7% 6% 5% 5%

Personal Expenditure 17,023 19,028 19,629 19,609 21,696 23,833 25,486 27,508 29,689 32,040As a % of Revenues 4.6% 4.5% 4.2% 3.8% 3.8% 3.8% 3.7% 3.7% 3.7% 3.7%Growth YoY (%) 12% 3% 0% 11% 10% 7% 8% 8% 8%

Network operations costs 62,466 90,031 106,678 126,266 148,422 165,103 182,706 201,746 220,702 238,525As a % of Revenues 16.7% 21.5% 23.0% 24.3% 26.1% 26.4% 26.6% 26.9% 27.1% 27.2%Growth YoY (%) 44% 18% 18% 18% 11% 11% 10% 9% 8%

Licence, revenue share & spectrum 38,270 40,875 47,515 52,772 55,716 61,313 67,547 73,925 79,925 85,998As a % of Revenues 10.2% 9.8% 10.2% 10.2% 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%Growth YoY (%) 7% 16% 11% 6% 10% 10% 9% 8% 8%

Sales and marketing expenditure 24,474 27,897 40,450 45,714 47,842 43,553 46,040 48,372 51,235 53,755As a % of Revenues 6.6% 6.7% 8.7% 8.8% 8.4% 7.0% 6.7% 6.4% 6.3% 6.1%Growth YoY (%) 14% 45% 13% 5% ‐9% 6% 5% 6% 5%

Administration and other expenses 24,523 28,726 27,371 30,643 34,320 37,950 41,365 44,674 48,248 52,108As a % of Revenues 6.6% 6.9% 5.9% 5.9% 6.0% 6.1% 6.0% 5.9% 5.9% 6.0%Growth YoY (%) 17% ‐5% 12% 12% 11% 9% 8% 8% 8%

Total operating expenses 219,664 251,362 292,829 334,534 383,856 409,243 445,683 483,769 522,154 559,769As a % of Revenues 58.8% 60.1% 63.1% 64.5% 67.4% 65.5% 64.9% 64.4% 64.2% 63.9%Growth YoY (%) 14% 16% 14% 15% 7% 9% 9% 8% 7%

EBIDTA 152,858 167,633 166,175 184,400 185,692 215,479 241,087 267,196 290,898 315,706As a % of Revenues 40.9% 40.1% 35.8% 35.5% 32.6% 34.5% 35.1% 35.6% 35.8% 36.1%Growth YoY (%) 10% ‐1% 11% 1% 16% 12% 11% 9% 9%


Savings in sales and marketing expenses: Customer acquisition costs will decline on account of decrease in industry churn which will translate to lower gross additions. We note that the typical customer acquisition cost for Bharti is around Rs 125 which includes a variable cost component of ~Rs 100 (SIM cost and channel commission) .We estimate lower gross additions of ~40mn in FY14E which could translate to a potential saving of Rs 4bn. Access charges will grow slower than revenues on account of base effect (one offs): In FY13E access charges included onetime SMS termination costs and higher ILD termination costs which declined in Q4FY13. Thus considering Q4FY13 as base we have modeled for lower access charges. Other costs will also grow slower or in‐line with revenue: We do not expect any significant negative surprises in other costs and the company could see some operating leverage benefits in other costs also.

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Africa business – markets very sluggish; muted expectations

Considering that revenue details aren’t available for major African markets where Bharti Airtel is present, we analyse the company’s performance vis‐à‐vis peers on various parameters. 1) Revenue and revenue growth ‐ weak trends all around; but Bharti has outperformed Revenue growth trends of the African markets indicate that Bharti has grown faster than peers. Data is available for two players – MTN and Millicom, and both of them have witnessed YoY revenue decline in H2CY12. For Bharti, revenue growth in H2CY12 is down to 6.8% YoY – a far cry from ~20% growth witnessed in H1CY11. Q4FY13 results of Bharti indicated a further slowdown in revenue growth for Bharti Airtel – 4.6% in constant currency terms; further underscoring our belief that market growth in Africa remains sluggish.

Revenue (US$ mn) H1CY11 H2CY11 H1CY12 H2CY12 Comments

Bharti Africa 1,902 2,087 2,137 2,230 Bharti has grown faster than peers

YoY growth (%) 19.3% 12.3% 6.8% Competition ‐ blended growth (YoY) 3.5% 1.2% ‐1.8%

MTN Nigeria (34% of Bharti Africa revenue) 2,392 2,468 2,389 2,287 YoY 17.2% 6.3% 4.4% ‐5.4% Millicom (overlaps with 22% of Bharti Africa revenue) 469 496 478 496 YoY 7.4% 5.8% ‐1.5% 0.0%


2) Strong subscriber growth…but ARPU is the key culprit A subscriber comparison of Bharti with its African peers indicates that Bharti’s subscriber growth has been ahead of peers. This confirms with management commentary that the company has been gaining ground in African markets. Additionally, market subscriber growth trends are also healthy and in double digits on a YoY basis. While the subscriber growth trajectory is healthy, we note this needs to be seen in conjunction with ARPU, which has witnessed a steep decline; as we highlight below.

Subscriber snapshot Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13

Bharti Africa 46.3 48.4 50.9 53.1 55.9 58.7 61.7 63.7QoQ 4.8% 4.6% 5.2% 4.3% 5.1% 5.0% 5.1% 3.3%

YoY 27.3% 20.8% 21.0% 20.2% 20.6% 21.1% 21.1% 19.9%Competition ‐ blended growth (YoY) 17.3% 16.3% 15.4% 12.9% 12.3% 12.8% 14.2% 16.2%

MTN Nigeria (34% ‐ Bharti Africa rev) 40.5 41.1 41.6 42.9 43.2 45.6 47.4 51.3QoQ 0.8% 1.4% 1.3% 3.0% 0.7% 5.7% 3.9% 8.1%YoY 15.6% 11.6% 7.7% 6.7% 6.5% 11.0% 13.9% 19.6%MTN Zambia (10% ‐ Bharti Africa rev) 2.2 2.4 2.7 2.9 3.2 3.5 4.1 4.2QoQ 6.4% 9.7% 13.5% 8.9% 7.1% 9.9% 17.4% 3.1%YoY 50.8% 43.5% 42.3% 44.2% 45.2% 45.6% 50.7% 42.6%Millicom (22% ‐ Bharti Africa rev) 16.3 16.9 17.1 17.0 17.4 18.2 18.7 18.5QoQ 6.6% 3.8% 0.7% ‐0.6% 2.5% 4.8% 2.4% ‐0.6%YoY 17.4% 17.4% 15.8% 10.8% 6.5% 7.5% 9.4% 9.4%Voda Tanazania (6% ‐ Bharti Africa rev) 9.3 10.3 11.6 9.7 9.1 9.0 9.4 9.5QoQ 4.5% 10.9% 13.1% ‐16.8% ‐6.2% ‐1.1% 4.3% 1.2%YoY 15.6% 22.0% 34.1% 9.1% ‐2.1% ‐12.7% ‐19.5% ‐2.0%Voda DRC (9% of Bharti Africa revenue) 4.2 4.8 5.1 5.6 6.2 6.7 7.1 7.7QoQ 2.2% 12.7% 7.0% 10.2% 10.6% 7.3% 5.8% 8.7%YoY 24.2% 31.5% 33.1% 35.8% 47.0% 40.0% 38.4% 36.6%


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Bharti has gained subscriber market share in Nigeria – We also deep‐dive into Bharti’s subscriber movement in its largest market, i.e. Nigeria (contributed 34% of its FY12 Africa revenue) and determine that Bharti has gained ground in Nigeria. The company’s subscriber market share has increased by 244bps from Q1FY12 to Q4FY13. The market share gains have come at the cost of MTN and Globacom, which have lost 133bps and 135bps during the same period.

Nigeria subscriber growth (mn) Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Comments

MTN 40.5 36.5 38.7 42.9 43.2 45.6 47.4 51.3 Lost 133 bps market share from Q1FY12 QoQ (%) 0.8% ‐9.9% 5.9% 10.9% 0.7% 5.7% 3.9% 8.1% YoY (%) 17.3% 0.0% 0.0% 6.7% 6.5% 24.9% 22.6% 19.6% Market share (%) 45.2% 44.6% 44.3% 43.5% 42.4% 42.7% 42.1% 43.9% Globacom 19.5 17.6 19.6 20.8 22.0 22.3 24.1 23.8 Lost 135 bps market share from Q1FY12 QoQ (%) ‐2.5% ‐9.7% 11.5% 6.2% 5.5% 1.2% 8.4% ‐1.2% YoY (%) 13.4% 0.0% 0.0% 4.2% 12.8% 26.4% 22.9% 14.3% Market share (%) 21.7% 21.5% 22.5% 21.2% 21.6% 20.8% 21.4% 20.4% Bharti Airtel 16.0 15.6 15.8 18.6 19.8 21.1 23.1 23.7 Gained 244 bps market share from Q1FY12 QoQ (%) ‐0.9% ‐2.6% 1.8% 17.5% 6.6% 6.5% 9.4% 2.5% YoY (%) 5.1% 0.0% 0.0% 15.4% 24.1% 35.7% 45.8% 27.3% Market share (%) 17.8% 19.0% 18.1% 18.9% 19.5% 19.7% 20.5% 20.3% Etisalat 7.8 9.5 10.8 11.9 13.1 14.4 14.9 15.1 Gained 419 bps market share from Q1FY12 QoQ (%) 7.7% 21.4% 13.0% 10.9% 9.5% 10.2% 3.6% 1.4% YoY (%) 90.7% 75.6% 58.3% 63.9% 66.7% 51.3% 38.7% 26.7% Market share (%) 8.7% 11.6% 12.3% 12.1% 12.8% 13.5% 13.2% 12.9% Others 5.8 2.7 2.4 4.3 3.8 3.5 3.2 3.0 Industry 89.7 81.9 87.3 98.5 101.9 106.9 112.8 116.9 QoQ (%) ‐0.4% ‐8.7% 6.6% 12.9% 3.4% 4.9% 5.5% 3.6% YoY (%) 14.7% 0.0% 0.0% 9.5% 13.6% 30.5% 29.2% 18.6%


ARPU declining at a fast pace – An ARPU comparison of Bharti with its African peers reveals that ARPU is declining at a fast clip in almost all markets – the decline is almost at a double digit pace. The data also reveals that the pace of ARPU decline for Bharti is greater than that of competition (on a blended basis); however, this can’t be conclusively stated as very few of Bharti’s peers report data on a regular basis. We note that the rapid pace of ARPU decline is the key culprit for revenue growth as rapid subscribers addition continues to happen (as highlighted above).

ARPU snapshot (US$) Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13

Bharti Africa 7.3 7.3 7.1 6.8 6.5 6.4 6.2 5.9QoQ 1.6% 0.2% ‐2.3% ‐4.1% ‐4.3% ‐2.4% ‐2.4% ‐4.9%

YoY ‐1.7% ‐1.5% ‐2.5% ‐4.6% ‐10.2% ‐12.5% ‐12.5% ‐13.3%Competition ‐ blended growth (YoY) ‐11.8% ‐12.2% ‐6.8% ‐5.3% ‐2.6% ‐5.3% ‐6.7% ‐7.7%

MTN Nigeria (34% of Bharti Africa revenue) 9.8 9.8 9.7 9.4 9.2 8.3 8.1 7.9QoQ ‐2.0% 0.0% ‐1.0% ‐3.1% ‐1.8% ‐10.1% ‐2.7% ‐2.4%YoY ‐10.9% ‐10.9% ‐8.5% ‐6.0% ‐5.8% ‐15.3% ‐16.7% ‐16.1%MTN Zambia (10% of Bharti Africa revenue) 4.7 5.0 5.2 4.4 5.2 5.1 4.8 4.2QoQ ‐6.0% 6.4% 4.0% ‐15.4% 18.0% ‐2.3% ‐5.3% ‐12.1%YoY ‐57.3% ‐58.3% ‐13.3% ‐12.0% 10.4% 1.4% ‐7.7% ‐4.1%Millicom (overlaps with 22% of Bharti Africa revenue) 5.1 4.9 4.8 4.6 4.5 4.3 4.2 4.0QoQ ‐3.8% ‐3.9% ‐2.0% ‐4.2% ‐2.2% ‐4.4% ‐2.3% ‐4.8%YoY ‐7.3% ‐9.3% ‐11.1% ‐13.2% ‐11.8% ‐12.2% ‐12.5% ‐13.0%Vodacom Tanazania (6% of Bharti Africa revenue) 2.8 2.8 2.8 3.4 3.8 4.7 4.6 5.7QoQ 2.7% 0.0% 1.5% 18.1% 13.5% 22.5% ‐1.4% 23.7%YoY ‐4.0% ‐6.9% ‐2.0% 23.2% 36.1% 66.8% 62.1% 69.7%Vodacom DRC (9% of Bharti Africa revenue) 4.8 5.1 4.7 4.6 4.2 4.3 4.1 3.1QoQ ‐2.0% 6.3% ‐7.8% ‐2.1% ‐8.7% 2.4% ‐4.7% ‐24.4%YoY ‐7.7% ‐3.8% 0.0% ‐6.1% ‐12.5% ‐15.7% ‐12.8% ‐32.6%


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4) EBITDA margins under pressure; here too Bharti has outperformed peers In our comparison of EBITDA margins of Bharti Airtel’s Africa EBITDA, EBITDA growth and EBITDA margins with peers, we find that Bharti has managed to hold on to its EBITDA margin, while peers have seen a decline in margins. However, Bharti’s EBITDA margins are much lower than that of competition, implying that the company has more scope to cut costs than peers.

EBITDA (US$ mn) H1CY11 H2CY11 H1CY12 H2CY12 Comments

Bharti Africa 505 553 573 598 EBITDA margin 26.5% 26.5% 26.8% 26.8% EBITDA margins steady for Bharti

YoY growth (%) 13.5% 8.3% Competition ‐ blended growth (YoY) 1.1% ‐2.0% ‐7.0%

MTN Nigeria (overlap: 34% of Bharti Africa rev) 1,543 1,486 1,445 1,282 YoY 32.6% ‐0.8% ‐0.3% ‐12.0% EBITDA margin 64.5% 60.2% 60.5% 56.0% Millicom (overlap: 22% of Bharti Africa rev) 194 206 181 179 EBITDA margin 41.3% 41.5% 37.8% 36.1% YoY 17.9% 6.3% ‐8.4% ‐13.1%


5) Capex and capex/sales – Bharti is spending significantly lower than competition We observe that on the capex front, Bharti incurred substantial capex in 2011, much higher than African peers on a capex to sales basis. However, in 2012, the company’s capex was much lower than that of peers. Bharti’s FY14 capex guidance for US$ 600mn is lower than the US$ 724mn that the company spent in FY13. While management has asserted that its capex is much more efficient than its African counterparts, we highlight that MTN in Nigeria alone has guided for a CY13 capex of US$ 1.6bn (ZAR 13.1bn), more than 2x of Bharti’s planned capex for FY14.

Capex (US$ mn) H1CY11 H2CY11 H1CY12 H2CY12 Comments

Bharti Africa 802 840 374 370

Capex to sales (Bharti) 42.2% 40.2% 17.5% 16.6% Bharti's capex to sales declining Peers ‐ Capex to sales 14.5% 27.5% 23.3% 50.4%

MTN Nigeria (overlap: 34% of Bharti Africa rev) 295 595 543 1,098 Capex to sales 12.3% 24.1% 22.7% 48.0% Millicom (overlap: 22% of Bharti Africa rev) 120 221 126 304 Capex to sales 25.6% 44.6% 26.4% 61.4%


Our estimates for Bharti are conservative. We are looking at muted 6% YoY revenue growth for the company as the operating environment remains challenging. Considering the sluggish revenue growth, we don’t expect any material margin improvement for the company.

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(US$ mn) FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E

Minutes (mn) 46,296 71,913 92,832 108,048 129,355 155,722 185,225 213,934YoY 26% 29% 16% 20% 20% 19% 15%Subscribers (mn) 44.2 53.1 63.7 73.7 85.7 101.7 117.7 133.7YoY 20% 20% 16% 16% 19% 16% 14%Net adds (mn) 8.9 10.6 10.0 12.0 16.0 16.0 16.0ARPU (US$) 6.8 7.1 6.3 5.7 5.4 5.3 5.2 5.1YoY 4% ‐11% ‐10% ‐4% ‐3% ‐2% ‐1%RPM (USc) 6.2 5.8 4.8 4.3 4.0 3.8 3.7 3.6YoY ‐7% ‐17% ‐9% ‐7% ‐5% ‐4% ‐2%MOU (mins) 107.2 112.8 121.4 131.0 135.2 138.5 140.7 141.8YoY 5% 8% 8% 3% 2% 2% 1%Revenue 2,878 4,137 4,417 4,680 5,212 5,943 6,819 7,735YoY 17% 7% 6% 11% 14% 15% 13%Access charges 525 820 785 731 858 1,012 1,180 1,335% of Revenue 18.2% 19.8% 17.8% 15.6% 16.5% 17.0% 17.3% 17.3%YoY 27% ‐4% ‐7% 17% 18% 17% 13%Licence fees, revenue share & spectrum charges 112 174 198 211 235 267 307 348As a % of Revenues 3.9% 4.2% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%Growth YoY (%) 27% 13% 6% 11% 14% 15% 13%Network operations costs 460 666 762 815 903 995 1,092 1,193As a % of Revenues 16.0% 16.1% 17.2% 17.4% 17.3% 16.7% 16.0% 15.4%Growth YoY (%) 18% 14% 7% 11% 10% 10% 9%Employee cost 286 342 355 384 411 440 471 505As a % of Revenues 10.0% 8.3% 8.0% 8.2% 7.9% 7.4% 6.9% 6.5%Growth YoY (%) ‐3% 4% 8% 7% 7% 7% 7%Sales and marketing expenditure 729 1,040 1,160 1,319 1,406 1,626 1,871 2,107As a % of Revenues 25.3% 25.1% 26.3% 28.2% 27.0% 27.4% 27.4% 27.2%Growth YoY (%) 16% 11% 14% 7% 16% 15% 13%Total operating expenses 2,112 3,043 3,260 3,459 3,813 4,340 4,921 5,488As a % of Revenues 73.4% 73.6% 73.8% 73.9% 73.1% 73.0% 72.2% 70.9%Growth YoY (%) 17% 7% 6% 10% 14% 13% 12%EBIDTA 766 1,094 1,157 1,221 1,399 1,603 1,898 2,247As a % of Revenues 26.6% 26.4% 26.2% 26.1% 26.9% 27.0% 27.8% 29.1%Growth YoY (%) 16% 6% 6% 15% 15% 18% 18%


Access charges to reduce on account of cuts in interconnect rates: We highlight that the company is likely to see a YoY decline in access charges on account of reduction in interconnect rates made in various markets, viz. Nigeria, Kenya etc. We expect the company continue its market‐place aggression resulting in growth of sales and marketing expenses outpacing revenue growth.

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Strong quarterly growth trends We also expect consistent and strong quarterly growth trend for Idea Cellular. The company has both near term and long‐term earning triggers which provide significant scope for re‐rating.

Bharti Airtel Quarterly P&L (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14E Q2FY14E Q3FY14E Q4FY14ERevenue 193,619 202,830 202,537 204,604 214,186 220,934 229,714 240,689 QoQ (%) 3.4% 4.8% 2.8% 1.0% 4.7% 3.2% 4.0% 4.8%YoY (%) 14.0% 17.4% 9.6% 9.2% 10.6% 8.9% 13.4% 17.6%Operating expenses 135,132 139,322 140,698 139,734 145,825 150,447 156,930 163,585 QoQ (%) 8.1% 3.1% 1.0% ‐0.7% 4.4% 3.2% 4.3% 4.2%YoY (%) 19.8% 21.6% 12.1% 11.7% 7.9% 8.0% 11.5% 17.1%EBITDA 58,487 63,508 61,839 64,870 68,361 70,487 72,784 77,103 QoQ (%) ‐6.0% 2.7% 3.0% 4.9% 5.4% 3.1% 3.3% 5.9%YoY (%) 2.5% 3.4% 3.8% 4.2% 16.9% 11.0% 17.7% 18.9%EBITDA margin (%) 30.2% 30.5% 30.5% 31.7% 31.9% 31.9% 31.7% 32.0%EBIT 20,916 24,948 22,834 25,042 27,072 27,421 28,857 32,888 QoQ (%) ‐24.1% 19.3% ‐8.5% 9.7% 8.1% 1.3% 5.2% 14.0%YoY (%) ‐18.8% ‐4.9% ‐3.8% ‐9.1% 29.4% 9.9% 26.4% 31.3%EBIT margin (%) 10.8% 12.3% 11.3% 12.2% 12.6% 12.4% 12.6% 13.7%PAT 7,622 7,212 2,837 5,086 9,175 10,463 9,794 13,042 QoQ (%) ‐24.2% ‐5.4% ‐41.2% 79.3% 80.4% 14.0% ‐6.4% 33.2%YoY (%) ‐37.3% ‐29.8% ‐71.9% ‐49.4% 20.4% 45.1% 245.2% 156.4%PAT margin (%) 3.9% 3.6% 1.4% 2.5% 4.3% 4.7% 4.3% 5.4%EPS (Rs) 2.01 1.90 0.75 1.34 2.29 2.62 2.45 3.26

Source: Company, PhillipCapital India Research Strong opening quarter for FY14 for India business but Africa will be a disappointment: Q1FY14 will be reasonably strong quarter for the domestic business with all round revenue growth led by wireless business. We expect 2.4% QoQ minutes growth and 1.9% improvement in voice RPM in India business. Driven by strong revenue growth EBIDTA margins will see QoQ improvement in EBIDTA margins. While the India business will see improvement in revenue growth and margin improvement, the African business will witness decline in revenues, compression in EBIDTA and widening of losses on account of challenging operating environment.

Bharti Airtel – India & SA ‐ Quarterly P&L (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14E Q2FY14E Q3FY14E Q4FY14EIndia Minutes (mn) 239,338 234,224 240,814 253,144 259,219 254,035 262,353 272,847QoQ (%) 3.9% ‐2.1% 2.8% 5.1% 2.4% ‐2.0% 3.3% 4.0%YoY (%) 8.0% 7.7% 9.9% 9.9% 8.3% 8.5% 8.9% 7.8%India RPM (Rs) 0.427 0.426 0.425 0.423 0.431 0.434 0.439 0.447QoQ (%) ‐2.6% ‐0.2% ‐0.1% ‐0.5% 1.9% 0.6% 1.2% 1.8%YoY (%) ‐0.2% ‐1.4% ‐4.6% ‐3.3% 1.1% 1.9% 3.2% 5.6%India Voice RPM (Rs) 0.357 0.354 0.352 0.350 0.358 0.360 0.365 0.371QoQ (%) ‐2.8% ‐0.7% ‐0.8% ‐0.5% 2.4% 0.6% 1.2% 1.8%YoY (%) ‐1.1% ‐2.3% ‐6.3% ‐4.8% 0.3% 1.7% 3.7% 6.1%India & SA mobile revenue ‐ (1) + (2) 106,848 111,170 109,364 112,853 117,436 116,171 121,321 128,254QoQ (%) 1.7% 4.0% ‐1.6% 3.2% 4.1% ‐1.1% 4.4% 5.7%YoY (%) 8.6% 13.6% 7.5% 7.4% 9.9% 4.5% 10.9% 13.6%India wireless revenue ‐ (1) 102,092 99,760 102,445 107,181 111,795 110,248 115,219 121,970QoQ (%) 1.2% ‐2.3% 2.7% 4.6% 4.3% ‐1.4% 4.5% 5.9%YoY (%) 7.8% 6.3% 4.8% 6.2% 9.5% 10.5% 12.5% 13.8%South Asia wireless revenue & one‐offs ‐ (2) 4,756 11,410 6,919 5,672 5,641 5,923 6,101 6,284QoQ (%) 13.3% 139.9% ‐39.4% ‐18.0% ‐0.5% 5.0% 3.0% 3.0%YoY (%) 29.6% 189.4% 72.0% 35.2% 18.6% ‐48.1% ‐11.8% 10.8%India broadband and enterprise services 21,348 23,463 23,785 22,764 23,902 24,619 25,358 26,265QoQ (%) 4.8% 9.9% 1.4% ‐4.3% 5.0% 3.0% 3.0% 3.6%YoY (%) 7.5% 14.1% 13.2% 11.8% 12.0% 4.9% 6.6% 15.4%Passive infrastructure 24,048 25,567 26,350 27,189 27,662 27,938 27,938 28,357QoQ (%) ‐0.6% 6.3% 3.1% 3.2% 1.7% 1.0% 0.0% 1.5%YoY (%) 5.6% 7.6% 8.0% 12.4% 15.0% 9.3% 6.0% 4.3%Other India & SA revenue 4,494 4,913 5,062 5,276 5,434 5,597 5,821 5,996

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QoQ (%) 1.9% 9.3% 3.0% 4.2% 3.0% 3.0% 4.0% 3.0%YoY (%) 21.5% 23.0% 17.2% 19.6% 20.9% 13.9% 15.0% 13.6%Total India & SA revenue 137,177 144,187 142,672 145,512 151,758 151,664 156,981 164,319QoQ (%) 2.2% 5.1% 3.1% 2.0% 4.3% ‐0.1% 3.5% 4.7%YoY (%) 8.6% 13.7% 8.4% 8.4% 10.6% 5.2% 10.0% 12.9%Operating expenses 135,132 139,322 140,698 139,734 145,825 150,447 156,930 163,585QoQ (%) 8.1% 3.1% 1.0% ‐0.7% 4.4% 3.2% 4.3% 4.2%YoY (%) 19.8% 21.6% 12.1% 11.7% 7.9% 8.0% 11.5% 17.1%EBITDA 43,584 47,097 45,456 49,435 52,259 52,267 53,818 57,135QoQ (%) ‐8.0% 0.1% 4.1% 8.8% 5.7% 0.0% 3.0% 6.2%YoY (%) ‐5.3% ‐4.5% 0.5% 4.4% 19.9% 11.0% 18.4% 15.6%EBITDA margin (%) 31.8% 31.6% 31.9% 34.0% 34.4% 34.5% 34.3% 34.8%


Bharti Airtel Africa Quarterly P&L (Rs mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14E Q2FY14E Q3FY14E Q4FY14E

Revenue 1,066 1,097 1,133 1,120 1,098 1,136 1,193 1,253QoQ (%) ‐0.4% 2.8% 3.4% ‐1.2% ‐2.0% 3.5% 5.0% 5.0%YoY (%) 8.9% 6.4% 7.2% 4.6% 3.0% 3.6% 5.3% 11.9%Operating expenses 792 799 833 836 815 837 882 925QoQ (%) 2.4% 1.0% 4.3% 0.3% ‐2.6% 2.8% 5.3% 4.9%YoY (%) 10.0% 5.2% 7.3% 8.2% 2.9% 4.8% 5.8% 10.7%EBITDA 275 298 300 285 283 299 311 328QoQ (%) ‐7.7% 8.3% 0.8% ‐5.1% ‐0.6% 5.5% 4.1% 5.3%YoY (%) 5.3% 10.2% 6.5% ‐4.4% 3.0% 0.3% 3.6% 15.0%EBITDA margin (%) 25.8% 27.2% 26.5% 25.4% 25.8% 26.3% 26.1% 26.1%EBIT 62 80 80 62 56 67 75 86QoQ (%) ‐39.5% 30.0% 0.2% ‐22.8% ‐9.9% 20.0% 11.4% 15.7%YoY (%) ‐5.3% ‐1.3% 37.6% ‐39.1% ‐9.4% ‐16.3% ‐7.0% 39.2%EBIT margin (%) 10.8% 12.3% 11.3% 12.2% 12.6% 12.4% 12.6% 13.7%Net income (124) (97) (96) (90) (97) (96) (88) (82)

Source: Company, PhillipCapital India Research • Q2FY14 likely to be subdued on minutes addition but EBIDTA margins

expected be robust: Q2 is generally the slowest quarter of the year and we have estimated a volume de‐growth of 2% in line with prior‐period trend. While volume growth is likely to be sluggish we expect pricing to improve marginally on account of carry forward effect of price hikes taken at the end of Q1FY14. The company is also likely to manage sales and marketing expenses which will translate to robust EBIDTA margins. We expect improvement in Africa business from Q2FY14 onwards. Our estimates for the African business are conservative compared to the consensus and some sequential improvements from Q2FY14 onwards cannot be ruled out.

• Q3 and Q4 will again deliver sharp growth numbers: It is expected that the next round of price hikes will be closer to the festival season in October 2014. We expect strong revenue and EBIDTA growth for the domestic operations on account of bounce‐back in minutes growth and improvement in RPM. We also expect improvement of revenue growth trends in Africa which will provide impetus to the earnings growth.

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Debt profile – forex exposure not to result in material cash loss We estimate a cash loss of ~Rs 1bn for Bharti Airtel on account of the currency depreciation in Q1FY14. We estimate the company’s US$ denominated equipment supplier payables is estimated at US$ 500‐600mn. This comprises ~US$ 250‐300mn which would be serviced by the Indian business. An 8% depreciation of the INR (in Q1FY14) against the US$ implies a one‐time cash loss of Rs 1bn (~Rs 0.25/share). However, we highlight that future electronics India capex (largely US$ denominated) increases on account of the depreciation. Below we highlight the current debt outstanding of Bharti Airtel. Estimated current net debt of Bharti Airtel (US$ mn)

1,438

7,500

10,638

1,700

‐

2,000

4,000

6,000

8,000

10,000

12,000

India African debt Consol Net Debt

US$ debt at HoldCo level LC Debt at OpCo level


Bharti Airtel reported total net debt of US$ 11.7bn as of Q4FY13. Since then the following changes that have occurred: 1) 23rd April 2013 – Bharti Airtel acquired 100% stake in Warid Uganda. Warid Uganda

has 2.8mn subscribers and the combined entity will have a subscriber base of 7.8mn. We estimate that Bharti Airtel has paid ~US$ 90mn for this deal

2) 2nd May 2013 – Bharti Airtel acquired 30% equity stake of Warid in Airtel Bangladesh Limited. The company has ~7.5mn subscribers and we estimate that Bharti would have paid ~US$ 70mn

3) 3rd May 2013 – Bharti Airtel issues 199.87 Mn new shares to be issued to Qatar Foundation Endowment representing 5% stake in the Company for a total consideration of USD 1.26 Bn.

We estimate that the company’s current quarter cash flow needs are fulfilled through its internal cash generation and hence we estimate the current net debt position of the company at US$ 10.6bn. As highlighted above, Bharti has debt and payables in the following entities

India business – o We estimate the company’s India business debt to be US$1.4bn. This is largely

rupee denominated and isn’t affected by the adverse currency movement. o Equipment supplier payables – we estimate Bharti’s domestic equipment supplier

payables of US$ 500mn, as the company has a 180 day payment policy for its capex payables. Of this, we assume that 50% is US$ denominated and must be funded from the Indian operations. This (US$ 250mn) is the portion affected by the INR depreciation and will cause a one‐time forex restatement loss to be routed through the P&L of around Rs 1bn (~Rs 0.25/share).

African business – o The company has ~US$ 7.5bn at the holding company level of the Africa business,

Bharti Airtel International (Netherlands) B.V. The functional currency of this

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company is US$, hence the INR depreciation against the US$ will not flow through the company’s consolidated P&L. Translation of this debt will be adjusted through the Foreign Currency Translation Reserve of the company.

o Debt at operating companies’ (Opco’s) – Bharti also has debt at the operating level in each of its African subsidiaries to cater to operating needs. We estimate this to be ~US$ 1.7bn and this is predominantly local currency denominated. However, we note that at the individual operating level, there might be minor US$ loans, which might see a restatement loss in keeping with the movement of the respective local currency with the US$.

o Equipment supplier payables of ~US$ 400mn, including ~US$250mn which is US$ denominated. We note that the US$ denominated trade payables for each of the countries will also see restatement losses or gains in keeping with the quantum of movement of the respective currencies versus the US$. We highlight that the African basket, has in fact appreciated 1.2% against the US$ in the current quarter.

The company’s recent debt raising of US$ 1.5bn through issuance of long term bonds is to cater to principal repayments on this loan over the next two years. While the short‐term implications of the INR depreciation against the US$ aren’t significant, but future capex in rupee terms will inflate and is a medium to long‐term negative. Additionally, another important risk monitorable is the movement of the basket of African currencies against the US$. Revenue‐weighted basket of African currencies has appreciated versus the US Dollar Contrary to common perception, from Q4FY13‐end till date (i.e. 11th June 2013), the African basket of currencies (weighted by Bharti’s FY12 Africa revenue) has appreciated by 1.2% QoQ against the US$. We highlight that the revenue earned by Bharti from its African operations is used to fulfill the company’s US$ denominated debt obligations connected to the acquisition and this currency move is positive as this reduces the debt obligations in Africa’s local currency terms (as opposed to market expectations of a bloating of liabilities). Movement of revenue‐weighted basket of African currencies (end‐of‐period values) vis‐à‐vis the US$*

1.0%

‐4.9%

1.2%

‐0.2%

‐2.2%

‐0.3%

0.2%

‐6.0%

‐5.0%

‐4.0%

‐3.0%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

Q4FY13 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2F14TD*


* ‐ Q2FY14 Till date; positive values imply that the revenue‐weighted basket of African currencies versus the

US$, and vice‐versa;

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Below are details of the movement of African currencies against the US$.

Movement of African currencies vis‐à‐vis the US$

Nigeria Zambia DRC Tanzania Congo Gabon Ghana Niger Malawi Revenue weighted movement vs. US$

Q1FY12 1.8% ‐2.7% ‐0.1% ‐7.2% 2.6% 2.6% ‐0.4% 2.9% 0.1% 0.1%Q2FY12 ‐4.9% 0.1% ‐0.3% ‐3.2% ‐8.6% ‐8.6% ‐5.3% ‐8.9% ‐9.0% ‐5.3%Q3FY12 ‐1.6% ‐6.1% 1.3% 4.7% ‐3.3% ‐3.3% ‐2.7% ‐3.3% 1.2% ‐0.9%Q4FY12 2.8% ‐3.0% ‐1.4% ‐0.6% 3.0% 3.0% ‐8.4% 3.3% ‐1.6% 1.0%Q1FY13 ‐3.2% 2.5% 0.3% 1.2% ‐5.4% ‐5.4% ‐9.1% ‐5.4% ‐62.0% ‐4.9%Q2FY13 3.4% 1.0% 0.4% ‐0.2% 1.5% 1.5% 2.2% 1.5% ‐11.5% 1.2%Q3FY13 0.7% ‐2.1% 0.2% ‐0.6% 2.4% 2.4% ‐0.4% 2.2% ‐11.6% ‐0.2%Q4FY13 ‐1.5% ‐3.1% ‐0.5% ‐2.0% ‐2.9% ‐2.9% ‐1.7% ‐2.9% ‐15.8% ‐2.2%Q1FY14 ‐2.5% ‐0.5% 0.3% ‐0.5% ‐2.2% 1.8% 1.8% ‐4.8% 1.9% ‐0.2%

Q1FY14* 0.8% ‐1.5% ‐0.2% 0.4% ‐0.1% 0.6% 0.6% ‐1.2% 0.6% 0.1%

Source: Bloomberg, PhillipCapital India Research

* ‐ Q2FY14 Till date

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Fair Value Calculation We look at Bharti Airtel with a 5‐year horizon to clock revenue CAGR of 11%. Bharti is currently witnessing market share stabilization and we expect the company to grow with the sector in the medium to long term. Our revenue estimates for 3G services are conservative, but this segment has the potential to surprise us positively.

Derivation of Enterprise value 2018 (excluding intermediate FCF) _____________Segmental Growth Profile_____________ _____________EV 2020 calculation_____________

Sales FY13 Sales CAGR (5‐year %) Sales FY18E

EBIT margin(%) EBIT (N)

Yield required (%) P/E EV/EBIT EV (2020)

Wireless services 440,234 9 674,937 25 168,734 7.0 14 10.0 1,687,342 Telemedia services 38,157 8 56,427 25 14,107 9.0 11 7.8 109,720 Enterprise carrier services 53,202 10 86,393 20 17,279 8.0 13 8.8 151,188 Tower business services 103,154 8 152,262 40 60,905 8.5 12 8.2 501,570 Africa 240,539 14 464,118 25 116,030 11.5 9 6.1 706,267 Intersegment (71,697) 6 (94,544) 28 (26,472) 10.0 10 7.0 (185,306)Total 803,590 11 1,339,594 26 350,582 8 12 8.5 2,970,781


Below we outline the derivation of our DCF valuation showcasing the multiples we assign to the businesses. We also roll‐forward our DCF vis‐à‐vis our prior computation to arrive at an September 2014 target price of Rs 435. We consider Rs 340bn (Rs 86/share; 90% of computed potential regulatory impact) as the NPV hit from regulatory eventualities. Intermediate cash flow generation Cash Flows (Rs mn) FY14E FY15E FY16E FY17E FY18E

EBIT 116,225 148,435 169,943 211,365 257,096NOPLAT 75,333 102,662 116,200 143,445 173,890Depreciation 172,498 176,619 193,443 193,443 193,443Capex 139,300 158,500 161,200 172,285 178,012FCF 108,532 120,781 148,443 164,603 189,321% conversion 93 81 87 78 74Discount factor 1.0 0.9 0.8 0.7 0.6PV 108,532 107,840 118,338 117,161 120,317NPV 108,532 216,372 334,710 451,871 572,188

Source: Company, PhillipCapital India Research Rs mn/ Rs per share Value

Enterprise value‐2018 2,970,781 NPV Intermediate FCF 572,188 Net cash‐ end of FY2014 (500,310)Return requirement 12%EV value end of FY2014 2,460,173Target value end of FY2014 1,959,863Target value per share (end Sep 2014) 519Regulatory risks captured (Rs mn) 343,900Value/share (Rs/share) (86)Adj. target value per share (end of Sep 2014) 433


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Key regulatory and other risks We highlight that the risks faced by Bharti Airtel are similar to those highlighted for Idea Cellular. Below we outline the potential financial impact of these risks. Summary of regulatory risks Issue __________Bharti Airtel__________ Rs mn. Rs/sh

One‐time fee on excess spectrum (900/1800MHz) 25,851 11.6

Renewal of spectrum (900MHz)/Spectrum refarming 184,526 46.1

Renewal of 1800MHz spectrum (including excess spectrum) 120,087 30.0

Impact of 8% licence fee on Tower Cos. 33,310 8.3

TOTAL impact 363,774 96.1

Source: Company, PhillipCapital India Research Bharti also has other legal cases including:

o Mr. Sunil Mittal was summoned as a witness in the CBI inquiry on allocation of excess spectrum. Mr. Mittal has contested this in the Supreme Court.

o Other cases pertaining to subscriber linked dialing for routing ILD calls from 2003‐08. The DoT’s claim against Bharti Airtel is Rs 6.5bn.

o Legal cases pertaining to the acquisition of Airtel Networks Nigeria. Recommendation Chart

Buy (TP 430)

Buy (TP 430)

Buy (TP 500)

Buy (TP 423)

Sell (TP 235)

Neutral (TP 365)

Buy (TP 380)

200

250

300

350

400

450

500

1/3/2011 5/24/2011 10/11/2011 2/29/2012 7/16/2012 12/5/2012 4/25/2013


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Financials


Net sales 714,587 803,590 905,522 999,489Growth, % 20 12 13 10Total income 714,587 803,590 905,522 999,489Other Operating expenses ‐477,873 ‐554,886 ‐616,799 ‐674,435EBITDA (Core) 236,714 248,704 288,723 325,053Growth, % 18.6 5.1 16.1 12.6Margin, % 33.1 30.9 31.9 32.5Depreciation ‐133,681 ‐154,964 ‐172,498 ‐176,619EBIT 103,033 93,740 116,225 148,435Growth, % 5.6 (9.0) 24.0 27.7Margin, % 14.4 11.7 12.8 14.9Interest paid ‐38,185 ‐43,844 ‐47,167 ‐33,660Other Non‐Operating Income 104 0 0 0Pre‐tax profit 64,952 49,896 69,058 114,775Tax provided ‐22,602 ‐27,151 ‐24,296 ‐35,393Profit after tax 42,350 22,745 44,761 79,382Others (Minorities, Associates) 13 88 ‐2,300 ‐2,760Net Profit 42,363 22,833 42,461 76,622Growth, % (30.0) (46.1) 86.0 80.5Net Profit (adjusted) 42,363 22,833 42,461 76,622Unadj. shares (m) 4,000 4,000 4,000 4,000Wtd avg shares (m) 4,000 4,000 4,000 4,000


Cash & bank 20,300 17,295 222,045 245,620Debtors 63,735 66,430 54,465 58,805Inventory 1,308 1,109 2,000 2,000Other current assets 62,741 118,070 47,040 47,040Total current assets 148,084 202,904 325,550 353,465Gross fixed assets 674,932 688,430 655,232 637,113Net fixed assets 674,932 688,430 655,232 637,113Non‐current assets 747,600 781,898 781,656 781,656Total assets 1,570,615 1,673,232 1,762,438 1,772,234 Current liabilities 488,873 450,420 444,410 444,410Total current liabilities 488,873 450,420 444,410 444,410Non‐current liabilities 547,935 678,708 648,708 578,708Total liabilities 1,036,808 1,129,128 1,093,118 1,023,118Paid‐up capital 18,988 18,988 19,987 19,987Reserves & surplus 487,125 484,229 593,647 670,269Shareholders’ equity 533,808 544,103 657,280 737,076Total equity & liabilities 1,570,616 1,673,231 1,750,398 1,760,194



Pre‐tax profit 64,952 49,896 69,058 114,775Depreciation 133,681 154,964 172,498 176,619Chg in working capital 14,863 15,524 5,305 ‐4,339Total tax paid ‐22,602 ‐27,151 ‐24,296 ‐35,393Cash flow from operating activities 221,645 193,233 222,565 251,662Capital expenditure ‐157,187 ‐168,462 ‐139,300 ‐158,500Chg in marketable securities ‐26,422 ‐20,594 71,030 0Cash flow from investing activities ‐183,609 ‐189,056 ‐68,270 ‐158,500Equity raised/(repaid) 0 0 67,956 0Debt raised/(repaid) ‐35,184 118,331 ‐30,000 ‐70,000Other financing activities ‐4,923 ‐167,987 0 0Cash flow from financing activities ‐40,107 ‐49,657 37,956 ‐69,586Net chg in cash 1,535 ‐3,881 192,710 23,576


Per Share data EPS (INR) 10.6 5.7 10.6 19.2Growth, % (30.0) (46.1) 86.0 80.5Book NAV/share (INR) 133.5 136.0 164.3 184.3FDEPS (INR) 10.6 5.7 10.6 19.2CEPS (INR) 44.0 44.4 53.7 63.3CFPS (INR) 39.7 43.2 73.3 62.9Return ratios Return on assets (%) 4.4 3.1 4.4 5.7Return on equity (%) 8.1 4.2 7.1 11.0Return on capital employed (%) 6.1 4.4 5.9 7.7Turnover ratios Asset turnover (x) 0.6 0.7 0.8 0.9Sales/Total assets (x) 0.5 0.5 0.5 0.6Sales/Net FA (x) 1.1 1.2 1.3 1.5Working capital/Sales (x) (0.5) (0.3) (0.4) (0.3)Fixed capital/Sales (x) 1.9 1.7 1.5 1.3Working capital days (184.4) (120.3) (137.4) (122.9)Liquidity ratios Current ratio (x) 0.3 0.5 0.7 0.8Quick ratio (x) 0.3 0.4 0.7 0.8Interest cover (x) 2.7 2.1 2.5 4.4Total debt/Equity (%) 129.3 134.1 106.4 85.4Net debt/Equity (%) 125.5 130.9 72.7 52.1Valuation PER (x) 30.5 56.6 30.4 16.9Price/Book (x) 2.4 2.4 2.0 1.8EV/Net sales (x) 2.7 2.5 2.0 1.7EV/EBITDA (x) 8.3 8.1 6.1 5.2EV/EBIT (x) 19.0 21.4 15.2 11.3

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Reliance Communications Subhead line

TELECOM: Company update 19 July 2013


Reliance Communications is clearly an acquisition candidate and the company is taking measures to unlock value for the shareholders. We believe that improvement of the industry structure will make Reliance Communications an attractive acquisition target as the company has huge underutilized asset base. While we do not expect any significant improvement in the core business but we believe that improving industry fundamentals and expectations of further corporate developments will help the stock to trade at elevated valuations. We maintain our Neutral recommendation on the stock. Our key reasons are as follows:

Deals with Reliance Jio improve the financial structure and improve operational performance: Reliance Communications has forged two agreements with Reliance Jio for providing passive infrastructure services which will include sharing of tower and capacity on its terrestrial fibre optic network. The total value of the two deals is Rs 120bn and Rs 12bn respectively. We estimate the two deals add Rs 27/share and Rs xx/share for Reliance Communications

De‐merger of surplus land unlocks value for shareholders: Reliance Communications will de‐merge the surplus land. According to the company the value of the land is Rs 120bn. We estimate that the de‐merger of land will add Rs 30/share after discounting for liquidity and associated taxes for development of the land. We also believe that the de‐merger of land will help the company is separating the core assets from the non‐core assets will help Reliance Communications to fasten the sale process of the core telecom business.

Core business performance will continue to remain uninspiring: Reliance Communications operates GSM and CDMA networks. The GSM subscriber additions have been subpar while the company has continued to lose CDMA subscribers. The company has lost significant revenue market share in the last 3 years. We do not expect any significant improvement in the operating performance as the company’s stretched balance sheet limits the company’s participation in the market.

Maintain estimates, Maintain Neutral Rating: The company and industry’s fundamentals have improved over the last six months and the stock has seen a significant run up on account of the corporate developments. At current valuations we find the company offers limited upside from the current levels. RCOM is the most expensive Indian Telecom stock but considering the expectations of an imminent buy out the stock is likely to trade at elevated valuations. We maintain our Neutral recommendation on the stock considering the limited upside and stretched valuations.

Neutral RCOM IN | CMP RS 147


O/S SHARES (MN) : 2064MARKET CAP (RSBN) : 302MARKET CAP (USDBN) : 5.152 ‐ WK HI/LO (RS) : 151 / 47LIQUIDITY 3M (USDMN) : 62.2FACE VALUE (RS) : 5




ABS 18.5 70.2 125.3REL TO BSE 13.8 64.4 108.2


0

30

60

90

120

150

Apr‐10 Feb‐11 Dec‐11 Oct‐12RCOM BSE Sensex


Other Key Ratios

FY13 FY14E FY15E

Net Sales 217,784 257,562 272,335EBITDA 71,616 97,272 99,364Net Profit 6,537 19,314 24,288EPS, Rs 3.2 9.4 11.8PER, X 46.4 15.7 12.5EV/EBIDTA, % 9.6 6.6 5.9EV/Net Sales, x 3.2 2.5 2.2ROE, % 2.3 6.3 7.3Debt/Equity, % 139.8 131.0 106.2Source: Phillip Capital India Research Naveen Kulkarni (+9122 6667 9947) [email protected] Vivekanand Subbaraman (+9122 6667 9766) [email protected]

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19 July 2013 / INDIA EQUITY RESEARCH / RELIANCE COMMUNICATION COMPANY UPDATE

Details of RCom’s surplus land Location Area (acres) Sq. feet

DAKC, Koparkhairane, Navi Mumbai 135 5,880,600

Connaught Place, Delhi 4 174,240


(Rs mn)

Value estimated by independent valuers 120,000 Discount to estimated value 20%Value of land 96,000 Taxes 33,600 Tax adjusted realisation 62,400 Per share stock price impact (Rs/share) 30

Target price derivation of RCom (Rs/share)DCF‐derived valuation of core business 103Value‐addition due to R‐Jio deal 27Tax‐adjusted value of land 30 New target price of RCom 160 Source: Company, PhillipCapital India Research

Recommendation Chart

Neutral (TP 160)

Neutral(TP 103)

Buy (TP 85)

Neutral (TP 85)

Sell (TP 50)

Neutral (TP 62)

Neutral (TP 80)

Neutral (TP 85)

0

20

40

60

80

100

120

140

160

1/3/2011 5/30/2011 10/21/2011 3/16/2012 8/7/2012 1/3/2013 5/29/2013


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19 July 2013 / INDIA EQUITY RESEARCH / RELIANCE COMMUNICATION COMPANY UPDATE

Financials


Net sales 203,423 217,784 257,562 272,335Growth, % ‐12 7 18 6Total income 203,423 217,784 257,562 272,335Other Operating expenses ‐138,919 ‐146,168 ‐160,289 ‐172,972EBITDA (Core) 64,504 71,616 97,272 99,364Growth, % (29.0) 11.0 35.8 2.1Margin, % 31.7 32.9 37.8 36.5Depreciation ‐39,783 ‐38,452 ‐42,632 ‐47,033EBIT 24,721 33,164 54,640 52,331Growth, % (4.1) 34.2 64.8 (4.2)Margin, % 12.2 15.2 21.2 19.2Interest paid ‐15,901 ‐24,993 ‐30,498 ‐21,970Pre‐tax profit 8,820 8,171 24,142 30,361Tax provided 1,062 ‐1,634 ‐4,828 ‐6,072Profit after tax 9,882 6,537 19,314 24,288Net Profit 9,882 6,537 19,314 24,288Growth, % (33.8) (33.9) 195.5 25.8Net Profit (adjusted) 9,882 6,537 19,314 24,288Unadj. shares (m) 2,064 2,064 2,064 2,064Wtd avg shares (m) 2,064 2,064 2,064 2,064


Cash & bank 10,785 12,814 63,905 63,611Marketable securities at cost 1,230 1,115 1,115 1,115Debtors 35,839 39,105 35,282 34,322Inventory 5,663 4,967 4,234 5,223Loans & advances 78,950 77,918 77,269 81,701Other current assets 29,569 22,135 30,907 32,680Total current assets 162,036 158,054 212,713 218,652Gross fixed assets 995,639 1,045,924 1,066,000 1,107,442Less: Depreciation ‐331,091 ‐392,041 ‐434,673 ‐446,914Add: Capital WIP 50,230 38,637 38,637 38,637Net fixed assets 714,778 692,520 669,964 699,165Total assets 876,814 850,574 882,177 863,114 Current liabilities 147,004 127,032 131,815 135,645Provisions 31,286 27,522 35,092 37,961Total current liabilities 178,290 154,554 166,907 173,606Non‐current liabilities 369,178 401,458 401,458 351,458Total liabilities 547,468 556,012 568,365 525,064Paid‐up capital 10,320 10,320 10,320 10,320Reserves & surplus 306,803 276,927 296,241 320,529Shareholders’ equity 325,725 294,500 313,814 338,102Total equity & liabilities 873,193 850,512 882,179 863,167



Pre‐tax profit 8,820 8,171 24,142 30,361Depreciation 39,783 38,452 42,632 47,033Chg in working capital ‐17,482 ‐20,536 6,091 53,426Total tax paid ‐2,043 1,062 ‐1,634 ‐4,828Cash flow from operating activities 29,078 27,149 71,232 125,990Capital expenditure ‐25,153 ‐15,000 ‐18,000 ‐22,000Chg in marketable securities ‐141 115 0 0Other investing activities 1,932 0 0 0Cash flow from investing activities ‐23,362 ‐125 ‐20,076 ‐76,233Debt raised/(repaid) ‐4,579 32,280 0 ‐50,000Dividend (incl. tax) 1,932 ‐1,932 ‐1,932 ‐1,932Cash flow from financing activities ‐2,290 28,999 ‐1,932 ‐51,932Net chg in cash 3,426 56,024 49,223 ‐2,175


Per Share data EPS (INR) 4.8 3.2 9.4 11.8Growth, % (33.8) (33.9) 195.5 25.8Book NAV/share (INR) 153.6 139.2 148.5 160.3FDEPS (INR) 4.8 3.2 9.4 11.8CEPS (INR) 24.1 21.8 30.0 34.6CFPS (INR) 14.1 13.2 34.3 34.8DPS (INR) ‐ 0.9 0.9 0.9Return ratios Return on assets (%) 2.3 2.6 4.5 4.4Return on equity (%) 3.1 2.3 6.3 7.3Return on capital employed (%) 2.7 3.1 5.3 5.2Turnover ratios Asset turnover (x) 0.3 0.3 0.4 0.4Sales/Total assets (x) 0.2 0.3 0.3 0.3Sales/Net FA (x) 0.3 0.3 0.4 0.4Working capital days 3.9 22.7 12.9 13.8Liquidity ratios Current ratio (x) 1.1 1.2 1.5 1.5Quick ratio (x) 1.1 1.2 1.5 1.5Interest cover (x) 1.6 1.3 1.8 2.4Dividend cover (x) 3.4 10.0 12.6Total debt/Equity (%) 116.4 139.8 131.0 106.2Net debt/Equity (%) 113.0 135.3 110.1 87.0Valuation PER (x) 30.7 46.4 15.7 12.5PEG (x) ‐ y‐o‐y growth (0.9) (1.4) 0.1 0.5Price/Book (x) 1.0 1.1 1.0 0.9Yield (%) ‐ 0.6 0.6 0.6EV/Net sales (x) 3.2 3.2 2.5 2.2EV/EBITDA (x) 10.2 9.6 6.6 5.9EV/EBIT (x) 26.7 20.8 11.7 11.3

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Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Sajid Khalid (Head – Institutional Equities) (91 22) 6667 9972 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles Deepak Jain (9122) 6667 9758 Banking, NBFCs Manish Agarwalla (9122) 6667 9962 Sachit Motwani, FRM (9122) 6667 9953 Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Ennette Fernandes (9122) 6667 9764 Vivekanand Subbaraman (9122) 6667 9766 Cement Vaibhav Agarwal (9122) 6667 9967 Economics Anjali Verma (9122) 6667 9969

Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Jishar Thoombath (9122) 6667 9986 Metals Dhawal Doshi (9122) 6667 9769 Dharmesh Shah (9122) 6667 9974 Infrastructure & IT Services Vibhor Singhal (9122) 6667 9949 Varun Vijayan (9122) 6667 9992 Raheel Arathodi (9122) 6667 9768 Oil&Gas, Agri Inputs Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951

Retail, Real Estate Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Mid‐caps Kapil Bagaria (9122) 6667 9965 Raheel Arathodi (9122) 6667 9768 Technicals & Quant Neppolian Pillai (9122) 6667 9989 Shikha Khurana (9122) 6667 9948 Sr. Manager – Equities Support Rosie Ferns (9122) 6667 9971

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Ashvin Patil (9122) 6667 9991 Shubhangi Agrawal (9122) 6667 9964 Dipesh Sohani (9122) 6667 9756

Rajesh Ashar (Sales Trader) (9122) 6667 9746 Mayur Shah (Execution) (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice.Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital (India) Pvt. Ltd. 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai ‐ 400011

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