Wireless Tele Services-Sep11- BNP Paribas

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PREPARED BY BNP PARIBAS SECURITIES ASIATHIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. I

SECTOR REPORT

EQUITIES RESEARCH

INDIA

WIRELESS TELECOMMUNICAT

IMPROVIINDUSTRY OUTLOOK

Good pick in bad tim

SUMMARYTariff hike and 3G to drive revenue growth

In this note we focus on mobile tariff hikes, 3G aanalyse the triggers, the extent and the impact o

despite a muted start, we believe building blocksin place. Our analysis of companies in the sectorincumbents look poised for a strong rebound.

OUTLOOKProfitable revenue growth to drive FCF ge

Competitive intensity is declining and we see littleRevenue growth is gaining momentum. Besides tarrevenue will likely be boosted by data, while theremobile penetration to increase. Price-driven revenmargins and reduce capex, leading to strong FCF g

VALUATIONRaising estimates; Indian telcos to see 50

We raise our estimates and TPs for Idea and Bha

RCOM. Idea has gained revenue market share inoperation in the past three years, is a pure-playthe highest proportion of active and rural subscriwill enable it to keep outperforming peers. MobilIndia (70% population), is only 35%. Also, agro pri

13% CAGR in the past five years, which makes uscan be easily absorbed by users and minutes of urise. Indian operators profit growth is among thebelieve some premium is justified. Key risk: adver

Kunal Vora, [email protected]

+91 22 33704384

BNP Paribas Securities Asia research is available on Thomsonsalesperson for authorisation. Please see the important notice

PORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPEN

ION SERVICES

BNPP RECOMMCompany

Bharti AirtelReliance Comm

Idea Cellular

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TOP STOCK PI

Company

BBG Code

Share Price

Target Price

1 Year - high

1 year - low

VALUATION SU

Company

Bharti Airtel

Reliance Comm

Idea Cellular

Source: BNP Paribas esti

MAJOR CHANG

Company

Bharti Airtel

Idea Cellular

Reliance Comm

BNP Paribas

66

71

76

81

86

91

96

101

106

111Sep-10 Dec-10

(INR) Idea Cellu

IX

ENDATIONSBBG Code Rating

BHARTI IN BUYRCOM IN BUY

IDEA IN BUY

pparibas.com/index. Please contact your

27 SEPTEMBER 2011

K

Idea Cellular

IDEA IN

96.55

120.00

100.85

57.55

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P/E (x) Yld(%)

FY1 FY2 FY2

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31

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Mar-11 Jun-11 Sep-11

(%)lar Rel to MSCI India
http://equities.bnpparibas.com/http://equities.bnpparibas.com/http://equities.bnpparibas.com/


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Tablets Reshape IT Landscape Kunal Vora, CFA

BNP PARIBAS 27 SEPTEMBER 2011

CONTENTS

Investment thesis: Back to profitable growth ____________________________________________________ 3

Revenue growth driven by tariff increase and MoU growth ________________________________________ 4

Tariff increase: trigger, extent and impact _______________________________________________________ 6

Data: Early days, but huge potential ___________________________________________________________ 19

Revenue growth + margin expansion + reducing capex intensity = strong FCF _______________________ 27

Sector valuation: Outperformance to continue __________________________________________________ 30

Risks to our thesis __________________________________________________________________________ 33

Company report ____________________________________________________________________________ 36

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Kunal Vora, CFA


Investment thesis: Back to profitable growth

Strong revenue growth, driven by tariff hikes and data

We expect Bharti and Idea to report 12-20% three-year revenue CAGR for their India wireless business,driven by price increases, minutes of usage (MoU) growth and data usage growth. Revenue growth hasstarted to gain momentum after hitting a bottom in 2HFY10, with revenue growing 10% across circles in1QFY12 (Exhibits 1-2), which was prior to tariff hikes or 3G data launch. Competitive intensity is decliningand incumbents have taken a lead in raising tariffs in their stronger circles (Exhibit 9). Top 5 players, which

account for >80% of industry revenue, have raised tariffs in most of their strong circles. While subscribernet adds have peaked and have started to decline (Exhibit 21), we believe the market is far from saturationas rural India, which accounts for 70% of the Indias population, is still underpenetrated at 35% (Exhibits25-26). Increase in rural penetration and MoU will provide volume growth in the medium term, in our view.

Industry losing heavily; review of industry profitability indicates that tariff war is unsustainable

We have examined the financials of most of the listed and unlisted telco companies. Our analysis showsthat the industry ex-Bharti could be making losses of USD4b-5b per annum. New entrant UNINOR (notlisted) and MTS (not listed) have already put in USD2.0b-2.2b in terms of capex and EBITDA losses (Exhibits34-37), but their losses are still higher than revenue. Unlisted companies (such as Aircel and TataTeleservices) and PSU operators (MTNL and BSNL) are making significant losses despite reasonable revenueand subscriber market share. Leading private-sector operators like Idea and RCOM are operating at lowROEs of 4-7%. Excluding Bharti, no operator is generating double-digit ROE. Many of the new entrants are

also facing litigation in the 2G scam and they may find it difficult to get new funding for their networks. Theestablished operators are very unlikely to initiate fresh tariff wars, as they have already seen significanterosion of profitability due to margin pressure and increase in leverage due to the 3G spectrum cost(Exhibits 14-15). New entrants did enter into tariff wars, but this has had made no impact on their revenuemarket share (Exhibit 31).

Tariff hikes: Trigger, extent and impact

A look at the key tariff plans of leading operators for all circles reveals that most operators have takentariff hikes in their stronger circles where they have several advantages like strong subscriber base, highrevenue market share and network advantage due to the 900MHz spectrum (Exhibits 16-18). These circlesaccount for majority of incumbents revenue, and most subscribers are likely to be impacted as rates havebeen hiked both for per-second and per-minute subscribers. Our analysis indicates that local outgoing on-net calls typically account for 21% of volume and 33% of revenue, and we estimate the hike in this segmentwill boost revenue per minute by about 6% as all subscribers move to the new rates (Exhibits 19-20). We donot expect government intervention given the huge losses of the industry, especially the public sectoroperators.

Data in India; muted start to 3G, but we continue to see strong long-term potential

Most 3G operators launched 3G services in India in 1H11, so it is still very early to assess success or failureof 3G. However, our interaction with the industry experts suggests that initial take-up has been muted dueto low smartphone penetration, high tariffs, limited network reach, etc. But, we see strong potential fordata, and we expect 9-11% of an operators 2G subscribers to adopt 3G and contribute 3-5% to revenue byFY14. We believe once the ingredients are in place India can catch up in data just like it has done in thecase of mobile, where India was five years behind China in terms of penetration in 2005 but has caught upin a very short time. We believe 3G will see strong uptake once handset prices decline, network availabilityand quality improves, and localised content availability improves. While Indian operators continue torefrain from giving handset subsidy, they are working on improving the quality and affordability of 3G/2Gdevices with offers like Reliance Tablet and Vodafone Facebook phone (Exhibits 46-47). Operators canreduce device prices through economies of scale and are offering reverse subsidy in terms of discountedtariffs, which reduces the overall cost of ownership of data services for subscribers.

Revenue growth, margin expansion and declining capex to lead to strong FCF generation

We forecast EBITDA margin expansion of 1.7-2.7% for Indian telecom operators we cover over the next twoyears, compared to a decline of 2.2-7.5% reported in the past two years. We believe this will be supportedby an increase of 3-5% average revenue per minute (ARPM), compared to a 23-29% ARPM decline over thelast two years. Also, we believe 3G services will become EBITDA-margin-accretive with steady margins ofover 50% for operators such as Bharti as, cash cost for 3G is not very high if we exclude the spectrum cost.While peak capex is clearly behind for the Indian operators, capex is likely to decline further as initial 3G

expansion cost is taken care of in FY12 and as MoU moderates.

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Kunal Vora, CFA


Revenue growth driven by tariff increase and MoU growth

We expect Bharti and Idea to report 12-20% revenue CAGR over the next three years on their India wirelessbusiness, driven by increases in prices and data usage. Revenue growth is gaining momentum with strong10% revenue growth across circles in 1QFY12, which was prior to tariff hikes. The competitive intensity isdeclining and incumbents have taken the lead in raising tariffs in their stronger circles. Top 5 players,which account for >80% of industry revenue, have raised tariffs in their strong circles.

Most operators launched their 3G services in 1HCY11. While the initial take-up of 3G has been muted, weare bullish on data services, which we believe will be a long-term revenue driver for Indian wireless telcos.We expect 3G data to account for 3-5% of wireless revenue by FY14.

Tariff declines have offset strong volume growth; profitable volume growth ahead

In FY10 and FY11, Indian telcos reported strong growth in mobile subscribers and traffic volume. But, thisdid not translate into revenue growth due to the steep decline in revenue per minute. The competitiveintensity is declining, thus we expect net additions to fall but MoU growth to continue. This, coupled withan increase in revenue per minute, will boost voice revenue, in our view.

Per-second billing has had a significant impact on realisation and margins

Tata DoCoMo (not listed) introduced per-second billing plan in India in 2QFY10 and RCOM launched simplyReliance in 3QFY10. Per-second billing was replicated by all leading operators, including Bharti, Idea and

Vodafone India (not listed), in 3QFY10. These plans caused a steep decline in ARPM with Bharti and Ideareporting a 21-25% decline in revenue per minute over the four subsequent quarters (3QFY10-2QFY11). Post

2QFY11, we have seen ARPMs stabilising and revenue growth returning to the sector. We expect revenueper minute to start increasing as operators start reversing the process of tariff decline through selectivetariff increase.

Stronger operators take the lead in raising tariffs

Incumbents have taken the lead in raising tariffs, especially on per-second rates. While Tata Teleservices(not listed) and RCOM tweaked their tariffs for relatively small contributors like SMS and long-distancecalling rates, Bharti took the lead in raising the local on-net calling rate, which we estimate accounts forone-third of its GSM wireless revenue. Other large operators Vodafone, Idea, RCOM as well as Tata havealso subsequently raised tariffs in several circles.

Revenue growth gaining momentum across circles; all circles reported 10%+ growth

Industry revenue growth has started to recover, with revenue increasing 13-18% y-y in 1QFY12 in A, B, Cand metro circles. Exhibit 1 indicates that revenue growth has rebounded. This is prior to any tariff hikeand excludes any significant contribution from the recently launched 3G services. Also, we have seen strongrevenue growth of 10%+ in 21 out of the 22 circles, including metros which have more than 100%penetration. Aside from the boost from tariff hike, we expect future revenue growth to be driven bysubscriber adds in rural India and by an increase in data revenue in urban India.

EXHIBIT 1: Industry revenue growth gaining momentum EXHIBIT 2: Most circles reported 10+% growth, 1QFY12

Sources: TRAI; BNP Paribas Sources: TRAI; BNP Paribas

(5)

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4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

(%) A Circles B Circles

C Circles Metro Circles

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AssamN

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UPE

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Haryana

Delhi

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Karnataka

Kerala

Kolkata

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Kunal Vora, CFA


EXHIBIT 3: Pricing-driven revenue growth EXHIBIT 4: Leading to strong EBITDA growth

Sources: Companies; BNP Paribas estimates Sources: Companies; BNP Paribas estimates

EXHIBIT 5: 3-year revenue market share trend EXHIBIT 6: Change in revenue market share, 1QFY12


EXHIBIT 7: GSM and CDMA ARPU trend EXHIBIT 8: GSM and CDMA subscriber base


(20)

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entrants

(%) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

(2.5)

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Tariff increase: trigger, extent and impact

Our analysis of tariff hikes and discussions with operators indicate that GSM incumbents have raised tariffsin their highest revenue-generating circles (Exhibit 9). Bharti has hiked tariff by 20% in three key categories,including on-net local calls, per-minute rate and calls to fixed-line. Our analysis indicates that on-net localcalls account for 18% of MoU but 34% of wireless revenue (Exhibit 19).

Despite 10+ operators, on-net calls account for 52% of outgoing minutes

Despite the presence of more than 10 operators in most circles, on-net minutes account for over 50% oftraffic. On-net minutes as a percentage of total minutes had been on a decline since 2HFY10, when thecompetitive intensity was at its peak. However, over the last one year, on-net minutes usage has stabilisedat 52%. We see this as another sign of declining competitive intensity. This also indicates that a hike in localon-net tariff should have a significant impact on revenue.

Per-second and per-minute tariff raised; these plans cover most subscribers

Tariffs have been hiked 20% for per-second and per-minute subscribers, which we believe representmajority of subscribers. We believe the tariff increase will lead to a 6% increase in ARPM over the next oneyear.

Incumbents raise tariffs in strong circles; among challengers RCOM has raised tariff in most, Tata in some

GSM incumbents Bharti, Idea and Vodafone have raised rates in most of their strong circles. RCOM has alsoraised rates for its GSM offering in most circles. Tata DoCoMo, which introduced per-second billing, hasalso raised tariff in a few circles. The table below shows tariffs for the top 3 GSM operators for their per-second billing plans and it indicates that tariffs have been raised to 1.2 paise per second for on-net callingin most circles.

EXHIBIT 9: Voice call rates of leading operators; rate hiked from INR0.01/sec to INR0.012/sec in most key circles

-------------Vodafone------------- -------------Bharti------------- -------------Idea-------------

On-net Off-net Fixed-line % of total On-net Off-net Fixed line % of total On-net Off-net Fixed line % of total

call rate call rate rate revenue call rate call rate rate revenue call rate call rate rate revenue

Paise/Sec (%) (%) (%)

Andhra 1.0 1.0 1.5 4 1.2 1.2 1.5 11 1.0 1.0 1.2

Gujarat 1.2 1.2 1.5 11 1.2 1.2 1.5 3 1.2 1.2 1.8 8

Karnataka 1.0 1.0 1.0 4 1.2 1.2 1.5 11 1.0 1.0 1.0 5

Maharashtra 1.2 1.2 1.5 8 1.2 1.2 1.5 5 1.2 1.2 1.5 19

TN 1.2 1.2 1.5 6 1.0 1.2 1.5 9 1.0 1.0 1.0 1

Haryana 1.2 1.2 1.2 3 1.0 1.0 1.0 1 1.0 1.2 1.2 4

Kerala 1.2 1.2 1.2 4 1.0 1.2 1.5 2 1.2 1.2 1.5 11

MP 1.0 1.0 1.0 1 1.2 1.2 1.5 4 1.2 1.2 1.5 12

Punjab 1.0 1.0 1.0 3 1.0 1.2 1.5 4 1.2 1.2 1.5 6

Rajasthan 1.2 1.2 1.5 5 1.2 1.2 1.5 7 1.0 1.0 1.0 4

UPE 1.2 1.2 1.5 8 1.2 1.2 1.5 6 6

UPW 5 1.0 1.0 1.5 2 1.2 1.2 1.2 10

WB 1.2 1.2 1.5 5 1.0 1.2 1.2 3 1.0 1.0 1.0 1

Assam 1.2 1.2 1.2 1 1.2 1.2 1.5 2 1.0 1.0 1.0

Bihar 1.0 1.0 1.0 3 1.2 1.2 1.5 7 1.0 1.0 1.5 4

Himachal 1.2 1.2 1.5 0 1.0 1.2 1.2 1 1.2 1.2 1.5 0

Jammu 1.2 1.2 1.2 0 1.2 1.2 1.5 1 1.2 1.2 1.5

NE 1.2 1.2 1.2 0 1.2 1.2 1.5 1 1.0 1.0 1.0 0

Orissa 1.0 1.0 1.0 1 1.2 1.2 1.5 2 0.7 0.7 0.7 1

Chennai 1.0 1.2 1.2 2 0

Delhi 1.2 1.2 1.5 10 1.2 1.2 1.5 10 1.2 1.2 1.5 7

Kolkata 1.0 1.2 1.2 3 1.0 1.2 1.2 2 1.0 1.0 1.0 1

Mumbai 1.0 1.0 1.0 10 1.0 1.2 1.2 4 1.0 1.0 1.0 4

Sources: Companiesdata; BNP Paribas

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EXHIBIT 10: Local calls account for >80% of MoU EXHIBIT 11: On-net calls continue to represent >50% of traffic


EXHIBIT 12: Revenue per minute will stabilise or increase EXHIBIT 13: Minutes volume carried and y-y traffic growth


Triggers for tariff increase, reversal of tariff increase unlikely

Tariff hike is a step in the right direction, in our view, as industry net debt is at an all-time high andprofitability at a multi-year low (Exhibits 14 and 15). The competitive intensity is declining, as most newentrants have made only token roll outs and are facing regulatory overhang and risk of license cancellation.Uninor and MTS, the most aggressive of the new entrants, have invested close to USD2b in capex but aremaking heavy losses (Exhibits 18-22). Industry has already utilised most cost levers and operates atamongst the lowest cost structure in the world. We believe tariff hike is a rational move and not industrycartelisation as industry profitability is low and leverage has increased significantly.

Regulatory sound bites indicate that the government is unlikely to intervene

While there have been concerns about government intervention on tariff hike, we believe the government isunlikely to intervene given the poor profitability of the industry. The Minister of State for Communicationsand IT in a written reply to the Rajya Sabha stated that The operators have the flexibility to fix the tarifffor mobile services depending on the market conditions and other commercial considerations subject tothe regulatory principles of non-discrimination, compliance of interconnection usage charges and non-predation

New entrants no concern, incumbents can differentiate on data instead of plain-vanilla tariff cuts

Operators have realised the futility of tariff cuts to gain revenue market share as other operators canreplicate tariff plans. Despite steep tariff cuts, revenue market share in the past eight quarters has

remained largely unchanged. The exceptions have been operators (Idea, Vodafone) who have launchedservices in new circles. Most new entrants are facing regulatory risk and funding issues, limiting theirability to invest in networks and to indulge in tariff wars. Profitability of all operators has been underpressure.

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EXHIBIT 14: Net debt/EBITDA has increased post 3G auction EXHIBIT 15: Profits have declined due to tariff war and leverage

Sources: Companies data; BNP Paribas Sources: Companies data; BNP Paribas

Observations from our analysis of tariff plans offered by key operators

We looked at some of the popular plans of incumbents for all circles and observe that on-net tariffs have

been raised to 1.2paise/second in several circles. Validity of special vouchers as well as their price differs

significantly across operators and for same operator across circles. Operators are also offering deferred

talk time to improve stickiness especially in rural circles. Per second billing as well as per minute billing

are the most popular plans and are available from GSM operators for most circles.

Most operators have raised tariffs in their stronger circles where they have competitive advantage:

Incumbents have initiated tariff hikes in their stronger circles. These are typically circles where the

operator has among the highest revenue market share, has 900Mhz spectrum and superior network

coverage, and the circles are among the largest contributors to total revenue. The operators also have 3G

spectrum in several of these circles, which should enable them to attract high-ARPU subscribers.

Per-second billing the most popular plan, per minute plan next: Per-second billing is the most popularplan and all major operators are offering the same in all circles. Some of the plans with rates of less than

1paise/second come with higher cost voucher and are of short duration. Per-minute plan is also beingoffered by operators in most of the circles.

Validity of the special recharge voucher is also an important parameter: While the tariff and the price ofthe voucher are important, there is wide variance in the validity of special vouchers. This significantlyaffects total additional one-time revenue, as well as determines when subscriber migrates to higher tariffplan.

Deferred talk time to rural subscribers to improve stickiness: Incumbents are offering plans, especially inthe predominantly rural C circles, where subscribers are offered free talk time for three-to-nine months aslong as subscribers recharge a minimum amount. For example, Bharti is offering deferred talk time to newsubscribers in Kerala, Rajasthan, Himachal etc

Significant difference in cost of vouchers across operators and across circles for same the operator: Thereis no uniformity in special vouchers or rate cutters across operators or for the same operator across circles.Most special vouchers,especially high-value vouchers, compensate the subscriber in terms of free talktime. While this assures the operator of a minimum receivable from subscriber, this is not additional one-time revenue.

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EXHIBIT 16: Vodafone Key tariff plans and competitive positioning by circle (Subs and revenue market share, spectrum holding)

----------Vodafone per second---------- ----------Vodafone per minute---------- Subs Revs ARPU Rev Spectrum Own

Pack price on-net off-net fixed line Pack price on-net off-net fixed line MS MS band 3G

Paise/Sec (%) (%) (INR) (%)

Andhra 66 1.0 1.0 1.5 11.8 10.9 134.1 4 1,800

Gujarat 129 1.2 1.2 1.5 25.0 1.0 1.0 1.0 30.7 39.5 172.7 11 900 Yes

Karnataka 206 1.0 1.0 1.0 205.0 0.5 0.5 0.5 13.0 13.5 161.9 4 1,800

Maharashtra 25 1.2 1.2 1.5 25.0 1.0 1.0 1.0 18.6 23.3 174.3 8 900 Yes

TN 24 1.2 1.2 1.5 24.0 0.6 0.6 0.9 15.8 18.3 169.1 6 900 YesHaryana 7 1.2 1.2 1.2 19.8 28.4 160.6 3 900 Yes

Kerala 24 1.2 1.2 1.2 17.1 22.1 190.2 4 900

MP 52 1.0 1.0 1.0 38.0 0.4 0.4 1.2p/sec 6.6 5.4 92.9 1 1,800

Punjab 12 1.0 1.0 1.0 13.0 0.5 0.5 0.5 13.7 17.1 178.6 3 1,800

Rajasthan 10 1.2 1.2 1.5 10.0 1.0 1.0 1.0 19.7 22.1 138.9 5 900

UPE 25 1.2 1.2 1.5 25.0 1.0 1.0 1.0 21.2 29.6 145.5 8 900 Yes

UPW 15.0 1.0 1.0 1.0 18.8 23.7 127.1 5 900

WB 14 1.2 1.2 1.5 13.0 0.6 0.6 0.9 26.3 36.5 121.2 5 900 Yes

Assam 9 1.2 1.2 1.2 13.1 11.5 144.3 1 1,800

Bihar 38 1.0 1.0 1.0 9.2 11.0 117.6 3 1,800

Himachal 49 1.2 1.2 1.5 38.0 0.5 0.5 0.5 4.9 8.1 194.1 0 1,800

Jammu 1.2 1.2 1.2 9.9 8.1 172.6 0 1,80

NE 9 1.2 1.2 1.2 11.3 10.2 144.6 0 1,800

Orissa 22 1.0 1.0 1.0 25.0 0.5 0.5 0.5 10.0 11.4 113.8 1 1,800

Delhi 150 1.2 1.2 1.5 19.0 26.2 322.2 10 900 Yes

Kolkata 37 1.0 1.2 1.2 80.0 0.5 0.5 0.5 18.6 29.5 187.2 3 900 Yes

Mumbai 506 1.0 1.0 1.0 507.0 0.5 0.5 0.5 16.2 30.9 405.7 10 900 Yes

Sources: Vodafone; TRAI; BNP Paribas

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Kunal Vora, CFA


EXHIBIT 17: Bharti Key tariff plans and competitive positioning by circle (subs and revenue market share, spectrum holding)

---------------Bharti per second --------------- --------------- Bharti per minute -------------- Subs Revs ARPU Rev Spectrum Own

Pack price on-net off-net fixed line Pack price on-net off-net fixed line MS MS band 3G


Andhra 43.0 1.2 1.2 1.5 35.0 0.6 0.6 0.9 27.7 40.2 213.2 11 900 Yes

Gujarat 43.0 1.2 1.2 1.5 42.0 0.6 0.6 0.9 13.8 17.8 170.4 3 1,800

Karnataka 46.0 1.2 1.2 1.5 43.0 0.6 0.6 0.9 29.3 46.8 249.3 11 900 Yes

Maharashtra 43.0 1.2 1.2 1.5 42.0 0.6 0.6 0.9 13.7 20.1 202.4 5 1,800

TN 18.0 1.0 1.2 1.5 na na na na 16.4 36.3 318.6 9 1,800 YesHaryana 50.0 1.0 1.0 1.0 na na na na 10.3 17.9 191.9 1 1,800

Kerala 26.0 1.0 1.2 1.5 50.0 1.0 1.0 1.0 10.7 17.1 229.9 2 1,800

MP 10.0 1.2 1.2 1.5 na na na na 20.2 28.2 152.4 4 1,800

Punjab 25.0 1.0 1.2 1.5 50.0 1.0 1.0 1.0 21.9 36.1 238.8 4 900

Rajasthan 25.0 1.2 1.2 1.5 45.0 0.6 0.6 0.9 28.4 44.6 194.6 7 900 Yes

UPE 43.0 1.2 1.2 1.5 42.0 0.6 0.6 0.9 19.4 28.7 155.4 6 900

UPW 32.0 1.0 1.0 1.5 41.0 0.5 0.5 0.9 12.9 17.5 136.1 2 1,800 Yes

WB 46.0 1.0 1.2 1.2 44.0 0.5 0.5 0.5 20.8 26.1 108.1 3 900 Yes

Assam 15.0 1.2 1.2 1.5 na na na na 26.6 32.2 192.3 2 900 Yes

Bihar 15.0 1.2 1.2 1.5 na na na na 28.2 44.2 154.7 7 900 Yes

Himachal 5.0 1.0 1.2 1.2 50.0 1.0 1.0 1.0 23.1 39.7 194.7 1 900 Yes

Jammu 10.0 1.2 1.2 1.5 na na na na 32.6 39.8 236.3 1 900 Yes

NE 15.0 1.2 1.2 1.5 na na na na 27.6 36.4 211.0 1 1,800 Yes

Orissa 44.0 1.2 1.2 1.5 42.0 0.6 0.6 0.9 23.5 36.5 155.3 2 900

Delhi 25.0 1.2 1.2 1.5 45.0 0.6 0.6 0.9 20.2 36.2 410.7 10 900 Yes

Kolkata 46.0 1.0 1.2 1.2 44.0 0.5 0.5 0.5 15.7 27.0 203.0 2 900

Mumbai 43.0 1.0 1.2 1.2 42.0 0.5 0.6 0.6 9.9 18.4 398.9 4 1,800 Yes

Sources: Bharti; TRAI; BNP Paribas

EXHIBIT 18: Idea Key tariff plans and competitive positioning by circle (subs and revenue market share, spectrum holding)

---------------Idea per second --------------- ---------------Idea per minute --------------- Subs Revs ARPU Rev Spectrum Own

Pack price on-net off-net fixed line Pack price on-net off-net fixed line MS Share MS band 3G


Andhra 50.0 1.0 1.0 1.2 13.5 16.9 182.8 11 900

Gujarat 1.2 1.2 1.8 14.7 17.1 155.2 8 900 Yes

Karnataka 47.0 1.0 1.0 1.0 58.0 0.4 0.4 0.6 8.6 8.5 159.7 5 900

Maharashtra 20.0 1.2 1.2 1.5 20.0 0.6 0.6 0.8 20.9 28.9 191.2 19 900 Yes

TN 49.0 1.0 1.0 1.0 61.0 0.4 0 .4 0.4 2.3 2.2 142.5 1 1,800

Haryana 19.0 1.0 1.2 1.2 15.5 21.0 150.7 4 900 Yes

Kerala 63.0 1.2 1.2 1.5 21.7 31.2 212.3 11 900 Yes

MP 7.0 1.2 1.2 1.5 41.0 0.5 0.5 0.5 25.0 31.3 138.0 12 900 Yes

Punjab 15.0 1.2 1.2 1.5 15.5 19.3 180.3 6 900 Yes

Rajasthan 44.0 1.0 1.0 1.0 72.0 0.4 0.4 0.4 7.0 9.7 173.9 4 1,800

UPE 10.0 1.0 1.0 1.0 9.5 11.9 135.1 6 1,800 Yes

UPW 45.0 1.2 1.2 1.2 18.4 27.3 156.3 10 900 Yes

WB 22.0 1.0 1.0 1.0 21.0 0.4 0.4 0.4 3.4 3.2 71.6 1 1,800

Assam 21.0 1.0 1.0 1.0 2.4 1.9 118.3 0 1,800

Bihar 32.0 1.0 1.0 1.5 40.0 0.4 0.4 0.9 8.6 9.4 109.3 4 1,800

Himachal 31.0 1.2 1.2 1.5 5.0 7.2 144.4 0 1,800 Yes

Jammu 35.0 1.2 1.2 1.5 33.0 0.4 0.4 0.4 2.2 2.0 179.6 0 1,800 Yes

NE 21.0 1.0 1.0 1.0 21.0 0.4 0 .4 0.4 3.0 2.5 131.8 0 1,800

Orissa 10.0 0.7 0.7 0.7 10.0 0.3 0.3 0.3 2.8 3.3 93.0 1 1,800

Delhi 15.0 1.2 1.2 1.5 9.7 10.1 242.7 7 1,800

Kolkata 22.0 1.0 1.0 1.0 21.0 0.4 0.4 0.4 3.1 2.9 98.6 1 1,800

Mumbai 25.0 1.0 1.0 1.0 25.0 0.4 0.4 0.4 6.5 7.0 245.9 4 1,800

Sources: Idea; TRAI; BNP Paribas

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Quantifying the Impact of tariff hike and other observations on tariff plans

To quantify the impact of change in tariffs on realized revenue per minute, we have looked at industry mixof minutes of use based on TRAIs performance indicator report which indicates the contribution of differentcategory of minutes (incoming, outgoing, local, national, roaming etc) in terms of volume as well asrevenue.

Our conclusions are:

Local calls account for 70% of voice revenue, on-net roughly about 1/3rd

of voice revenue.

While SMS and national tariffs have been raised by some operator, their impact is less significant.

As Tariff hikes percolate down to all subscribers, we estimate there could be an impact of INR0.02 (6%)on ARPM.

We see ample scope for tariff tweaking, which could provide further upside to ARPM and to ourestimates.

EXHIBIT 19: Minutes and revenue breakdown for GSM operators, by traffic category

Sources: TRAI; BNP Paribas estimates

Methodology

We take the industry mix of minutes of use based on TRAIs performance indicator.

We assume a blended rate per minute for different categories such as local and long distance calling,termination, etc. Assuming local call rate at INR0.60/min and national long distance rate atINR0.72/min, voice ARPM for Bharti works out to INR0.43, which is in line with the companys publishednumbers.

Outgoing calls account for 86% of total revenue, but 49% of traffic. Local outgoing calls account for 69%

of revenue and on-net local calls 33%. Assuming on-net local call rate increases 20% for 100% of thesubscriber base (assuming all subscribers are on per-second/per minute billing), voice RPM shouldincrease 6.6%, or INR0.027/min.

Assumptions

We acknowledge that there are company-specific differences in the mix of local/on-net/off-net/fixedminutes, but these details are not available and we use industry numbers published by TRAI.

Most companies have different plans in different circles and several plans within circles. However, wearrive at Bhartis current revenue per minute based on a tariff of INR0.01/sec (INR0.60/min) for local on-net and INR0.012/sec for offnet (INR0.72/min). Our sensitivity analysis shows blended realization atdifferent levels of per second billing rates for local on-net as well as local off-net tariffs.

0

5

10

15

20

25

30

35

Outgoing -local -

offnet

Outgoing -local -

onnet

Incoming -offnet

Outgoing -NLD -

offnet

Outgoing -NLD -

onnet

Outgoing -local - to

fixed

Incoming -roaming

Outgoing -ILD

Outgoing -NLD - to

fixed

Incoming -onnet

(%) Revenue Minutes

Raised by 20%

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Kunal Vora, CFA


EXHIBIT 20: Bharti sensitivity of ARPM to tariff hike on local on-net and off-net rates based on GSM industry traffic patterns

----------------------------------------------- Off-net outgoing (paise per second) -----------------------------------------------

1.00 1.10 1.20 1.40 1.60 2 000.80 0.38 0.39 0.40 0.42 0.45 0.49

0.90 0.39 0.40 0.42 0.44 0.46 0.50

1.00 0.41 0.42 0.43 0.45 0.47 0.51

On-net (paise per second) 1.10 0.42 0.43 0.44 0.46 0.48 0.53

1.20 0.43 0.44 0.45 0.47 0.50 0.54

1.30 0.44 0.45 0.47 0.49 0.51 0.55

1.40 0.46 0.47 0.48 0.50 0.52 0.56

1.50 0.47 0.48 0.49 0.51 0.53 0.58

Change in ARPM at different per second billing rate

1.00 1.10 1.20 1.40 1.60 2.00

0.80 (11)% (8)% (6)% (1)% 4% 14%

0.90 (8)% (5)% (3)% 2% 7% 17%

1.00 (5)% (2)% 0% 5% 10% 20%

On-net (paise per second) 1.10 (2)% 0% 3% 8% 13% 23%

1.20 1% 3% 6% 11% 16% 26%

1.30 4% 6% 9% 14% 19% 29%

1.40 7% 9% 12% 17% 22% 32%

1.50 10% 12% 15% 20% 25% 35%

Sources: TRAI; BNP Paribas estimates

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Kunal Vora, CFA


Subscriber addition has moderated but not saturated; operators focusing on quality of subscribers

Telecom subscriber addition in India has slowed sharply over the past few months. Our discussions withseveral operators indicate that the slowdown in subscriber adds has largely been driven by industry actionrather than by any fundamental change in the market. In July, industry net adds were at a 2.5-year low,Bharti reported its 5-year low net adds, and Tata Teleservices wrote off 2.7m subscribers.

Operators focusing on improving quality of subscriber base: Our discussions with operators anddistributors suggest that distributors have been pushing new sim card sales rather than recharges, as it is

more profitable for the distributor. This has led to an increase in inactive subscriber base and an increasein sales commission expenditure for operators. Operators have now reduced dealer commissions,implemented stringent know-your-customer rules and adopted a conservative churn policy, resulting in adecline in net subscriber adds.

No incentive to inflate subscriber base: Operators had an incentive to inflate subscriber base due tosubscriber-linked spectrum allocation policy, which no longer exists now. Also, as the telecom regulator hasstarted giving out active subscriber base (VLR), there is a higher transparency on actual subscriber base.

Tariff increase, mobile number portability and reduced competitive intensity: We see little prospects of asharp increase in subscriber addition, given the higher tariffs for new subscribers, given the introduction ofmobile number portability (MNP), which allows subscribers to change the mobile number without buying anew sim card, and given the lack of significantly discounted offers from incumbents.

EXHIBIT 21: Net adds have peaked. not subscriber base EXHIBIT 22: Wireless penetration

Sources: TRAI; BNP Paribas estimates Sources: TRAI; BNP Paribas estimates

EXHIBIT 23: Wireless penetration India still among the lowest EXHIBIT 24: Industry churn level has started to decline

Sources: ITU; BNP Paribas Sources: Companies data; BNP Paribas

0

5

10

15

20

25

0

200

400

600

800

1,000

1,200

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

(m subs) Subscribers (LHS)

Monthly net adds (RHS)(m subs)

0

10

20

30

40

50

60

70

80

90

100

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

(%)

0

20

40

60

80

100120

140

160

180

Russia

Singapore

Argentina

Germany

Malaysia

Chile

Korea(Rep.)

Brazil

Australia

Thailand

SouthAfrica

France

Japan

Indonesia

UnitedStates

Egypt

Philippines

SriLanka

Mexico

China

India

Zimbabwe

Bhutan

(%)

0

4

8

12

2Q08A

3Q08A

4Q08A

1Q09A

2Q09A

3Q09A

4Q09A

1Q10A

2Q10A

3Q10A

4Q10A

1Q11A

2Q11A

3Q11A

4Q11A

1Q12A

(%) Bharti RCOM Idea Vodafone

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Kunal Vora, CFA


Market not yet saturated, but peak net additions seem behind us: While sim card penetration hasincreased to 70%, active subscriber penetration is only 50%. Urban penetration in India is about 150%,while rural penetration is still low at 35%. Rural India accounts for 70% of national population and webelieve there is significant scope for expansion in rural penetration. While we believe peak net additions arebehind us, the Indian telecom market is unlikely to saturate in the near future and rural adds shouldcontinue to drive subscriber base higher.

EXHIBIT 25: India rural wireless penetration still low EXHIBIT 26: Rural India to drive subscriber adds


Rural income increased at 12-13% CAGR in the past five years; incumbents best positioned to monetise

Over the last five years minimum support prices of most agricultural crops have increased 12-13%. As 70%of the Indian population is rural and so largely dependent on agriculture, minimum support price ofagriculture products has significant impact on rural household incomes. Rural subscriber penetration hasincreased from 15% to 35% in the past two years, and we see potential for significant increase from thecurrent level of 35%. This makes us confident that even rural households should be able to absorb marginaltariff hikes. While we are not modelling any tariff hike beyond the ones already announced, further tariffhikes are likely and they could provide upside to our estimates.

GSM incumbents have a disproportionately higher rural subscriber share; Idea best positioned

GSM operators Idea, Bharti and Vodafone have the highest proportion of rural subscriber market share.They have the advantage of deeper network coverage and 900Mhz spectrum, which is better suited forrural coverage. Also, the competitive intensity in rural markets is lower than that in the urban markets.Ideas rural subscriber market share is 16.3%, more than double of its urban subscriber market share of7.7%. For RCOM and Tata DoCoMo, their rural subscriber share is significantly lower than their urban share.

EXHIBIT 27: Rural income growth strong on rising agri prices EXHIBIT 28: Gap between rural and urban market share - 4QF11

Sources: Government of india; BNP Paribas Sources: TRAI; BNP Paribas

0

20

40

60

80

100

120

140

160

180

Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

(%) Rural Urban Total

0

5

10

15

20

25

30

35

40

45

Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

(subs m) Rural Urban

100

120

140

160

180

200

220

240

260

280

300

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

(%) Sugarcane Paddy Bajra

Jowar Maize Groundnut

Wheat

(10)

(8)

(6)

(4)

(2)

0

2

46

8

10

IDEA

Bharti

Vodafone

BSNL

Aircel

STel

Etisalat

HFCL

Unitech

Sistema

Loop

Videocon

MTNL

Tata

Reliance

(%)

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Kunal Vora, CFA


Moderate but profitable minutes growth

We estimate minutes CAGR (FY12-13) of 16% for Bharti and 22% for Idea, which is lower than thecorresponding 29% and 53% growth reported during FY09-11. We are assuming low growth to account for ahigher comparative base, lower subscriber adds, and tariff increases. While we are factoring in moderationin minutes growth, it will be profitable growth as realisation will improve 3-5% over FY11-FY13E, comparedto the 23-29% decline reported in the past two years. Also, moderation of minutes growth should lowercapex needs and also reduce the quantum of increase in network cost.

For average minutes of use per subscriber, we are building in a marginal y-y decline. However, we believethere could be upside to our estimates, with operators focusing on quality of subscribers and with minutesusage consolidating on fewer cards. We expect minutes of usage to consolidate on lower number of cards.Also, we expect subscriber growth to continue in rural India.

EXHIBIT 29: MOU CAGR to moderate to 16-22% EXHIBIT 30:Average MOU to increase marginally

Sources: Companies data; BNP Paribas Sources: Companies data; BNP Paribas

0

10

20

30

40

50

60

70

80

90

100


(%)

100

150

200

250

300

350

400

450

500

550

600

1Q07A 1Q08A 1Q09A 1Q10A 1Q11A 1Q12A

Bharti RCOM Idea

Vodafone Uninor

(Minutes)

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Kunal Vora, CFA


New entrants revenue market share insignificant; ARPU at 50-75% discount to incumbents

While there has been intense competition, huge investments and steep tariff declines over the past threeyears, revenue market shares (Exhibit 31) have not changed very significantly. Incumbents Idea andVodafone have gained revenue market share on expansion into new circles, while Bharti has lost share onlymarginally, from 29.8% to 28.7%. Idea has been the biggest gainer in the past three years increasing itsrevenue share from 11% to 14.3%, while RCOM and BSNL have lost maximum share. New entrants such asUninor, STEL (not listed), Etisalat (not listed), Videocon (not listed), Loop (not listed) and Sistema (notlisted) have not gained any significant revenue share despite low tariffs, and the trend is likely to continue.

While there are 14 players in the market, top seven players account for 98% of revenue.

While the new entrants have gained subscribers, they have a very low proportion of active subscribers(Exhibit 32) and ARPU (Exhibit 33) is at a 50-75% discount to incumbents. Also, 3G will enable theincumbents to compete for high-end subscribers on data rather than on plain-vanilla voice tariff cut towhich we believe most high-end subscribers are inelastic. The incumbents continue to retain a very highrevenue market share in their 900Mhz circles, which remains a significant competitive advantage. Weobserve that even for the incumbents expanding into new circles it has been difficult to gain revenuemarket share. Also, we believe it will get increasingly difficult for new entrants to get funding in view of theunviable business model and regulatory overhang like potential license cancellation.

EXHIBIT 31: Revenue market share trend

(%) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12

Aircel 3.3 3.2 3.3 3.4 3.5 3.8 4.1 4.6 4.8 5.0 4.9 4.7 4.8

Bharti 29.8 30.0 30.8 30.6 31.6 31.2 30. 29.3 30.3 29.4 29.1 28.0 28.7

Loop 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

BSNL 10.7 10.7 10.5 11.1 9.7 9.8 9.3 8.8 7.6 8.0 7.7 8.2 7.2

HFCL 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2

Idea 11.0 11.1 11.8 12.1 12.5 12.1 13.1 13.0 13.4 13.2 13.7 14.0 14.3

MTNL 1.0 0.9 0.8 0.8 0.8 0.8 0.7 0.6 0.6 0.6 0.5 0.6 0.5

RCOM 13.8 14.3 13.0 11.9 11.9 12.4 12.5 11.9 11.6 11.6 10.7 10.1 9.3

Shyam 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.4 0.5 0.7 0.8 0.9

Tata 8.9 8.5 8.3 8.1 7.3 7.7 7.6 8.9 8.4 8.5 8.7 8.8 8.9

Vodafone 20.6 20.2 20.5 20.9 21.4 21.2 21.5 21.7 22.0 21.9 21.9 22.0 22.3

Uninor 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.2 0.2 0.5 1.0 1.3 1.7

STEL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1

Etisalat 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1

Videocon 0.3 0.5 0.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Sources: TRAI; BNP Paribas

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Kunal Vora, CFA


EXHIBIT 32: Gross and active subscriber base and revenue market share

-----------------Market share ----------------- Gap

Operator Total subs VLR subs Gross rev Comment

(%) (%) (%) (ppt)

Aircel 6.9 5.3 4.8 (2.1) Revenue share lags subscriber share

Bharti 20.0 25. 28.7 8.7 Maintains highest revenue market share

Loop 0.4 0.2 0.6 0.2 No impact outside Mumbai

BSNL 10.5 7.9 7.2 (3.3) Losing revenue as well as subscriber market share

HFCL 0.2 0.1 0.2 (0.0) Negligible revenue market share

Idea 11.2 14.9 14.3 3.0 High active subscriber share and revenue market share

MTNL 0.6 0.3 0.5 (0.1) Losing subscriber and revenue market share

RCOM 16.9 15.0 9.3 (7.6) Dual tech operator; significant gap between subscriber and revenue market share

Sistema 1.4 1.0 0.9 (0.5) Only pure CDMA operator, focused on data

STEL 0.4 0.2 0.1 (0.3) Operating in C circles, negligible revenue market share

Tata 10.8 7.4 8.9 (1.9) Dual tech operator; revenue market share has improved since GSM launch

Vodafone 16.7 19.4 22.3 5.6 High active subscriber and revenue market share

Uninor 3.1 2.6 1.7 (1.4) Negligible revenue market share, leading among new entrants

Etisalat 0.2 0.1 0.1 (0.1) Negligible revenue market share

Videocon 0.8 0.4 0.5 (0.3) Negligible revenue market share


EXHIBIT 33: ARPU, by operator and by circle

Aircel Bharti BSNL Etisalat HFCL Idea Loop MTNL RCOM Sistema STEL Tata Uninor Videocon Vodafane Average

State (INR) (INR) (INR) (INR) (INR) (INR) (INR) (INR) (INR) (IN ) (INR) (INR) (INR) (INR) (INR) (INR) Andhra 79 213 107 21 183 76 99 123 70 34 134 14

Gujarat 76 170 86 17 155 62 83 129 89 94 173 134

Karnataka 67 249 93 13 160 78 128 136 73 45 162 157

Maharashtra 75 202 95 18 191 70 82 84 90 26 174 139

TN 102 319 91 10 143 79 73 153 60 61 169 146

A circles 96 234 95 16 178 73 97 118 78 78 165 14

Haryana 42 192 73 17 151 - 36 49 104 54 161 110

Kerala 41 230 123 51 212 55 84 108 39 60 190 147

MP - 152 81 17 138 - 82 - 89 59 93 110

Punjab 86 239 82 20 119 180 - 46 - 106 179 144

Rajasthan 126 195 77 25 174 - 43 82 71 37 139 124

UPE 61 155 66 22 135 46 91 73 85 13 146 104

UPW 64 136 81 17 156 45 95 78 74 48 127 102

WB 55 108 79 72 51 93 58 67 29 121 87

B circles 57 169 82 21 119 155 - 53 85 84 75 57 142 113

Assam 139 192 151 118 148 - 57 390 144

Bihar 54 155 56 23 109 77 59 38 79 57 16 118 99

Himachal 80 195 78 144 73 - 61 88 66 194 112

Jammu 180 236 200 180 128 347 173

NE 145 211 139 132 118 39 283 145 160

Orissa 73 155 97 93 - 76 - 39 78 47 39 114 100

C circles 105 170 94 23 112 - 88 59 42 89 55 57 128 116

Delhi 99 411 54 243 137 127 75 140 322 232

Kolkata 68 203 58 99 - 73 90 101 66 187 118

Mumbai 124 399 94 246 199 82 131 66 167 96 127 406 215

Metro's 102 298 77 67 227 199 109 109 77 132 79 127 312 186

Average 91 205 88 57 119 166 199 109 72 85 42 106 73 79 174 134


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Kunal Vora, CFA


New entrants: Huge investments but returns look elusive

Uninorhas been the most aggressive of the new entrants, and the company has already invested INR100b(USD2.2b) in the business, excluding spectrum cost. However, Uninor continues to make huge EBITDA losseswith a quarterly run-rate of INR7b-8b. The companys revenue per minute is INR0.31, a 25% discount toincumbents, but its revenue market share is only 1.7% after almost two years of operations.

MTS is a CDMA-only operator and is focussed on data. The highest percentage of the companys revenuecomes from data, at 29%, and it is reporting strong growth in the data-card segment. However, MTS

continues to report huge EBITDA loss of INR3b-4b per quarter. Its cumulative capex and EBITDA loss overthe last six quarters totals INR88b (USD2b).

We believe this will deter other new entrants from making any significant investments. While many of thenew entrants have done token launches in some of the circles to fulfil rollout obligations, we believe anysignificant investments from new entrants are unlikely.

EXHIBIT 34: Uninor cumulative capex and EBITDA losses EXHIBIT 35: Telecom industry incurring huge losses

Source: Company data Sources: Companies data; BNP Paribas

EXHIBIT 36: Uninor revenue and EBITDA trend EXHIBIT 37: MTS: revenue and EBITDA trend

Source: Company data Source: Company data

0

20,000

40,000

60,000

80,000

100,000

120,000

Q2CY09

Q3CY09

Q4CY09

Q1CY10

Q2CY10

Q3CY10

Q4CY10

Q1CY11

Q2CY11

(INR m) Cumulative Capex Cumulative EBITDA loss

(60,000)

(40,000)

(20,000)0

20,000

40,000

60,000

80,000

BhartiIndia-FY11-

PAT

RCOM-FY11-PAT

Idea-FY11-PAT

Vodafone-FY11-

EBIT

Aircel-CY09PAT

MTS-FY11-PAT

TTSL-FY10-PAT

BSNL-FY11-PAT

MTNL-FY11-PAT

Uninor-FY11-EBIT

(INR m)

(10,000)

(8,000)

(6,000)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

Q2CY09

Q3CY09

Q4CY09

Q1CY10

Q2CY10

Q3CY10

Q4CY10

Q1CY11

Q2CY11

(INR m)Revenue EBITDA

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

Q4CY09

Q1FY10

Q2CY10

Q3CY10

Q4CY10

Q1CY11

Q2CY11

(INR m) Revenue EBITDA

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Kunal Vora, CFA


Data: Early days, but huge potential

Most 3G operators launched 3G services in India in 1H11, so it is still early days to assess the success orfailure of 3G. However, our interactions with industry participants, including operators, network vendors,distributors and target subscribers, indicate that the initial pick-up of 3G has been below their expectation.However, we believe there is strong potential for 3G in India. As evidenced by the strong increase in mobileservices, we believe India can catch up quickly in terms of adoption as the building blocks in terms ofhandsets, service price, content and network availability are in place. We are already seeing large numberof 3G handsets available at below USD100 price points, and Idea has recently taken the lead in reducing 3Gservice price.

EXHIBIT 38: Status of 3G launch, subscriber base, coverage, sites

Operator Subscribers Sites Coverage Circles launched Own 3G circles 3G spectrum cost

(INR b)

Bharti 2.0m - Mar 11 84 cities 13 123

RCOM 2.0m - June 11 June 11 - 11,000 333 towns 13 13 86

Idea 2.0m - June 11 June 11 - 6,989, 15,000 by Mar 12 825 towns, 95m subs, 250m-300m by YE 9 11 58

Vodafone 1.5m - Mar 11 Mar 11 - 5,600; 12,000 by Mar 12 147 towns and cities 12 9 116

Sources: Companies data; BNP Paribas

Operators focusing on network quality, user experience and on monetising 3G networks

Operators are focusing on improving network quality and providing a good customer experience which theybelieve is essential for sustained improvement in data revenue. Given the high spectrum cost and limitedspectrum availability, operators prefer a tiered pricing structure. Operators are clearly focused onmonetising the data and are focusing on servicing high number of low-usage subscribers than filling theirnetwork with low-yield, high-usage subscribers via unlimited plans and/or data card subscribers. Ouranalysis of 3G offers across operators and across service types indicates that while 3G services wereinitially launched at a premium to EVDO data card offers, 3G prices is at par with EVDO (Exhibit 40) afterIdeas recent price cut. In terms of coverage, Idea has mentioned that it currently covers a population of95m through its 3G services (~8% of population) and intends to raise it to 250m-300m subscribers (20-25%of population)

3G data prices being reduced, 2G prices being raised to reduce the arbitrageGPRS plans have been at a significant discount to 3G data plans. 2GB on GPRS monthly was available atINR98 compared to INR675 on 3G. While operators have made the GPRS offering more expensive atINR98/1GB, Idea has taken the lead and reduced 3G price to INR450/1.2GB.Thus, the arbitrage between 2Gand 3G is narrowing, which is likely to induce GPRS subscribers to 3G. As subscribers adopt 3G services andexperiences better speeds, the usage is likely to increase, aiding 3G ARPU.

CDMA-based EVDO data card sales indicate strong latent demand for high-speed data

EVDO data cards are doing well in India. Our discussions with the industry participants suggest that thereare already more than 5m data card subscribers in India. This is significant growth in a short time, as thereare only 12m wireline broadband connections in India. CDMA operators are losing revenue market share onvoice and are shifting their capacity towards data. We observe that the only pure-play CDMA operator,MTS, derives 29% of its revenue from data, which is the highest among all operators. MTSs data cardsubscriber base has doubled from 0.43m to 0.82m in the last two quarters. Vodafone, the second-largestGSM operator in the country, recently tied up with MTS to offer CDMA-based EVDO cards to its subscribersunder its brand, netcruise. Also, in view of the 3G launch, EVDO data card prices have been reduced and arenow available at less than USD25.

Impact of 3G data on revenue

We expect 3G data to contribute 1.3% of revenue in FY12 and 2.1% in FY13 for Bharti. However, thecontribution in terms of incremental revenue will be much higher at 9%. Also, as data is a high EBITDAmargin business, we expect EBITDA margin to expand as contribution of data increases.

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Kunal Vora, CFA


EXHIBIT 39: Key assumptions 3G business

Year-end 31 Mar 2012E 2013E 2014E

3G Subscribers (m)

Bharti 7.6 14.3 22.8

RCOM 4.1 9.5 15.5

Idea 4.6 9.3 13.1

3G subscribers as % of total subscribers (%)

Bharti 4 7 11

RCOM 3 6 9

Idea 4 8 11

3G ARPU (INR)

Bharti 112.5 101.3 96.2

RCOM 95.0 90.3 85.7

Idea 103.5 93.2 88.5

3G Revenue (INR m)

Bharti 6,693 13,362 21,462

RCOM 2,435 7,332 12,869

Idea 2,869 7,758 11,869

3G revenue as % of total revenue (%)

Bharti 1.3 2.1 3.1

RCOM 1.2 3.1 5.0

Idea 1.5 3.3 4.6

Source:; BNP Paribas estimates

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Kunal Vora, CFA


Data plans in India; tiered pricing with a focus on network monetization

Indian operators are offering different categories of 3G data plans like 1-3 days sachet, usage-basedmonthly plans and time-based plans. Until recently all operators, except state-owned MTNL and BSNL, hadsimilar-priced data plans. Idea has recently taken the lead in cutting tariffs on 3G. We believe the tariff cutis a positive for 3G as high tariff has been widely viewed as a barrier to 3G adoption. Also, we believe asignificant premium for 3G data plans is not sustainable, given the competition from 2G data plans andEVDO data cards. While entry-level plans for most operators are similar at INR100/100MB (or INR1,000/GB),most operators are offering lower realisation plans for high usage subscribers. For example, RCOM is

offering INR2,100/21GB (or INR100/GB), while Bhartis lowest realisation plan is INR750/2GB, which sets afloor for realisation at INR375/Gb. RCOM is also offering a significant discount to its 3G tablet users.

EXHIBIT 40: 3G data plans in India

------------Reliance------------ --------------Airtel-------------- ------------Vodafone------------ ----------Tata DoCoMo----------

Prepaid Prepaid Prepaid Prepaid

Price limit Price Price limit Price Price limit Price Price limit Price

(INR) (MB) (INR/MB) (INR) (MB) (INR/MB) (INR) (MB) (INR/MB) (INR) (MB) (INR/MB)

1 day Sachet 8 10 0.803 days Sachet 61 65 0.94

Monthly plans 100 100 1.00 101 100 1.01 102 100 1.02

198 250 0.79 201 250 0.80

397 500 0.79 450 600 0.75 375 500 0.75 500 650 0.77

649 1,024 0.63 750 2,048 0.37 848 3,072 0.28

749 2,048 0.37 750 2,048 0.37

899 3,072 0.29

1,199 5,120 0.23 1,250 5,120 0.24

848 10,240 0.08

1,499 10,240 0.15

1,799 15,360 0.12

2,100 21,504 0.10 2,000 14,336 0.14 2,000 14,336 0.14

Sources: Companies; BNP Paribas

EXHIBIT 41: 3G plans in India

--------------Aircel-------------- --------------MTNL-------------- -------------Reliance------------- ---------Tata Photon Plus---------

Prepaid Prepaid Tablet

Price limit Price Price limit Price Price limit Price Price limit Price

(INR) (MB) (INR/MB) (INR) (MB) (INR/MB) (INR) (MB) (INR/MB) (INR) (MB) (INR/MB)

1 day Sachet 7 8 0.88

3 days Sachet 22 25 0.88

Monthly plans 92 100 0.92 99 130 0.76

202 250 0.81 250 500 0.50 301 350 0.86

450 1,024 0.44 4,500 12,288 0.37 500 650 0.77

602 1,024 0.59 650 2,048 0.32 5,500 24,576 0.22 700 1,024 0.68

850 5,120 0.17 7,000 61,440 0.11 850 4,048 0.21

975 2,500 0.39 1,000 5,120 0.20

1,099 10,240 0.11 1,200 10,240 0.12

1,500 15,360 0.10

1,800 102,400 0.02

Sources: Companies; BNP Paribas

Smartphone adoption Likely to increase rapidly from a low base

According to Gartner, 175m handsets were sold in India in 2010, out of which only 9m were smartphones.While this was prior to the 3G launch, this highlights that low smartphone penetration is one of the factors

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Kunal Vora, CFA


that will weigh on 3G adoption initially. Our discussions with the operators indicate that 3G handsetpenetration is 8-10%, which translates into 50m handsets out of about 550m active subscribers. Ourdiscussions with operators and vendors indicates that smartphone as well as 3G handset sales haveincreased significantly since the launch of 3G services. We also observe that 3G phone prices are decliningrapidly and entry-level 3G phones are available at USD70 and there are several options available at belowUSD100 price point (Exhibit 44-45). However, our checks indicate that the low cost 3G handset qualityneeds to improve significantly for them to be conducive for 3G usage.

EXHIBIT 42: India handset sales smartphones and others EXHIBIT 43: China handset sales smartphones and others

Sources: Gartner; BNP Paribas Sources: Gartner; BNP Paribas

EXHIBIT 44: Low cost 3G handsets below USD100 price point

Source: BNP Paribas

EXHIBIT 45: Low cost 3G handsets, starting below USD70, several options available below USD100

Handset Price Price Handset Price Price

(INR) (USD) (INR) (USD)

Samsung Hero E3213 2,816 63 Airtyme Torrid GT 75 3,999 89Nokia 2730 Classic 3,499 78 SonyEricsson cedar 4,249 94

Nokia C2-01 3,690 82 Samsung Mpower TV S239 4,606 102

Spice G-6500 3,734 83 Micromax Q80 4,638 103

Onida F970 3,802 84 LG GU285 4,690 104

Samsung C5130 3,844 85 Nokia 7230 4,799 107

Videocon V1705 3,904 87 Micromax Andro A60 4,950 110

Sources: mysmartprice.com; BNP Paribas

0

1

2

3

4

5

6

7

0

10

20

30

40

50

60

Q1CY10 Q2CY10 Q3CY10 Q4CY10

(%)Other device (LHS) Smartphone (LHS)

Smartphone (RHS)

(m)

0

1

2

3

4

5

6

7

8

9

10

0

20

40

60

80

100

120

Q1CY10 Q2CY10 Q3CY10 Q4CY10

(%)Other devices (LHS) Smartphones (LHS)

Smartphone (RHS)

(m)

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Kunal Vora, CFA


Indian operators refrain from handset subsidies, but are offering reverse subsidy (subsidy on usage)

Indian operators continue to refrain from offering any handset subsidy. However, operators are focusing ondriving 3G adoption by offering reverse subsidy in terms of lower tariffs for subscribers acquiring handsetsfrom them. Handset subsidy is capital-intensive and difficult to adopt in the Indian market which ispredominantly prepaid with high churn and with lack of proper credit records.

Operators are instead working on reducing the total cost of ownership for subscribers by reducing deviceprices through bulk purchases from vendors and by providing discounts on usage of 3G services. This is a

good way for operators to promote devices such that they can enable data consumption, and we expectmore such offers going forward.

RCOM launched its 3G tablet for INR12,999 and offered a subsidised data rate for one year on thepurchase of tablet.

Vodafone has launched Vodafone 555 blue for INR5,000. It is not a 3G phone, but similar offers on 3Gare likely in the near term. The company will offer one-year free facebook usage on the phone. Thephone has a 2.4-inch screen, 2 mega-pixel camera, an integrated music player and a fully integratedfacebook experience.

Airtel and Aircel had earlier announced offers on iPhone wherein if a subscriber buys the phone fromthe operator he gets a discount on data plans for two years

EXHIBIT 46: Vodafone 555 phone with one year free facebook EXHIBIT 47: Reliance 3G tablet

Sources: Vodafone; BNP Paribas Sources: Reliance Comm; BNP Paribas

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Kunal Vora, CFA


3G data in India: Future looks promising

While 3G has been off to a slow start, we remain bullish on the long-term prospects for high-speed wirelessdata in India. Wireline penetration is only 3%, which is among the lowest in the world and wirelinebroadband penetration is negligible at 1%. 3G device penetration is low, but as the devices get replacedover the next 2-3 years, we expect it to increase. China also had a slow start to 3G services, but it hasstarted to pick up sharply over the last one year and it is currently adding 6m-7m subscribers per month

3G Network coverage in India is still low and as it increases over the next few months it will also enable 3G

uptake. Idea has said that it currently covers about 95m subscribers, which is only 8% of Indias population.The company expects to increase it to 250m-300m subscribers by end-FY12, implying coverage of 20-25%of population.

India continues to consume English content and is among the top three countries in terms of traffic for sixout of the seven leading websites in terms of traffic worldwide. This indicates strong latent demand forhigh-speed data in India. In terms of Internet penetration, India is at 7.5%. In terms of broadbandpenetration, India is much lower at 1%. We see significant potential for both to increase. The Indiangovernment is working on a national broadband plan, and our interaction with the regulator indicates thatone of the priorities of the government is to increase broadband penetration.

EXHIBIT 48: India among the lowest fixed-line penetration, at ~3% EXHIBIT 49: India negligible broadband penetration at 1%

Sources: ITU; BNP Paribas Sources: ITU; BNP Paribas

EXHIBIT 50: Global Mobile and Internet Penetration Comparison; India has significant room for increase

Sources: ITU; BNP Paribas

0

10

20

30

40

50

60

70

Kor

ea(Rep.)

France

Germany

UnitedStates

S

ingapore

Australia

Japan

Russia

A

rgentina

China

Brazil

Chile

Mexico

SriLanka

Malaysia

I

ndonesia

Egypt

Thailand

Sou

thAfrica

Ph

ilippines

Bhutan

Zimbabwe

India

Nepal

(%)

0

5

10

15

20

25

30

35

40

N

etherlands

S

witzerland

Denmark

Norway

Korea

France

Iceland

L

uxembourg

UnitedKingdom

Germany

Sweden

Belgium

Canada

Finland

UnitedStates

Japan

N

ewZealand

Australia

Israel

Austria

Slovenia

Spain

Estonia

Italy

Ireland

Greece

Portugal

Hungary

Cze

chRepublic

Poland

Slov

akRepublic

Mexico

China

India

DSL Cable Fibre/LAN Other(%)

Russia

Singapore

Argentina

Germany

Malaysia

Chile

Korea (Rep.)

Brazil

Australia

ThailandSouth Africa

FranceJapan

Indonesia

United States

EgyptPhilippines

Sri Lanka

MexicoChina

IndiaZimbabwe

Bhutan

Nepal0

10

20

30

40

50

60

70

80

90

20 40 60 80 100 120 140 160 180

Internetpenetration

Mobile penetration

(%)

(%)

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Kunal Vora, CFA


Internet usage is increasing; India among the top three in terms of traffic for six out of the top seven

websites

Analysis of traffic patterns of the leading global websites indicates that India is among the top countries forthem in terms of traffic. This suggests to us that pent-up demand for high-speed demand usage will bereleased as 3G network availability improves and handset prices decline. Even for video services, such asYouTube, India is the second-largest country in terms of traffic. China features below India for the globalwebsites as there is a much better availability and consumption of local content.

EXHIBIT 51: Global leading websites by internet traffic EXHIBIT 52: India among top three on most websites

Rank Website

1 Google

2 Facebook

3 YouTube

4 Yahoo!

5 Baidu.com

6 Wikipedia

7 Blogger.com

8 Windows live

9 Twitter

10 QQ.com

Google.com (1) Facebook (2) YouTube (3)

31.2% US 23.9% US 21.5% US

8.1% India 7.4% India 7.1% India

4.2% China 4.5% Germany 5.6% Japan

3.1% UK 3.6% UK 4.1% Germany

3.1% Brazil 3.4% Italy 3.6% UK

Yahoo (4) Wikipedia (6) Blogger.com (7)

31.5% US 21.2% US 19.0% US

8.5% India 7.8% Japan 10.7% India

4.1% China 7.1% India 5.7% Brazil

3.7% Taiwan 6.6% Germany 4.8% Indonesia

3.3% UK 4.4% UK 3.5% Italy

Sources: Alexa; BNP Paribas Sources: Alexa; BNP Paribas

China is already seeing strong 3G subscriber adds; India could catch up on 3G

While India has had a slow start in 3G, we believe it can catch up fast as the enabling variables for adoptionof high-speed data services fall into place. In wireless, India was 5-6 years behind China in 2005. But, overthe past few years India has seen an explosion in mobile services on declining tariffs, declining handsetprices and a sharp increase in household income. India is now at par with China in terms of wirelesspenetration.

China launched 3G services two years ahead of India and is now seeing a strong uptick in 3G subscriberadds. China is adding 6m-7m 3G subscribers a month, taking the total base to 80m as at June 2011, from25m in June 2010. The country has seen a sharp acceleration in 3G subscriber addition over the past fewmonths. For fixed-line, India has a penetration of 3% compared to Chinas 22%. We believe Indiasbroadband growth will come largely from wireless, as seen in telephony where wireless connections inIndia is 70% compared to 3% for fixed-line. Indias internet penetration is 7.5% versus Chinas 34.3%. Wesee small-screen wireless access as the key driver of internet and broadband penetration in India.

EXHIBIT 53: China 3G strong net adds driven by cheaper devices EXHIBIT 54: India and China Mobile vs Internet penetration

Sources: Companies; BNP Paribas Sources: TRAI; ITU; BNP Paribas

0

1

2

3

4

5

6

7

8

9

10

0

10

20

30

40

50

60

7080

90

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

(%)(m) 3G subs (LHS) 3G as % of total (RHS)

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(%) India wireless China wireless

India Internet China Internet

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Kunal Vora, CFA


Contribution of non-voice in wireless has started to increase

GPRS services have become meaningful contributors to revenue over the past few quarters, resulting in theshare of data revenue rising as a percentage of total. Indian telecom operators now have 13-15% of theirrevenue coming from non-voice, which comprises SMS, value-added services and wireless internet. Whilethe companies have reported a significant increase in wireless internet subscriber base, we believe theactive user base is still low.

EXHIBIT 55: Non voice as % of revenue on the rise in India EXHIBIT 56: Mobile internet users on a rise

Sources: Companies; BNP Paribas Sources: TRAI; BNP Paribas

6

7

8

9

10

11

12

13

14

15

16

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

(%) Bharti Idea Vodafone

0

5

10

15

20

25

30

35

40

45

50

0

50

100

150

200

250

300

350

400

450

4Q07A

1Q08A

2Q08A

3Q08A

4Q08A

1Q09A

2Q09A

3Q09A

4Q09A

1Q10A

2Q10A

3Q10A

4Q10A

1Q11A

2Q11A

3Q11A

4Q11A

(%)(m) Wireless internet (LHS) % of subscribers (RHS)

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Kunal Vora, CFA


Revenue growth + margin expansion + reducing capex intensity = strong FCF

We are modelling in EBITDA margin increase of 1.7-2.7% for Idea, Bharti and RCOM over the next two years(vs. 2.2-7.5% decline in the last two years), driven by 3-5% ARPM increase (vs. 23-29% decline over the lasttwo years). Also, we expect 3G services to be EBITDA-margin-accretive with steady margins of over 50% foroperators such as Bharti, as cash cost for 3G is not very high excluding spectrum cost. While peak capex isclearly behind for the Indian operators, we expect capex intensity to decline further as initial 3G expansioncosts have been incurred in FY12 and minutes growth are set to moderate.

A steep decline in ARPM on launch of per-second billing, along with an increase in license fees, led to a 3-4% decline in EBITDA margin for Indian telecom operators over 2QFY10-2QFY11. ARPM has been relativelystable over the last three quarters and EBITDA margin has also stabilised. In addition, operators haveabsorbed a significant portion of their 3G network cost.

Our analysis of Ideas y-y change in EBITDA margin indicates that the biggest contributor to the margindecline in FY10 was network cost, due to new launches and tariff declines. An increase in spectrum chargesimpacted margins in FY11. However, network cost as a percentage of revenue has started to decline, drivingmargin improvement in 1QFY12 (Exhibit 58).

Specifically, we see clear scope for reduction from the following cost heads:

Access charges: We expect EBITDA margin to increase as access charges as a percentage of revenue is

likely to decline, given the termination rate has been fixed at INR0.20/min and given the operatororiginating the minute will retain the entire benefit of higher tariff.

Employee cost: Operators are restructuring their operations. They are reducing headcount, as well asre-aligning their business. According to media reports, several leading operators, including Airtel, RCOM,Tata Teleservices, are restructuring their operations in the current year.

SG&A cost dealer commission and advertisement spend: Operators are working on reducing theirchurn level and improving the quality of subscriber base. They have reduced dealer commissions onrecharges and also on sale of sim cards for most circles. The combination of lower commission ratesand lower gross adds should help reduce SG&A cost. Also, in view of the softness in overall economy, weexpect operators to get better deal from the television broadcasters, driving down advertisementexpenses.

3G will be EBITDA-margin-accretive: We expect 3G services to become EBITDA-margin-accretive as thelargest operating cost for 3G is network cost in our view, and it is already being absorbed. 3G servicesshould provide margin upside as usage picks up. 3G has no significant incremental impact on other costheads like employee wages, access charges, and advertisement spend.

EXHIBIT 57: EBITDA margin to increase for all operators EXHIBIT 58: Idea y-y change in cost heads (as % of revenue)

Sources: Companies' data; BNP Paribas estimates Sources: Idea Cellular; BNP Paribas

20

25

30

35

40

45

FY07 FY08 FY09 FY10 FY11 FY12E FY13E


(10)

(8)

(6)

(4)

(2)

02

4

6

8

10

1Q08A

2Q08A

3Q08A

4Q08A

1Q09A

2Q09A

3Q09A

4Q09A

1Q10A

2Q10A

3Q10A

4Q10A

1Q11A

2Q11A

3Q11A

4Q11A

1Q12A

(%) Network cost Employee

License and Access SGA

Margin

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Low 3G capex due to late adoption, roaming tie-ups, co-location of sites and vendor competition

While there have been concerns about the 3G launch causing significant escalation in capex, Indianoperators have managed to reduce their capex consistently over the last few years. In FY12, capex guidanceindicates a capex-to-sales ratio of 17-20%, which we estimate will decline further in FY13 as operatorsreport strong revenue growth and minutes growth moderates.

3G spectrum in India is fragmented with over seven operators, but none of them have a pan-India 3Gspectrum. Operators have entered into roaming arrangements to provide pan-India 3G coverage. Roaming

arrangements will lead to better asset-sweating and optimal utilisation of capital. Bharti, Idea andVodafone between them cover all circles and have entered into 3G roaming arrangements amongthemselves. Operators are still working out the 3G roaming agreements and have provided no details so far.

Focusing on restricting cost increase via rational expansion of 3G networks

Indian telecom operators are relying on their existing sites to expand their 3G coverage and are not leasingfresh sites for 3G. This will enable wider deployment of 3G with limited capex. Our discussions withindustry participants and tower companies suggest that the cost of adding Node B in the existing site isabout one-fourth of the monthly cost per site. Assuming that roughly 20% of sites get converted into 3G, thenetwork cost increase would be about 5%.

Capex intensity should continue to decline

Indian telecom operators invested heavily during FY07-09, when capex-to-sales was 40-60%. Subsequentlycapex intensity has declined sharply, excluding the spectrum payout in FY11. For FY12, Bharti guides todomestic capex of about USD1.9b, Idea to INR40b and RCOM to INR15b, representing 17%, 8% and 21% ofour FY12 revenue estimate. This is despite the 3G launch in FY12. We expect a further decline in the capex-to-sales for Bharti and Idea.

EXHIBIT 59: Capex-to-sales on a declining trend EXHIBIT 60: Strong FCF generation


0

20

40

60

80

100

120

Bharti RCOM Idea

(%) FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

(200,000)

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

Bharti RCOM Idea

(INR m) FY07 FY08 FY09 FY10

FY11 FY12E FY13E 2014E

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Kunal Vora, CFA


MNP: Strengthens belief in the incumbents, subscribers moving from CDMA/new entrants to incumbents

While MNP has been a nonevent, in line with our expectation (see our reportMNP: no cause of concern,dated 20 October 2010), it indicates the strength of the incumbents networks. There has been a clear moveaway from CDMA, public-sector operators and new GSM entrants towards the incumbents. While the MNPgains are not enough to impact the financial performance of incumbents, it has eased concerns thatincumbents could lose some of their high-value prepaid subscribers.

MNP was launched in India in November 2010, and 15.5m subscribers (1.8% of total) had ported until

August 2011. This compared to an annual churn rate of over 50% for most operators. More interestingly, incontrast to concerns that the three GSM incumbents would lose their high-value post-paid subscribers,they have been net recipients of subscribers through MNP.

According to press reports, as at 7 July, Idea led the MNP race with a port-in port-out ratio of 57 (57 lostagainst 100 gained) followed by Vodafone (67), Airtel (75) and Aircel (87). CDMA operators were the biggestlosers, with RCOM and Tata Teleservices seeing the worst ratio of 1580 and 1,640 subscribers lost for 100for 100 gained respectively. There is also a trend of subscribers moving away from new entrants to theincumbents as RCOMs GSM and datacom had a ratio higher than 1. Also, MNP has not lead to any pressureon revenue per minute or revenue market share for the incumbents.

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Kunal Vora, CFA


Sector valuation: Outperformance to continue

Although the share prices of Indian wireless telcos have increased in the past few months, we continue tolike the sector. We see significant room for upgrades to long-term estimates. We continue to assumeflattish revenue per minute beyond FY13, but we believe the risk is in the upside as we have beenconservative in our estimates. Over the next few quarters, we expect Indian telecom operators to reportstrong improvement in profitability, driven by revenue increase and margin improvement. Voice revenuegrowth will be driven by minutes growth and by improvement in revenue per minute.

We believe the worst of competitive intensity is behind us. New entrants have understood the futility oftariff cuts and competitive intensity is unlikely to resurface. Most new entrants are also involved inlitigation, which will likely constrain their ability to raise funds. Bharti has taken the lead by raising pricesby a significant 20%, and initial indications suggest that most operators are likely to follow suit as Bharti isa leader in cost structure.

We retain BUY on Bharti, Idea as well as RCOM and are raising TP for Bharti from INR440 to INR470, for Ideafrom INR110 to INR120 and are cutting our TP on RCOM from INR200 to INR95

EXHIBIT 61: Global telcos EV/EBITDA vs 2-year EBITDA CAGR

Prices as at 23 September 2011Sources: BNP Paribas estimates for Idea, Bharti and RCOM all others are Bloomberg consensus estimates

EXHIBIT 62: 1-year forward EV/EBITDA trend EXHIBIT 63: 1-year forward P/E trend

Sources: Companies; BNP Paribas Sources: Companies; BNP Paribas

Bharti

RCOM

Idea

China Mobile

China Unicom

China Telecom

PT Indosat

Singtel

AxiataDiGi

Dialog

PCCW

Telekom Malaysia

SK Telecom

KT Corp

LG Telecom

NTT DoCoMo

NTT

AT & TVerizon

France TelecomDeutsche Telecom

TeliasonaraBT Group

Telenor

MTN

0

5

10

15

20

25

3.0 4.0 5.0 6.0 7.0 8.0 9.0

FY13 EV/EBITDA

Premium justified due to

higher growth

2 year EBITDA CAGR (%)

3

5

7

9

11

13

15

17

19

Apr-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11


5

10

15

20

25

30

35

40

45

50

Apr-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11


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Kunal Vora, CFA


EXHIBIT 64: RCOM, Idea EV/EBITDA rebased to Bharti EXHIBIT 65: Bharti: EV/EBITDA band

Sources: Companies; BNP Paribas Sources: Bharti Airtel; BNP Paribas

EXHIBIT 66: RCOM: EV/EBITDA band EXHIBIT 67: Idea: EV/EBITDA band

Sources: Reliance Comm; BNP Paribas Sources: Idea Cellular; BNP Paribas

EXHIBIT 68: Bharti: P/E band EXHIBIT 69: Idea: P/E band

Sources: Bharti Airtel; BNP Paribas Sources: Idea Cellular; BNP Paribas

60

80

100

120

140

160

180

200

Apr-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11


0

200

400

600

Apr-03

Jul-04

Sep-05

Dec-06

Feb-08

Apr-09

Jul-10

Sep-11

(INR)

6x

8x

10x

12x

0

100

200

300

400

500

Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11

(INR)

8x

10x

12x

14x

6x

0

40

80

120

160

Apr-07 Nov-07 Jul-08 Feb-09 Oct-09 Jun-10 Jan-11

Wireless Tele Services-Sep11- BNP Paribas

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