A difficult beginning witnessed by the Indian Telecom industry in 3QFY2010 continued to prevail during 4QFY10,

although the severity of the same was comparatively lesser. Stocks gained on an average of 2.1% during the quarter
vis-à-vis 30% dip witnessed in 3QFY10. BSE Sensex gained 0.3% over the same period. The sector continued to
witness strong growth in its subscriber base with falling ARPUs despite high competition and regulatory challenges.
The most awaited 3G & BWA auction was delayed further, while even the MNP implementation didn't take place as
per the schedule. A key event during the quarter was the acquisition of Zain Telecom (Africa) by Bharti Airtel, which is
expected to consummate soon.
 

Subscriber growth robust as call charges drop to new lows

 
The growth in subscriber addition continues its strong run-rate as the new players take the price wars to a new level,
with aspirations of client addition and incremental market share. The industry witnessed strong net addition of 19.9mn
and 11.2mn subscribers in the months of January 2010 and February 2010, respectively. Although subscriber growth
is robust, we believe that a large part of it is coming from multiple SIM ownership, which would not translate into
incremental revenue growth for the operators. In 4QFY2010, new entrants such as MTS and Uninor extended the
price wars by unveiling Rs0.30 per minute plans, which has resulted in numerous instances of multiple number
ownership and churn rates. The new subscriber addition growth has been propelled by new circle rollouts by players,
lower call rate offerings and the increased availability of dual SIM phones.
 
 
The Blended ARPU (Average Revenue Per User) of the industry is going down quarter after quarter, and the low call
charges are helping the strong subscriber growth. We believe that the ARPU will go further down as the operators
with sub-paise per second billing are hurting the RPM (Revenue Per Minute) average for the industry. Also, the MoU
(Minutes Of Usage) / subscriber would go down in the short-term on account of the growth in multiple card ownership.
However, the declining ARPU trend would neutralise in 12-18 months, once we reach the 750mn+ subscriber count,
where we would see a normalisation in the net new additions in subscribers.
 

 
Bharti Airtel maintained its leadership position, with a subscriber market share of 22.4% (GSM+CDMA combined) as
on February 2010. The top 3 positions were maintained, but Tata Tele services scaled up to topple BSNL for the fifth
position, registering the largest market share increase of 240bp YTD (April-February 2010), helped by its new
network rollouts in multiple circles, and aggressive pricing and marketing for its GSM launch under the 'DoCoMo'
brand. New entrants Uninor and Sistema marked their entry by cornering a 0.6% share each, eating a respectable
portion of the incremental subscriber addition. Going forward, the leaders are likely to see a decline in their market
shares, as the number of participants per circle would double from the 5- 6 currently to 10-14 in the next few months.
 

 
ZAIN = GAIN: Opportunities justify Valuation

The Zain board has approved Bharti's US $10.7bn offer to acquire its African business (excluding Sudan and
Morocco) and has also agreed to compensate in case issues related to minority shareholders crop up in the coming
years. With this, Bharti Airtel would gain 42mn subscribers from Zain, and the combined entity, with a subscriber base
of 170mn, is expected to become the world's seventh-largest telecom company. At a deal value of US $10.7bn,
valuations for Zain's African assets are pegged at an EV/EBIDTA of 11.6x (as against Bharti's valuation of 7.6x).
Also, on EV/Subscriber basis, Bharti is paying US $255.4 per subscriber, as against its own valuation of US $214 per
subscriber. Although the deal appears expensive on various parameters (EV/EBIDTA and EV/Subscriber), we believe
that the right way to look at the deal would be in terms of the opportunities it holds and the overall value of the
combined entity, as it offers considerable synergies to Bharti. Although the Zain deal has been valued higher than
that of its closest peer, MTN, we believe it would still be value accretive for Bharti owing to financial leverage from the
Leveraged Buy-Out structuring.
The biggest argument favouring the deal is that Africa is the only underpenetrated market in the world, and is likely to
evolve multi-fold over the coming years. We also believe that it would be able to deploy its trademark 'Minute Factory'
model, which would result in strong market share accretion for Bharti-Zain.
 

 
 Strong Opportunities to Emerge
 
- Low Penetration: Most of the markets where Zain operates are countries with a large population and low tele-
density (33%), which highlight considerable scope in terms of new subscriber additions.

- High ARPU: Zain's ARPU is 63% higher than Bharti's ARPU of Rs250 per subscriber, as tariff rates in Africa are 10
times higher than that of Bharti. The Total MoU per subscriber for the combined Zain operations is one-fifth of Bharti's
MoU of 446.

- Market Leadership: Zain has maintained its strong leadership in most of its operating markets, with a sizeable
market share of over 25% in the 15 countries under consideration. Zain is ranked either first or second in over 14 of
its 15 markets, which would help Bharti to further consolidate its positioning. The entry of Bharti is expected to result
in large market share dislocations, as and when it introduces aggressive pricing strategies to corner a larger
subscriber pie.
 
 
 
In a nutshell, we believe that the Bharti-Zain deal would impact the cash flow generation in the short run and would
drag the overall profitability of the company. But, we believe that the company would be able to integrate Zain's
business in the coming years, as the lower profitability would be re-aligned to more respectable levels. We should
appreciate the fact that Bharti has been able to generate 40%+ EBIDTA Margins at less than a rupee call charges. As
price tariffs are much higher (approximately 10 times higher) in the African market, the company would employ its low
cost model to deliver favourable returns in the coming period. It may also expand its reach in other African markets,
which may add more dimensions to this inorganic foray.
 
 
Regulatory Issues continue to drag Telecom Growth

The worries of the telecom industry stretched further in 4QFY2010, as the competition intensifies and the
Government continues to play spoilsport in fresh developmental aspects. The long delay in 3G spectrum allocation is
likely to stretch further, as auctions are unlikely to happen according to the prescribed schedule in April 2010. The
latest development is of the Central Vigilance Commission (CVC) demanding policy changes in the bidding process,
as it believes that the current policy favours existing license holders, with new players having to pay a separate
Rs16.51bn to obtain a unified access service license over and above their bid amount. The delay in the 3G auctions
is acting as a hindrance, as the TSPs (Telecom Service Providers) are expecting it to form a new revenue stream
through data VAS (Value-Added Services).
 
Total Minutes likely to grow; Competition Intensity to pacify

The total MoU has been growing at a robust pace and has clocked a 48% CAGR in the last four years. The MoU
growth is likely to continue, led by strong subscription growth (current penetration at just 47% as against 88% in the
US), and growth in the MoU per subscriber (just 452 as against 772 for the US). We expect total MoU to grow by over
20% over FY2010E-14E.

We believe that the ongoing price war is unlikely to persist, as even the current tariff rates are not feasible for newer
players, considering the large capex involved, marketing spend and regulatory/tax structure. We believe that new
players would not make any significant impact, as their growth is discount-driven (multiple cards) and would not result
in any major churning. Once the recovery process (end of the 'free minutes' era) begins, the minute usage is likely to
return back to the primary incumbent TSP. Bharti and RCom, with a high RPM and EBIDTA per minute are better
placed and are relatively immune to such tariff wars. We believe that the players with a low-cost integrated model
(own tower infrastructure) and a high subscriber base would benefit in the long term; thus, we continue to remain
positive on Bharti Airtel and RCom.