Sector Update

October 11, 2011 Price performance (%)

Bharti Airtel RCOM Idea 1M -9.3 -11.6 -4.0 3M -8.8 -24.2 13.6 6M 0.3 -32.3 40.6 12M 3.4 -59.0 30.8

Telecom Sector
More hype than substance in NTP 2011...
The Telecom Ministry has announced the draft of the New Telecom Policy 2011. The draft on the new policy did seem to be consumer and industry friendly and took cognizance of the need for enhanced broadband penetration in the country and need for additional spectrum. However, lack of clarity and strict timelines for implementation was a dampener. Key Highlights There would be a separate spectrum act with clear policies on spectrum sharing, pooling and even trading of spectrum Allocation of spectrum would be delinked from telecom licenses and be done through market mechanisms A one nation one license strategy eliminating roaming charges for consumers and eventual convergence of local and STD charges. This would shave off ~4-6% of EBITDA of large operators with Idea being most impacted. However, this would be compensated with increase in headline tariffs and volume up tick Infrastructure status to be awarded to telecom industry, thus making it eligible for fiscal and other incentives Make available additional 300 MHz spectrum for international mobile telecommunications services by 2017 and another 200 MHz by 2020 Frame an exit policy for telecom operators, which would further aid in freeing up unutilised spectrum Review the Trai and Indian Telegraph Act Increase the rural teledensity to 35-60% by 2017 and 100% by 2020 Achieve 175 million broadband connections at a minimum of 2 Mbps and up to 100 Mbps on demand by 2020 Meet at least 80% of the telecom demand domestically by 2020. This would help service providers bring down their costs Ease M&A rules for telecom service providers. However, we believe none of the small operators are an attractive buy out option since most of them are caught up in the 2G scam in some way or the other

Valuation summary - Bharti Airtel

P/E Target P/E EV / EBITDA P/BV RoNW RoCE FY10 15.8 18.8 8.9 3.5 22.0 19.7 FY11 23.7 28.2 10.2 2.9 12.4 8.6 FY12E 26.0 30.9 8.3 2.7 10.3 9.5 FY13E 16.2 19.2 6.5 2.3 14.3 13.2

Valuation summary - Reliance Communication

P/E Target P/E EV / EBITDA Price /BV RoNW (%) RoCE (%) FY10 3.4 3.7 6.2 0.4 10.7 2.2 FY11E 11.7 12.9 5.7 0.4 3.8 2.6 FY12E 21.2 23.2 8.3 0.4 2.0 2.5 FY13E 13.3 14.6 6.7 0.4 3.2 3.1

Valuation summary - Idea Cellular

P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) FY10 33.0 35.9 11.6 2.8 8.4 7.0 FY11E 35.1 38.2 11.1 2.6 7.3 5.7 FY12E 50.6 55.1 9.0 2.4 4.8 7.3 FY13E 34.4 37.4 7.5 2.3 6.6 8.8

510 410 310 210 110 10

Price movement
7,000 6,000 5,000 4,000 3,000 2,000 1,000 Oct-10 Jan-11 Bharti Apr-11 RCom Jul-11 Idea

Outlook
The draft has been posted on the website of DoT for feedback. After receiving feedback, an updated version will be prepared that will be discussed by Trai and telecom operators. Though the draft talked about the spectrum management act and that future spectrum would be given only through auction and conducting regular spectrum audit, it did not mention one-time spectrum fees or spectrum re-framing explicitly. Hence, the uncertainty regarding spectrum pricing and fees continues. Both Bharti Airtel and Idea Cellular (under our coverage universe) would be impacted the most by one-time spectrum fees and spectrum re-farming. However, till further clarity emerges, we maintain our BUY rating on Bharti Airtel and Idea Cellular with a target price of | 450 and | 104, respectively. Though Reliance Communication would be least impacted by spectrum pricing in the near term, we remain cautious due to large debt and poor operating performance. We recommend a HOLD rating on the stock with a target price of | 84.

Oct-11 Nifty (L.H.S)

Analysts name
Karan Mittal karan.mittal@icicisecurities Anil Shenoy anil.shenoy@icicisecurities.com

ICICI Securities Ltd. | Retail Equity Research

ICICIdirect.com coverage universe (Telecom Service Providers)

Bharti Airtel Idirect Code BHATE CMP Target % Upside 364 450 23.8% FY10 FY11 FY12E FY13E FY10 FY11E FY12E FY13E FY10 FY11E FY12E FY13E FY10 FY11 FY12E FY13E Sales (| Cr) 39615.0 59467.2 71054.6 81616.0 21496.4 22430.4 19659.6 21652.9 12397.9 15503.2 18878.4 21496.4 2098.3 2303.1 2380.5 2453.3 EPS (|) 24.0 15.9 14.5 23.4 22.6 6.5 3.6 5.8 2.9 2.7 1.9 2.8 -1.7 0.4 -2.6 -2.6 PE (x) 15.2 22.8 25.0 15.5 3.3 11.4 20.5 12.8 31.9 33.8 48.8 33.2 NA 40.6 NA NA EV/EBITDA (x) 8.5 9.9 8.1 6.3 6.1 5.6 8.2 6.6 11.3 10.8 8.8 7.3 18.6 26.0 16.5 16.0 RoNW (%) 22.0 12.4 10.3 14.3 10.7 3.8 2.0 3.2 8.4 7.3 4.8 6.6 -12.8 3.2 -19.6 -20.1 RoCE (%) 19.7 8.6 9.5 13.2 2.2 2.6 2.5 3.1 7.0 5.7 7.3 8.8 -2.8 -6.4 -0.4 -0.3

MCap (| Cr) RCOM Idirect Code

138,021 RELCOM

MCap (| Cr) Idea Idirect Code

15,284 IDECEL

CMP Target % Upside

74 84 13.2%

MCap (| Cr) TTML Idirect Code

30,423 HUGTEL

CMP Target % Upside

92 104 12.8%

MCap (| Cr)

3,254

CMP Target % Upside

17 17 -0.1%

Source: Company, ICICIdirect.com Research

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pankaj.pandey@icicisecurities.com

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