INSTITUTIONAL SECURITIES

INDIA RESEARCH

SECTOR UPDATE

Telecom
Competitive intensity Status check (Part 2)
11 February 2014 BSE Sensex: 20363
Competitive landscape What has changed? Feb14 spectrum auction has stretched longer than anticipated. The prolonged uncertainty on final payouts and a possible increase in competitive intensity post Reliance Jios (R-Jio) entry in voice are turning out to be the nemesis of telecom stocks. Although daily price increases in both 1800MHz and 900MHz bands have not been alarming, active bidding across circles open up possibilities of various operator strategies. In this note, we endeavor to present a few possible strategies of incumbents and consequent impact on debt/ enterprise valuation. Possible strategies a. b. c. Operators protecting the 900MHz turf in metro licenses coming up for renewal in 2014. Also, they may consider bidding fresh 900MHz in select metros. Load up 1800MHz spectrum in licenses coming up for renewal in 2015/ 16 to safeguard from a potential price increase in 900MHz band at the time of renewal. Increase the 1800MHz holding across circles to a minimum 5MHz and plan a launch of pan-India FD-LTE.

Idea Cellular Strategy: Bid for incremental 1800MHz spectrum; this would take the holding to at least 5MHz in nine circles coming up for renewal in 2015/16. It may consider bidding for fresh 900MHz in Delhi and Mumbai. a. b. We believe that Idea would not bid for anything in 900MHz at Day7 provisional winning prices (PWP), it would cost Rs37bn for Delhi and Rs28bn for Mumbai (for minimum 5MHz) Rs65bn/ Rs21 per share for Idea. We believe Idea would bid for 5MHz of 1800 MHz band across 9 circles (coming up for renewal in 2015/16). It may opt for some additional spectrum in other circles. This could mean an outlay of Rs40bn and Rs3bn respectively, as of Day7 PWP. Of this, Rs30bn is already built into our estimates. Considering all spectrum renewal till 2030, NPV of spectrum renewal for Idea is Rs53 per share (vs. Rs33 at reserve prices) assuming 900MHz prices at 2.5/3x that in 1800MHz band with Day7 PWP. Refer Exhibit1/ page2.

c.

Stock view: We see the stock recovering post auctions if it does not bid for 900MHz band in Mumbai/ Delhi. Maintain Outperformer. Bharti Airtel Strategy: Re-bid the 900MHz/ 1800MHz holding in Delhi and Kolkata. Consider fresh 900MHz spectrum in Mumbai and load up 1800MHz spectrum in six licenses coming up for renewal in 2015/16. a. b. c. d. We believe Bharti would bid for 900MHz in metros (5MHz in Delhi/ Mumbai and 7MHz in Kolkata). This would cost it Rs79bn at Day7 PWP. It would load upto 5MHz of 1800MHz band in six licenses due for renewal in 2015/16. It may also acquire additional spectrum in other circles. Both these acquisitions would amount to Rs38bn and Rs10bn respectively. Of these potential payments, we have already factored in Rs88bn in our estimates. Considering all spectrum renewal till 2030, NPV of spectrum renewal for Bharti is Rs60 per share (vs. Rs45 at reserve prices) assuming 900MHz prices at 2.5/3x that in 1800MHz band with Day7 PWP. Refer Exhibit1/ page2.

Stock View: We believe a diversified revenue base and bigger scale dissipate the additional debt burden and, hence, the stock price is relatively insulated from uncertainty around auction results. Maintain Outperformer.
Hitesh Shah, CFA hitesh.shah@idfc.com 91-22-6622 2565 Abhishek Gupta abhishek.gupta@idfc.com 91-22-6622 2661 For Private Circulation only. Important disclosures appear at the back of this report

SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.

Telecom

Exhibit 1: Potential payout in ongoing auctions and incremental impact on net debt/ enterprise valuation
(Rs bn) 120 90 60 30 0 Payout for 900MHz (Delhi + Mumbai) Payout for 1800MHz (licenses for renew al in 2015/16) Incremental 1800MHz in other circles Already Increase in net factored-in our debt estimate estimates 65 30 70 35 0 Payout for 900MHz (all three metros) Payout for 1800MHz (licenses for renew al in 2015/16) Incremental 1800MHz in other circles Already Increase in net factored-in our debt estimate estimates 40 Idea Cellular 3 78 (Rs bn) 140 38 105 79 39 88 Bharti Airtel 10

Source: Department of Telecom, IDFC Securities Research

Exhibit 2: NPV of spectrum payout on renewal increases by Rs15-20 per share for Bharti and Idea
Year (Rs m)
2014 2015/16 2021 2024 2026 Total NPV value (@ 12% discount rate) One time spectrum payout Total payout Per share (Rs) - @ Day7 prices Per share (Rs) - @ reserve prices Source: Department of Telecom, IDFC Securities Research

Bharti Airtel
65,932 104,750 80,831 29,428 1,138 282,078 188,705 52,013 240,718 60 45

Idea Cellular
171,910 34,516 13,130 219,556 153,995 21,135 175,130 53 33

Exhibit 3: Administered and liberalized spectrum holding of Bharti and Idea across frequency bands
Bharti Airtel License Andhra Pradesh Assam Bihar Delhi Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala Kolkata Madhya Pradesh Maharashtra Mumbai North East Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh (East) Uttar Pradesh (West) West Bengal 7-Dec-15 3-Jul-24 5-Feb-24 24-Nov-14 23-Sep-21 23-Sep-21 7-Dec-15 5-Feb-24 10-Feb-16 23-Sep-21 24-Nov-14 23-Sep-21 23-Sep-21 23-Sep-21 7-Dec-25 5-Feb-24 7-Dec-15 17-Apr-16 24-Nov-15 5-Feb-24 23-Sep-21 6-Feb-24 7.80 1.80 6.20 8.00 6.20 6.20 7.80 6.20 4.40 6.20 7.80 6.20 6.20 6.20 6.20 4.40 2.20 4.40 3.00 2.00 6.20 6.20 2.20 6.20 1.80 8.00 8.20 9.20 1.80 1.80 2.00 3.00 1.00 1.80 1.25 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 14-Dec-15 15-Nov-32 1-Dec-26 30-Sep-21 7-Dec-15 7-Dec-15 30-Sep-21 15-Nov-32 4-Apr-16 7-Dec-15 15-Nov-32 7-Dec-15 7-Dec-15 30-Nov-26 15-Nov-32 15-Nov-32 4-Apr-16 30-Sep-21 15-Nov-32 30-Sep-21 7-Dec-15 15-Nov-32 6.20 6.20 6.20 6.20 6.20 6.20 8.00 7.80 6.20 6.20 Idea Cellular 1.80 4.40 8.00 4.40 1.80 1.80 1.80 4.40 6.20 1.80 5.00 1.25 5.00 5.00 5.00 5.00 5.00 6.25 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 Expiry date 900MHz (A) 1800MHz (A) 1800MHz (L) 2100MHz (L) 2300MHz (L) Expiry date 900MHz (A) 1800MHz (A) 1800MHz (L) 2100MHz (L)

Source: Department of Telecom, IDFC Securities Research * Note: A= Administered; L= Liberalized

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11 February 2014

Telecom

Exhibit 4: Trend of provisional winning prices and demand over the last 7 days
900MHz
(Rs m per MHz) 8,000 Delhi Mumbai Kolkata (Rs m per MHz) 24,000 Pan-India (1800 MHz) Three Metro (900 MHz)

6,000

18,000

4,000

12,000

2,000

6,000

0 Reserve price Day1 Day2 Day3 Day4 Day5 Day6 Day7

0 Reserve price Day1 Day2 Day3 Day4 Day5 Day6 Day7

# of circles with price changes 1800 MHz 12 900 MHz 1,450

Demand (# of blocks) in 1800 MHz band - EOD 1,403 1,373 1,375 1,344 1,314 1,290 1,266 1,237

9 1,300

1,225

0 Day1 Day2 Day3 Day4 Day5 Day6 Day7

1,150 Day1 Day2 Day3 Day4 Day5 Day6 Day7

Source: Department of Telecom, IDFC Securities Research

Exhibit 5: Provisional winning prices of 1800MHz vis--vis earlier reserve prices

Circles
Andhra Pradesh Assam Bihar Delhi Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala Kolkata Madhya Pradesh Maharashtra Mumbai North East Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh (East) Uttar Pradesh (West) West Bengal

Auction reserve price (Mar-13)

2,295 69 371 3,881 1,799 372 62 51 1,849 522 910 432 2,103 3,799 71 162 538 376 2,449 609 859 207

Auction Reserve price (Feb'14)

1,630 70 370 2,190 1,430 270 60 50 1,550 520 730 430 1,730 2,070 70 160 540 260 2,080 610 620 210 17,650

Provisional winning price (PWP)

1,630 270 431 3,466 2,309 270 60 61 1,550 520 730 477 2,657 2,195 70 160 540 260 2,080 640 950 246 21,571

PWP - change vs. old RP

(29.0) 290.6 16.2 (10.7) 28.3 (27.4) (3.2) 19.6 (16.2) (0.4) (19.8) 10.4 26.3 (42.2) (1.4) (1.2) 0.4 (30.9) (15.1) 5.1 10.5 18.8 (9.3)

PWP - change vs. new RP

0.0 285.0 16.5 58.2 61.5 0.0 0.0 22.0 0.0 0.0 0.0 10.9 53.6 6.0 0.0 0.0 0.0 0.0 0.0 4.9 53.1 17.1 22.2

Total 23,786 Source: Department of Telecom, IDFC Securities Research

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11 February 2014

Telecom

Exhibit 6: Provisional winning prices of 900MHz vis--vis earlier reserve prices

Circles
Delhi Kolkata Mumbai

Auction reserve price (Mar-13)

7,762 1,820 7,599

Auction Reserve price (Feb'14)

3,600 1,250 3,280 8,130

Provisional winning price (PWP)

7,410 1,946 5,631 14,987

PWP - change vs. old RP

(4.5) 6.9 (25.9) (12.8)

PWP - change vs. New RP

105.8 55.7 71.7 84.3

Total 17,181 Source: Department of Telecom, IDFC Securities Research

Exhibit 7: Daily public report end of day 7 (1800MHz auctions)

Circle Category Total blocks Original Demand Excess Price in Price for Provisional Escalation Available reserve price in R49 Demand R49 (in Rs R50 (in Rs winning price over reserve (Rs m/ block) (Blocks) m/ block) m/ block) (in Rs m/ block) price (%)
A C C Metro A B C C A B Metro B A Metro C C B B A B B B 113 57 12 105 60 82 102 22 123 140 125 96 70 117 125 131 92 95 151 40 12 56 326 14 74 438 286 54 12 10 310 104 146 86 346 414 14 32 108 52 416 122 124 42 3,530 106 62 62 53 25 51 9 119 108 90 97 80 88 81 50 82 53 56 38 34 1,344 (7) 5 (12) (43) (7) (57) (51) (13) (4) (32) (35) 1 10 (29) (44) (81) (10) (42) (95) (2) (12) (22) 326 54 87 714 476 54 12 12 310 104 146 95 531 448 14 32 108 52 416 128 192 50 4,361 326 54 87 714 476 54 12 12 310 104 146 96 542 448 14 32 108 52 416 128 192 50 4,373 326 54 86 693 462 54 12 12 310 104 146 95 531 439 14 32 108 52 416 128 190 49 4,314 0.0 285.0 16.5 58.2 61.5 0.0 0.0 22.0 0.0 0.0 0.0 10.9 53.6 6.0 0.0 0.0 0.0 0.0 0.0 4.9 53.1 17.1 22.2

Andhra Pradesh Assam Bihar Delhi Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala Kolkata Madhya Pradesh Maharashtra Mumbai North East Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh (East) Uttar Pradesh (West) West Bengal

Total Source: Department of Telecom, IDFC Securities Research

Exhibit 8: Daily public report end of day 7 (900MHz auctions)

Circle Category Total blocks Original Demand Available Reserve price in R49 (Rs m/ block) (Blocks)
16 14 16 3,600 1,250 3,280 5 12 5

Excess Price in R49 Price for R50 Provisional Escalation Demand (in Rs m/ (in Rs m/ winning price over reserve block) block) (in Rs m/ block) price (%)
(11) (2) (11) 7,484 1,966 5,687 15,137 7,484 1,966 5,687 15,137 7,410 1,946 5,631 14,987 105.8 55.7 71.7 84.3

Delhi Kolkata Mumbai

Metro Metro Metro

Total 8,130 Source: Department of Telecom, IDFC Securities Research

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11 February 2014

Telecom
Analyst
Shirish Rane Prakash Joshi Nitin Agarwal Hitesh Shah, CFA Manish Chowdhary Bhoomika Nair Pramod Kumar Ashish Shah Abhishek Gupta Mohit Kumar, CFA Param Desai Probal Sen Saumil Mehta Harit Kapoor Sameer Bhise Abhishek Ghosh Nikhil Salvi Jay Kale, CFA Dharmendra Sahu

Sector/Industry/Coverage
Head of Research; Construction, Power Oil & Gas, Metals, Mining Pharmaceuticals, Real Estate, Agri-inputs IT Services & Telecom Financials Engineering, Cement, Power Equipment, Logistics Automobiles, Auto ancillaries Construction, Power Telecom, IT services Construction, Power Pharmaceuticals, Real Estate, Agri-inputs Oil & Gas Metals, Mining FMCG, Retail, Alcoholic Beverages Financials Engineering, Cement, Power Equipment, Logistics Strategy, Mid-caps Automobiles, Auto ancillaries Database Analyst

E-mail
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Equity Sales/Dealing
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