Sector Update

March 30, 2015

Telecom

Price performance (%)

1M
5.8
-16.4
10.8

Bharti Airtel
RCOM
Idea

3M
6.1
-27.6
14.4

6M
-7.1
-40.3
3.3

12M
21.1
-53.0
23.6

Valuation summary - Bharti Airtel

FY14
54.2
69.2
7.7
2.5
4.6
8.7

P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)

FY15E
26.8
34.1
7.6
2.3
8.7
9.5

FY16E
23.6
30.1
6.8
2.1
9.1
10.2

FY17E
20.6
26.3
5.8
2.0
9.5
11.2

Valuation summary - Reliance Communication

FY14
11.7
11.8
8.2
0.5
3.9
3.0

P/E
Target P/E
EV / EBITDA
Price /BV
RoNW (%)
RoCE (%)

FY15E
22.8
22.9
7.4
0.4
1.9
4.3

FY16E
16.0
16.1
6.8
0.4
2.6
4.4

FY17E
13.5
13.6
6.1
0.4
3.0
4.5

FY16E
17.8
21.4
7.8
2.4
13.5
10.6

FY17E
14.6
17.6
6.6
2.1
14.1
12.4

Valuation summary - Idea Cellular

FY14
30.1
36.3
9.9
3.6
11.9
10.8

P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)

FY15E
20.2
24.4
9.7
2.8
13.6
8.5

Price movement (Stock vs. Nifty)

10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
Apr-14

Jul-14
Bharti

Sep-14
RCom

Jan-15
Idea

460
410
360
310
260
210
160
110
60
10
Mar-15
Nifty (L.H.S)

Huge payouts, telcos win back spectrum

As the March 2015 auctions ended the government has pocketed nearly
| 1.1 lakh crore with | 28873 crore being its immediate pay in. Idea, Bharti
Airtel and Vodafone were the top three spectrum winners with a total
payout of | 30307, | 29130 and 25960 crore respectively, The spectrum
won by Idea, Airtel and Vodafone was 79.4 MHz, 111.6 MHz and 78.4
MHz, respectively. Though total payouts have been in excess of our
previous estimates, the fact that telcos where able to win back their
expiring circles comes in as a huge positive.
We had estimated a total payout of about | 16000 crore for Airtel on the
basis of the minimum reserve prices considering it would purchase
spectrum in excess of the expiring spectrum. However, post auctions,
with the total payout being | 29130.0 crore for Airtel, its debt burden is
expected to rise by | 21300 crore. The net debt/EBITDA may reach 2.8x in
FY15E from 2.4x as per our initial estimates. The company is expected to
achieve net debt/EBITDA of 1.8x by FY17E owing to its strong free cash
flow generation. We continue to maintain our target price of | 480 valuing
it on a DCF methodology with revised revenue assumptions, which would
offset the dent caused due to increasing interest costs.
For Idea, the additional payout will increase the debt burden by about
| 14016.8 crore. Hence, this would lead to an additional interest cost
burden and depreciation cost causing a PAT dilution of about 8%.
Moreover, the overhang of spectrum expiry has passed, which should aid
investor sentiment. We arrive at a revised target price of | 215 valuing it
on a DCF methodology with revised revenue assumptions. Reliance
Communication (RCom), however, has been unable to win back spectrum
in all its expiring circles. It has been lagging behind peers in its network
expansion activity. Hence, we re-value at | 60, with HOLD rating.
The 2015 auctions: consolidation of power in hands of biggies
About 418.05 MHZ of spectrum sold in the March 2015 auctions has
fetched the government revenues of ~| 109875 crore. The players have
safeguarded their turf by winning back the necessary expiring spectrum
and preparing the ground for a data boom. There is a huge gap between
the spectrum holding between incumbents and new operators. Smaller
players such as Sistema, Uninor and Videocon did not participate in the
auctions. Even Aircel, Tata Teleservices had relatively lower participation.
The long term viability of smaller players depends on the governments
stance on spectrum sharing and trading. The auctions have made
consolidation even more probable with power to be concentrated in the
hands of biggies. Though Reliance Jios (RJio) spectrum portfolio is
strong, the market share it will be able to capture remains to be seen.
Exhibit 1: Details of spectrum purchased in 2015 auctions

Research Analyst
Karan Mittal
karan.mittal@icicisecurities.com
Sneha Agarwal
sneha.agarwal@icicisecurities.com

Band (MHz)
800
900
1,800
2100
Total Spectrum
Total Payout (| Cr)
Immediate Payout (| Cr)

Idea
54.00
20.40
5.00
79.40
30,307
7,790

Airtel
61.20
15.40
35.00
111.60
29,130
7,833

Source: DoT, Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Vodafone
42.80
5.60
30.00
78.40
25,960
6,868

R Jio
48.75
28.00
76.75
10,078
2,695

TTSL
11.25
2.60
13.85
7,851
2,013

Rcom
26.25
10.00
11.80
48.05
4,299
1,107

Aircel
10.00
10.00
2,250
743

Player-wise repercussions of auctions

With the end of auctions, the telecom sector is free from fears such as
spectrum shortage, inability to support the upcoming data capacity and
players being unable to win back expiring spectrum. Though the auction
payout has been slightly ahead of expectations at | 109875 crore and
would increase the debt burden in the industry, we believe tariff hikes are
imminent and would be sufficient to set off the dent in margins to be
caused by increased depreciation and interest costs.
Airtel: Strongest spectrum portfolio, cements leadership position
Bharti Airtel bought 111.6 MHz of spectrum in the current auctions with a
total payout of | 29130 crore translating into an immediate payout of
| 7833 crore to the government. Post auctions, Airtel has emerged as the
telco with the highest spectrum portfolio among incumbents of about
561.5 MHz across bands of 800/900/1800/2100/2300 MHz with a mix of
liberalised and non-liberalised spectrum. The company has been able to
buy back sufficient spectrum in all its expiring circles. As evident, it is
largely focusing on 3G offerings.
We had estimated a total payout of about | 16000 crore for Airtel on the
basis of the minimum reserve prices considering it would purchase
spectrum in excess of the expiring spectrum. However, post the auctions,
with the total payout being | 29130.0 crore for Airtel, its debt burden is
expected to rise by | 21300 crore. The net debt/EBITDA is expected to
reach 2.8x in FY15E from 2.4x as per our initial estimates. This is
expected to lead to an additional interest cost and depreciation burden
causing a PAT dilution of about 10% to FY17 estimates. However, owing
to the lofty payouts across industry we believe a tariff hike is imminent.
In addition, such an enormous spectrum holding will enhance its service
quality standards to serve data and, hence, would improve the revenue
profile of the company. The company is expected to achieve net
debt/EBITDA of 1.8x by FY17E owing to its strong free cash flow
generation. We continue to maintain a target price of | 480 valuing it on a
DCF methodology with revised revenue assumptions. This would offset
the dent caused due to increasing interest costs.

ICICI Securities Ltd | Retail Equity Research

Page 2

Exhibit 2: Airtel spectrum holding details

Airtel
LSA / Spectrum band
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

Expiring Spectrum (MHz)

Non Liberalized
900
1800
7.8
2.2
6.2
7.8
2.2
4.4
1.8
7.8
6.2
2.0
-

Acquired in March 2015 Auctions (MHz)

Liberalized
800
900
1800
2100
9.0
1.2
6.2
1.6
5.0
3.4
5.0
7.4
8.8
2.0
5.0
5.0
8.8
1.6
1.2
6.2
5.0
10.0
1.0
6.0
5.0
5.0
2.2
-

Total Spectrum holding (MHz) - Post factoring in expiries in 2015 & 2016
Non-Liberalized
Liberalized
800
900
1800
2100
2300
800
900 1800 2100
5.0
9.0
10.0
1.8
5.7
5.0
6.2
6.2
3.0
5.0
1.6
5.0
20.0
6.0
7.0
6.2
5.0
6.2
20.0
3.4
5.0
5.0
7.4
10.2
6.2
5.0
2.6
5.0
20.0
8.8
8.8
6.2
20.0
5.0
20.0
7.0
7.0
8.0
5.8
5.0
8.2
20.0
5.0
9.2
5.0
20.0
5.0
6.0
5.0
8.8
8.6
6.2
1.8
1.2
11.2
5.0
20.0
10.0
9.2
5.0
6.0
8.2
0.6
5.0
5.0
5.0
6.2
1.0
5.0
6.2
5.0
4.4
1.8
5.0
2.2
4.4
-

* Airtel has additional 6.2 MHz spectrum in 1800 MHz band in Tamil Nadu (excluding Chennai) and 2.4 MHz (1800 MHz) and 6.2 MHz (900 MHz) in Chennai
Source: DoT, TRAI, ICICIdirect.com Research

Idea Cellular Fills weak link in its portfolio- spectrum

Idea Cellular bought 79.4 MHz of spectrum in the current auctions with
the highest payout of | 30307.0 crore translating into an immediate
payout of | 7790 crore to the government. The company has been able to
buy back sufficient spectrum in all its expiring circles, which remained a
major concern before the auctions. The expiring circles had over 70%
contribution to overall revenues. Hence, the positive emanating from
winning back spectrum outweighs the more-than-expected payout
concern. Idea has, in fact, strengthened its spectrum portfolio in some of
the circles viz. Maharashtra, Madhya Pradesh, Kerala, etc. by winning
spectrum in both the 900/1800 MHz bands.
We had estimated a total payout of about | 16000 crore for Idea on the
basis of the minimum reserve prices considering it would win back only
expiring circles. However, the fact that it has augmented its overall
portfolio beyond the expiring circles augurs well for its data capabilities.
Still, the additional payout will increase the debt burden by about
| 14016.8 crore. Hence, this would lead to an additional interest cost
burden and depreciation cost causing a PAT dilution of about 8%.
However, owing to the lofty payouts across industry we believe a tariff
hike is imminent. In addition, its ability to now corner the upcoming data
boom would improve the revenue profile of the company. We have
revised our revenue estimates for Idea factoring in higher data offering
capability and imminent price hikes. Moreover, the overhang of spectrum
expiry has passed. This should aid investor sentiment. We have arrived at
a revised target price of | 215 valuing it on a DCF methodology with
revised revenue assumptions.

ICICI Securities Ltd | Retail Equity Research

Page 3

Exhibit 3: Idea spectrum holding details

Idea Cellular
LSA / Spectrum band
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

Expiring Spectrum (MHz)

Non Liberalized
900
1800
6.2
1.8
6.2
6.2
6.2
6.2
1.8
6.2
1.8
7.8
2.0
7.8
6.2
1.8
-

Acquired in March 2015 Auctions (MHz) Total Spectrum holding (MHz) - Post factoring in spectrum expiring in 2015 and 2016
Liberalized
Non-Liberalized
Liberalized
800
900
1800
2100
800
900
1800
2100
2300
800
900 1800 2100
5.0
5.0
5.0
6.0
5.0
5.7
8.0
5.0
0.6
5.0
5.0
5.0
1.6
6.0
5.0
6.0
6.0
4.8
4.4
5.0
4.8
5.0
5.0
5.0
1.0
5.0
6.0
6.0
5.0
6.0
10.0
5.0
5.0
5.0
7.4
5.0
7.4
7.0
9.0
5.0
9.0
9.0
4.4
2.0
1.0
5.0
6.0
5.0
5.0
5.0
5.6
5.0
5.6
8.0
6.2
6.4
5.0
6.4
6.2
5.0
5.0
2.2
5.0
5.0
2.2
6.3
-

Source: DoT, TRAI, ICICIdirect.com Research

RCom- Bids in 800 MHz band, debt overhang only gets amplified
RCom bought 48.05 MHz of spectrum in the current auctions with a total
payout of | 4299 crore translating into an immediate payout of | 1107
crore to the government. RCom focused largely on the 800 MHz band in
the current auctions. The company was unable to procure 2G spectrum in
some of the expiring circles. With the end of the auctions, we feel RCom
has an inferior spectrum profile in the circles of Bihar and West Bengal
where the company is banking on intra-circle roaming arrangements and
spectrum sharing guidelines. The payouts for RCom remained in line with
estimates but with the reduction in spectrum footprint in some circles, we
feel the revenues may get affected. Hence, we have revised our target
price to | 60. We have arrived at a HOLD recommendation on account of
the recent run up in the stock.

ICICI Securities Ltd | Retail Equity Research

Page 4

Exhibit 4: RCom spectrum holding details

RCoM
LSA / Spectrum band
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

Expiring Spectrum (MHz)

Non Liberalized
900
1800
6.2
6.2
1.8
6.2
6.2
4.4
1.8
6.2
4.4
1.8

Acquired in March 2015 Auctions (MHz) Total Spectrum holding (MHz) - Post factoring in spectrum expiring in 2015 and 2016
Liberalized
Non-Liberalized
Liberalized
800
900
1800
2100
800
900
1800
2100
2300
800
900 1800 2100
5.0
4.4
5.0
2.5
5.0
5.0
5.0
5.0
5.0
4.4
5.0
2.5
3.8
4.4
2.5
1.3
0.6
3.8
4.4
1.3
0.6
2.5
5.0
2.5
5.0
2.5
5.0
2.5
4.4
5.0
2.5
0.6
5.0
4.4
0.6
5.0
4.4
1.3
5.0
6.2
5.0
1.3
5.0
5.0
5.0
5.0
5.0
4.4
5.0
4.4
5.0
0.6
5.0
5.0
2.5
5.0
5.0
5.0
1.3
5.0
3.8
5.0
1.3
5.0
2.5
0.6
3.8
4.4
5.0
2.5
0.6
3.8
4.4
5.0
5.0
4.4
5.0
4.4
1.3
5.0
4.4
1.3
1.3
3.8
5.0
1.3
-

Source: DoT, TRAI, ICICIdirect.com Research

Reliance Jio - Expenses outweigh plausible inflows

Reliance Jio has spent ~| 33000 crore till date on a spectrum portfolio of
595.6 MHz across 800/1800/2300 MHz bands. Out of the 595.6 MHz
owned, about 440 MHz was purchased way back in 2010. We are yet to
see the launch of services. The total expenses of about | 80000 crore till
date outweigh the plausible revenue inflows. It seems to have three
options, 1) provide exceptional quality standards of service and attract
customers from other operators, 2) resort to price competition and
destroy the existing price discipline and delay its payback further or 3)
acquire some smaller players to have a ready subscriber base to serve.

ICICI Securities Ltd | Retail Equity Research

Page 5

Exhibit 5: RJio spectrum holding details

R Jio
LSA / Spectrum band
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

Expiring Spectrum (MHz)

Non Liberalized
900
1800
-

Acquired in March 2015 Auctions (MHz) Total Spectrum holding (MHz) - Post factoring in spectrum expiring in 2015 and 2016
Liberalized
Non-Liberalized
Liberalized
800
900
1800
2100
800
900
1800
2100
2300
800
900 1800 2100
20.0
5.8
5.0
20.0
5.0
5.4
5.0
20.0
5.0
20.0
5.4
20.0
6.0
5.0
4.0
20.0
5.0
4.0
5.0
5.4
20.0
5.0
5.4
5.0
20.0
5.0
20.0
5.0
20.0
5.0
5.0
20.0
10.0
5.0
20.0
5.0
6.4
20.0
5.0
5.0
20.0
5.0
6.6
5.0
20.0
5.0
6.4
5.0
20.0
5.0
5.0
20.0
10.0
20.0
10.0
0.6
20.0
6.8
3.8
3.0
20.0
3.8
3.0
20.0
20.0
5.6
-

Source: DoT, TRAI, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 6

Outlook & valuation

The recent auctions bode well for the telcos. We reaffirm our view on the
sector even though the overall debt burden seems huge. With the end of
the auctions, incumbents have safeguarded themselves from spectrum
related uncertainty for the coming 20 years. In addition, there is no major
spectrum expiry before 2020, which lifts the regulatory overhang to a
major extent.
Though the debt burdens have increased for players post the auctions,
strong free cash flow generation would help them reduce their previous
leverage ratios. Also, with almost all major telcos having paid huge
money, we expect incumbents to take pricing hikes relatively easily.
We maintain BUY on Bharti Airtel with a target price of | 480 and re-rate
Idea Cellular as BUY with a revised target price of | 215. Reliance
Communication, on the other hand, could not renew the spectrum in all
the expiring circles, which would dampen its revenue potential in those
circles. We re-value the stock at | 60, with a HOLD recommendation
owing to the recent run up in the stock.

ICICI Securities Ltd | Retail Equity Research

Page 7

ICICIdirect.com coverage universe (Telecom)

CMP
Sector / Company
(|)
TP(|) Rating
376
480
Buy
Bharti Airtel (BHATE)
171
215
Buy
Idea Cellular (IDECEL)
58
60 Hold
RCom (RELCOM)
412
500
Buy
Tata Comm. (VIDSAN)
Source: Company, ICICIdirect.com Research

EPS (|)
P/E (x)
EV/EBITDA (x)
RoCE (%)
RoE (%)
M Cap
(| Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
150,382
14.1 15.9 18.2 26.8 23.6 20.6 7.6
6.8
5.8 9.5 10.2 11.2 8.7
9.1
9.5
61,679
8.8 10.0 12.2 19.44 17.1 14.0 9.5
7.7
6.4 8.5 10.6 12.4 13.6 13.5 14.1
13,875
2.6
3.7
NA 22.3 15.6
NA 7.4
6.8
NA 4.3
4.4
NA 1.9
2.6
NA
11,728
5.9 18.7 28.2 70.16 22.0 14.6 8.2
7.3
6.1 6.9
8.6 11.4 19.3 41.1 40.2

ICICI Securities Ltd | Retail Equity Research

Page 8

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research

Page 9

ANALYST CERTIFICATION
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our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in
respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.
ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned
in the report in the past twelve months.
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation
or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any
material conflict of interest at the time of publication of this report.
It is confirmed that Karan Mittal, MBA Sneha Agarwal, MBA, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve
months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the
publication of the research report.
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject
company/companies mentioned in this report.
It is confirmed that Karan Mittal, MBA Sneha Agarwal, MBA, Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.
We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution,
publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.

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