Though 3G operations are likely to improve blended ARPU of operators, they may be earnings dilutive in the near term, given their higher opex and capital related charges.
These operations would be value neutral for Bharti and RCom due to marginal impact (~2-3% upside) on their valuations. Target price for Idea, however, is expected to drop by 13% as against the 2G scenario, leading to value destruction for the company.
Launch of operations by new entrants and expansion by incumbents in new circles is expected to lower tariffs over the next one year.
This, along with MNP implementation, launch of MVNOs, and higher rural penetration, will lead to higher network operating and marketing costs, thereby pressurizing margins.
New entrants, after 2-3 years of unsuccessful operations (assuming operations launched in FY10), are likely to exit the market in FY12-13 after the expiry of their lock-in period in Jan 2011.
Moreover, unavailability of 3G spectrum to other players (assuming only five slots) would limit their future growth. Also, any slowdown in subscriber growth post FY12 may force marginal players to exit the market.
This would strengthen the market position and ARPUs of incumbents like Bharti and RCom, a potential upside, which we have not factored in our model.
Despite the emerging challenges in the Indian telecom space, Bharti remains our best play due to its strong fundamentals and a robust financial position.
Moreover, we believe that a 12% YTD fall is a good entry point in the stock and that it would outperform in the medium term. Our revised target price stands at Rs770 (23% upside). RCom has corrected 23% YTD; however, we believe that the CMP reflects the company’s true fundamentals.
Due to absence of any further upside, we downgrade RCom to HOLD with a price target of Rs200. We also downgrade Idea to SELL (target price Rs52) due to continued margin pressure arising from loss-making Spice operations, launch of operations in six new circles in FY10, and strain on balance sheet on account of 3G operations.
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