INSTITUTIONAL EQUITY RESEARCH India Telecombackoffice.phillipcapital.in/Backoffice/Research... · Source: PhillipCapital India Research, TRAI, RBI In FY17, Indian telecom services

INSTITUTIONAL EQUITY RESEARCH

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India Telecom

PRIMEd for uptrading, consolidation, and growth

INDIA | Telecom | Sector Update

24 April 2017

The Indian telecom sector is poised to grow at a CAGR of 11% over FY17-22, driven by a significant increase in ‘value’ provided to consumers. Strong growth will be accompanied by large-scale industry consolidation, leading to improvement in return ratios and sustenance of higher valuation multiples over the longer term. With industry consolidation, robust revenue growth, and reasonable valuations, we recommend an overweight position on the sector. Our top picks are Bharti Airtel, followed by Idea Cellular. Bharti Infratel will also benefit from increased data consumption, which will translate into higher tower density and tenancies, notwithstanding market consolidation. Our key reasons are as follows:

Industry to see 11% CAGR over the next five years: The Indian telecom industry has managed reasonable growth through the years, marked by periods of hyper competition as the rise in subscriber usage surpassed all expectations. 2008-12 saw hyper competition – when many new players entered the market doling out freebies, leading to sharp declines in voice tariffs. In this period, the Indian telecom industry saw a CAGR of 6% (contrary to industry expectations of a fall), which then improved to 9% in 2012-16 (when the industry accrued consolidation benefits). In the present scenario, we believe more consumers will uptrade to higher usage plans rather than down-trade to high-usage, low-tariff plans – this will lead to the industry size growing. Industry consolidation in 2018 will result in prices stabilising, and translate into strong industry revenue growth. Top-three players will command 90% of revenue market share: Currently, smaller operators control 26% of the market, and a significant portion of their mobile connections exist due to multi-SIM usage. As the industry moves towards voice-and-data bundled plans, data capacity will be very critical in maintaining market share. Smaller players do not have adequate data capacity, restricting their ability to sell bundled products, which will result in decling multi-SIM usage. Thus, industry consolidation will be much faster over the forthcoming years, and top-three players are likely to control almost 90% of the market. Reliance Jio will be the fastest-growing telecom player, while Bharti could also gain some share, considering it has the most comprehensive data strategy. Idea-Vodafone could lose share in the medium term, because of regulatory and consolidation challenges. However, Idea-Vodafone will also see markedly higher data capacity, leading to sustenance of market share (post merger) in the long term. Spectrum availability and capacity issues are largely past: Leading telecom operators have secured enough spectrum to cater to the maket for the next five years, with current estimated industry capacity at around 2.5bn GB/month. In the past, even with industry consolidation, returns have not been inspiring because of sky-high spectrum prices and the need to buy certain bands to maintain market leadership. While absolute spectrum prices may not decline significantly (simultaneously creating huge entry barriers for new players), the gap between supply and demand has become significant. The government has disproportionately higher spectrum to auction vis-à-vis the number of players in the market. Leading operators already have large spectrum banks, and the demand-supply balance is skewed in their favour. Thus, spectrum crunch and data capacity issues seem largely over. Bharti and Idea Cellular top picks while Reliance Industries and Bharti Infratel also make the cut: As revenue and earnings growth is non-linear during periods of hypercompetition and consolidation, the current phase mark by peak of business stress provides the very good opportunity to build overweight position in Telecom stocks. Our top sector picks are Bharti Airtel (TP Rs 420) followed by Idea Cellular (TP Rs 130). We also find Reliance Jio and Bharti Infratel to benefit from industry consolidation and sharp surge of data revenues. Hence, we recommend Buys on Reliance Industries (TP Rs 1650) and Bharti Infratel (TP Rs 400).

Companies BHARTI AIRTEL

Reco Buy

CMP, Rs 343

Target Price, Rs 420

IDEA CELLULAR

Reco Buy

CMP, Rs 85


BHARTI INFRATEL

Reco Buy

CMP, Rs 351


RELIANCE INDUSTRIES

Reco Buy

CMP, Rs 1402


Naveen Kulkarni, CFA, FRM (+ 9122 6246 4122) [email protected] Manoj Behera (+ 9122 6246 4116) [email protected]

Sabri Hazarika (+ 9122 6667 9756) [email protected]


INDIA TELECOM SECTOR UPDATE

Table of Contents

Industry poised for 11% CAGR over FY17-22 ···························································· 3

ARPU to rise over the next three years ····································································· 5

Top-three players will command 90% of the revenue market share by 2022 ·········· 8

Spectrum crunch past; capacity constraints limited ················································ 14

Companies

Bharti Airtel ············································································································· 15

Idea Cellular ············································································································· 21

Bharti Infratel ·········································································································· 27

Reliance Industries ·································································································· 29



Industry poised for 11% CAGR over FY17-22 The Indian telecom market has been fiercely competitive, with bouts of hypercompetition marked by a sharp declines in tariffs, but also accompanied by significant increases in usage. In the past, whenever tariffs have fallen sharply, short-term impact on revenues has been negative, but over time, usage has picked up and revenues have started gaining traction. Before the hyper-competiton surrounding Reliance’s Jio’s launch since September 2016, the previous most intensely competitive period was when new players introduced per-second billing in 2009 by Tata Teleservices and sharp voice tariff cuts by Reliance Communications (Simply Reliance Plans) in October 2009 – what followed then was a short period of decline in revenues. But with increase in usage, the industry revenues picked up. Tariffs stabilised over the next 12 months and industry consolidation ensued, which aided rising industry revenues. Between FY09 and FY16 the telecom industry has seen a healthy 8% CAGR, notwithstanding periods of hyper-competition followed by periods of consolidation.

Industry Adjusted Gross Revenue (AGR) growth (%)

Source: PhillipCapital India Research, TRAI

We expect the industry to post 11% CAGR over FY17-22 – to Rs 3tn from Rs 1.8tn – driven by a significant increase in adoption and usage of data. Consolidation will mean that long-term pricing will see reasonable improvement. Pricing in telecom is generally a non-linear function, and depends on the competitive intensity among players. As the number of telecom players reduces, and with most of the benefits will accruing from FY19, FY19 revenue growth is likely to be sharp. This is similar to 2012, when the telecom market saw consolidation and revenue uptick for incumbent players was quite sharp, led by both volume and pricing growth.

11

3 4

11

5

12 11

7

-4

7

12

14 14

9

-10

-5

-

5

10

15

20

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E

AGR yoy growth (%)

Between FY09 and FY16 the telecom industry has seen a healthy 8% CAGR, notwithstanding periods of hyper-competition followed by periods of consolidation

We expect the industry to post 11% CAGR over FY17-22 – to Rs 3tn from Rs 1.8tn – driven by a significant increase in adoption and usage of data



Telecom services revenue/GDP

Source: PhillipCapital India Research, TRAI, RBI

In FY17, Indian telecom services revenues as a percentage of GDP hit an all-time low of 1.2x because of competitive intensity – in fact, this ratio is one of the lowest in the world owing to the highly competitive industry structure, marked by 10 players. While the revenue cycle is at an all-time low, based on the telecom services revenue/GDP ratio of 1.2x, the end of free promotional offers by Reliance Jio means that the cycle is more likely to have bottomed. With Jio now looking at monetisation, industry revenues will start rising from here. We believe this ratio should rise considerably from current levels. In developed markets such as the US or the EU, this ratio is around 2.5x. Our estimates for industry growth are conservative, considering significant growth in value delivered to consumers.

2.1 2.1

1.8

1.6 1.5

1.4 1.4 1.4 1.4

1.2 1.2 1.2 1.2

1.3 1.3

1.0

1.2

1.4

1.6

1.8

2.0

2.2

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Telecom revenues/GDP (%)

In FY17, Indian telecom services revenues as a percentage of GDP hit an all-time low of 1.2xbecause of competitive intensity – in fact, this ratio is one of the lowest in the world owing to the highly competitive industry structure, marked by 10 players.



ARPU to rise over the next three years According to GSMA, the total number of unique users in India at the end of June 2016 was 616mn, while the total number of mobile connections (SIMs) was more than 1bn. The incidence of multi-SIM usage in India was rampant during the hyper-competition years of 2009-12; this trend peaked in 2011 and started declining thereafter. The incidence of multi-SIM usage has declined over the years, but the rate of unique customer addition has been reasonably stable.

Unique subscriber projection

Source: PhillipCapital India Research, GSMA

In consolidation periods, mobile connections have sometimes declined on an annual basis, as operators adopted more stringent norms to weed out inactive connections. The growth of mobile connections is a function of competitive intensity more than the real market potential growth rate. The growth of unique subscribers also depends on competitive intensity, but the growth rate is more stable because of factors such as affordability; real GDP growth rate also tends to have a significant impact on this. GSMA predicts that India will add 337mn unique mobile subscribers by 2020 while the number of mobile connections will cross 400mn. In the last three years, India has added around 210mn unique subscribers, but the industry expects this growth to pick up in the next three years because of Reliance Jio’s entry. Early signs after Jio’s launch are clearly indicating that the pace of subscriber addition will pick up – Jio added 100mn subscribers in the first five months of launching. Jio’s entry has significantly increased the value provided to consumers – both on voice and data products. This will mean that the industry will see very rapid adoption-growth over the next three years. While the growth of both mobile connections and unique subscribers will be very robust, the incremental SIM per subscriber translates to 1.2x – which means the incidence of multi-SIM usage will still decline significantly.

21

16

14

21

14

17

13

17

13

11

7

5

0

5

10

15

20

25

0

200

400

600

800

1000

1200

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E

Average unique subscribers Growth(%)

Unique subscriber to grow at CAGR of 12% from FY17-22E



Average SIMs per year

Source: PhillipCapital India Research, TRAI, GSMA

The incidence of multi SIM usage has been declining over a period because of market consolidation and stabilisation of tariff plans. However, the launch of Jio could lead to multi-SIM usage picking up in the short term. We believe the rampant increase in multi-SIM usage is more likely to be ephemeral this time, as the market consolidation is going to be much more pronounced. Also, multi SIM usage was more pronounced during the voice era, as people would buy SIMs for different types of calling – one for incoming and one for outgoing, and then depending on the offers. However, voice tariffs are at the lowest possible levels, and some subscribers could adopt one SIM for voice and one for data. But even in this scenario, the packages offered by operators are bundled plans with a focus towards ARPU. In this scenario, consumers are likely to gravitate towards one SIM with a higher usage pattern over the medium to long term. This could mean that there will be a drastic reduction in multi-SIM usage. Decline in multi-SIM usuage means significantly lower subscriber acquisition costs for telecom operators.

SIMs per user

Source: PhillipCapital India Research, GSMA, TRAI

New plans geared to extract maximum from subscribers A look at the unique users’ propensity to pay and the current market tariff plans provides useful insights into the marketing plans of telecom operators. Headline ARPU, which is dictated by multi-SIM usage and competitive intensity, was Rs 152 per SIM per month, but the actual unique subscriber spending was Rs 282 per month (adjusted for multi-SIM usage). In FY17, both ARPU per-SIM and per-unique-subscriber would have fallen because of freebies offered by Reliance Jio, but as Jio starts charging, more subscribers are likely to gravitate towards the actual pay-out plans. For example a current offer by Reliance of Rs 309 (including service tax, Rs 270

488

698

865 893 886 937 1,002

1,098

1,238

1,378 1,498 1501 1,471

43

24

3 -1

6 7 10

13 11 9

0 -2

-10

0

10

20

30

40

50

-

200

400

600

800

1,000

1,200

1,400

1,600


Average SIMs per year Growth(%)

2.2

2.6 2.8

2.5

2.1 1.9

1.8 1.7 1.7 1.6 1.6 1.5

1.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0


SIMS per user

Average SIMs per year is expected to grow CAGR of 6% from FY17-22E



without) is an ‘all you can eat” for both voice and data (almost) – which indicates an ARPU that is similar to the amount spent by a unique subscriber.

ARPU per SIM projection (Rs/month)

Source: PhillipCapital India Research, TRAI, GSMA

Average revenue per-user per-SIM has been very volatile in the last 10 years, and it has seen a sharp decline in periods of sharp tariff declines. ARPU per SIM fell by 30% after the introduction of per-second billing plans by Reliance Communications and Tata Teleservices. In the period after the sharp declines (when the market consolidated and inactive subscribers were weeded out), ARPU per SIM improved significantly. While ARPU per unique subscriber has declined in periods of sharp tariff declines, the fall is much lower than the decline in ARPU per SIM when multi-SIM usage typically rises. While ARPU per unique subscriber has seen periods of sharp declines during periods of higher competition, during these periods, the market uptake (in terms of addition of unique subscribers) has generally exceeded expectations.

Unique subscriber ARPU projection (in mn)

Source: PhillipCapital India Research, GSMA

Over the next three years, we have built ARPU per unique subscriber declining by a similar quantum as during the hyper-competition periods of 2009-2011, and similar subscriber addition. Thus, we assume ARPU will decline in 2017 and 2018, but pick up significantly from 2020. The pick up is likely to be much sharper than our expectations, as the industry consolidation is much higher than in earlier periods. The industry is likely to move towards becoming a four-player market by 2020, with most of it being shared by the top-three. The consolidation of the market is not only much more pronounced this time, but the market structure is also likely to persist at concentrated levels because of a significant rise in entry barriers (because of the quantum amount of capital needed to start a telecom business India).

198

140 123 126

143 152 159

142 137 144 159

174 192

-30

-12

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6 5

-11

-3

5

10 10 10

-40

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-20

-10

0

10

20

-

50

100

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ARPU per SIM Growth(%)

440

366 345

320 297 294 282

244 228 235 254 262 269

-17

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-1

-4

-13

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3

8

3 3

-20

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0

5

10

-

100

200

300

400

500


ARPU per unique subscriber Growth(%)

Both ARPU per SIM and ARPU per unique subscriber should bottom out in FY18 and can be expected to grow from FY19 onwards



Top-three players will command 90% of the revenue market share by 2022 Currently, the incumbents (Bharti Airtel, Vodafone and Idea Cellular) control around 74% of the telecom market. In 2009, the top-3 telecom operators controlled xx% of the total telecom market. However, as hyper competition ensued, the top-3 telecom operators were able to strengthen their presence and gained substantial market share. Idea Cellular was the top gainer during this period. Market leader Bharti Airtel lost some market share in the initial two years, but it was able to gain market share in subsequent years. The current period of hyper competition is different from the last era of competition, as the product has undergone a substantial change. Operators will eventually compete on quality of service and product, which in case of data can be easily differentiated as compared to voice. Voice product differentiation was a big challenge. In case of data, the product differentiation is a far lesser challenge because reach and speeds are more discernible and quantifiable. Besides, customers have many tools available – such as online speed tests – to guage product quality themselves.

Current market share of telecom players


In this new-era competition, data capacity and reach are the primary factors of differentiation, but they require huge capital investments. Thus, it is very likely that incremental market share gains for top-three players will be much faster than the earlier period. Faster market share gains and ensuing consolidation means that the industry is likely to see improvement in return ratios much earlier than expected by consensus. With the merger of Idea and Vodafone, the top-three market players to emerge will be – Idea-Vodafone, Bharti Airtel, and Reliance Jio. Jio will gain the most market share over the next three years, while Idea-Vodafone combined will lose market share. We believe Bharti Airtel will manage to retain market share and could gain some market share in the long term.

Bharti 31.7%

Idea 19.4%

Vodafone 23.0%

RCOM 5.1%

BSNL 5.2% Aircel

5.4%

Uninor 2.1%

TTSL 6.6%

Others 1.5%

FY17E



Projected market share by 2022


Jio’s entry has been a game changer for the telecom industry, as its focus shifted from realisations and volumes to customer ARPU. The focus of the telecom operators is now to extract as much value as possible from a subscriber while offering bundled packages. This has led to sharp declines in realisations for both voice and data, but the scope for customers upgrading has also increased.

3G footprint of telecom operators 3G Bharti Idea+Vodafone JIO RCOM+Aircel Tata BSNL/MTNL

Delhi

Mumbai

Kolkata

Andhra Pradesh

Gujarat

Karnataka

Maharastra

Tamil Nadu

Haryana

Kerala

Madhya Pradesh

Punjab

Rajasthan

Uttar Pradesh East

Uttar Pradesh West

West Bengal

Assam

Bihar

Himachal Pradesh

Jammu & Kashmir

North East

Odisha

Source: Company, PhillipCapital India Research To extract higher ARPU from customers, operators will need cross-product capability, as lines between voice and data have started blurring. The ability to seamlessly bundle voice and data products is increasingly becoming a key factor for telecom operators. Operators that do not have this capability will have to merge with larger operators or will continuosly lose revenues. Reliance Jio, Bharti Airtel, and Vodafone Idea are the only three telecom operators in India that have the capability to bundle voice and data products using their own netwoks. Bharti Airtel and Vodafone-Idea

Bharti 32.4%

Idea+Vodafone 36.1%

RCOM+Aircel+Others

7.5%

BSNL 2.6%

JIO 21.4%

FY22E



have an added advantage because they have not only significant 4G capability, but their 2G & 3G capabilities can address a much larger subscriber base with bundled offers similar to Reliance Jio.

Operators’ 4G footprint 4G Bharti Idea+Vodafone JIO RCOM+Aircel* Tata BSNL/MTNL

Delhi

Mumbai

Kolkata

Andhra Pradesh

Gujarat

Karnataka

Maharastra

Tamil Nadu

Haryana

Kerala

Madhya Pradesh

Punjab

Rajasthan

Uttar Pradesh East

Uttar Pradesh West

West Bengal

Assam

Bihar

Himachal Pradesh

Jammu & Kashmir

North East

Odisha

Source:Company, PhillipCapital India Research, *RCOM and Aircel combination will use Jio’s network

India has installed a base of around 300mn smart phones and we believe around 1/3

rd of the base is 4G enabled, considering 72mn subscribers have signed up for Jio’s

paid service – which one cannot without a 4G mobile phone. Currently, more than half of the handsets shipped to India are smart phones and seven out of those 10 phones are 4G enabled. Also nine out of 10 smartphones sold online are 4G enabled. Thus 4G capability and capacity for operators will be a key factor as the consumer-upgrade cycle is likely to hasten. According to GSMA, India will have 688mn smartphones by 2020. Considering that the replacement cycle in India is two years, we believe most smartphones by 2020 will be 4G enabled. While the 4G smartphone penetration is likely to rise very fast, the number of operators with 4G capability is unlikely to rise meaningfully. In the current state of affairs, Reliance Jio, Bharti Airtel, Idea Cellular, and Vodafone have 4G capabilities. Reliance Communications has spectrum-sharing arrangements with Reliance Jio and in turn gets access to its coveted 4G network. Aircel will merge with Reliance Communications. BSNL and MTNL do not have 4G networks and may take a while to launch 4G products. Historically, the state-owned operators have proven to be inefficient in launching data products. Hence, the market has only 3 major data networks in the consolidated market, which include Bharti Airtel, Vodafone-Idea and Reliance Jio. Declining multi-sim usage will lead to market concentration Because of its high competitive intensity, the Indian telecom market is characterised by widespread arbitrage on voice plans. Subscribers use multiple SIMs for voice calling and most of the arbitrage opportunities arise because smaller telecom operators offer attractive voice rates. However, in this new era, where data and voice will be bundled into one plan, and subscribers cannot have more than one data SIM in a phone, the tendency will gravitate towards using one SIM card.



Attractive bundled plans by telecom operators will result in faster upgrades of subscribers to 4G smartphones, which will result in customers porting from smaller telecom operators to larger one that offer these bundled plans. While there will be cases of multi-SIM usage with one for data and one for voice but more customers are likely to move towards a single SIM where bundled offers are more attractive. In the medium term, multi-SIM usage could rise because Jio’s voice network is not stable and subscribers will use Jio’s SIM as a data SIM. However, we believe Jio’s voice network will stabilize and other incumbent operators will also offer similar plans leading to subscribers using single SIM card instead of multi SIMs.

Top-three players’ market share movement

Source: PhillipCapital India Research

While larger operators will gain revenue and subscriber market share because of declining multi-SIM usage, smaller operators that do not have product capability and do not have sufficient financial strength to invest in the business will consistently lose market share. Feature phones still account for 30% of the total volume, but the market might soon see the introduction of 4G feature phones, which will be disruptive and favour operators with 4G networks.

Incremental market share vs. market share for top-three players


0%

10%

20%

30%

40%

50%

60%

70%

80%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Bharti Idea Vodafone

65.9% 65.9% 66.4% 68.0%

69.9% 71.5%

73.2%

82.1%

64.6%

79.9%

91.4% 89.1%

85.0%

92.3%

50%

60%

70%

80%

90%

100%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Top 3 market share Incremental market share



Smaller telecom operators have consistently lost market share


One of the key metrics to measure competitive intensity, which has consistently worked for Indian markets, is the Hirschman Herfindahl Index (HHI). HHI is the sum of the square of the market share of each player in the industry. Typically, a market with an HHI of less than 1500 is considered highly competitive, one that has a score of 1500-2500 is considered moderately competitive, while +2500 is considered highly concentrated. HHI for the telecom industry can be measured based on two market-share factors –subscribers and revenues. Revenue market share generally shows higher concentration because top operators have higher share of high-ARPU customers. However, subscriber market share is more indicative of the competitive intensity in the market – smaller operators provide more competitive offers, reflected in the subscriber base.

Hirschman Herfindahl Index

Source: PhillipCapital India Research, TRAI, COAI

The Indian telecom market will move from ‘high-competittion’ to ‘high-concentration’ over the next five years due to major consolidation. The choices for customers will reduce and with limited 4G networks offering ‘all-you-can-eat’ plans, subscribers will gravitate towards the leading operators, cause further concentration of subscribers.

0%

2%

4%

6%

8%

10%

12%

14%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

RCOM BSNL Aircel Uninor TTSL Others

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800 HHI - Subscriber Market share

HHI for developed economies (based on subscriber market share) US 2772

Germany 3355

Italy 2776

France 2851

UK 2788

Japan 3475

South Korea 3741

India-2018 1748

India -2022 2543



Hirschman Herfindahl Index


Movement of subscriber base (mn)


Estimated ARPU movement (Rs)


1500

2000

2500

3000

3500 HHI on revenue market share (RMS)

0

200

400

600

800

1,000

1,200

1,400 Bharti Idea+Vodafone Reliance JIO Others

100

150

200

250

300

FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Bharti Airtel Idea Vodafone RJIO Total India



Spectrum crunch past; capacity constraints limited According to Ericsson, mobile data traffic will see 49% CAGR to 2 exabyte per month by 2021. Reliance Jio has an even more aggressive estimate of 5 exabyte per month in the same timeframe. According to Reliance Jio, India is closer to 1 exabyte per month already. We believe data growth will be between the numbers predicted by Reliance Jio and by Ericsson. Even in 2021-22 the market will still have voice products as the basic needs are still voice communication while data is a discretionary product for most subscribers. With the growth in data likely to be very high, the key question is whether telecom operators have, (1) the capability to supply the market, and (2) the investments needed to sustain growth. In this regard, Reliance Jio has claimed that they have the capacity to service 50-60% of the market in 2021. Thus, Jio serves as benchmark against which all other telecom operators can be measured in terms of data capacity and the need for further investments in spectrum and active network. The biggest constraint for data capacity is the amount of spectrum owned by telecom operators. Idea Cellular and Vodafone quickly realised that the capacity they have built is quite inadequate for market needs and needed to pool their resources for addressing future capacity.

Current data capacity

No of broadband

carrier

No of broadband

cell sites

Data capacity

(mn GB/month)

Data subscribers

capacity*

Bharti 150 171000 634 126.7

Vodafone+Idea 163 1,89,000 825 165.1

JIO 139 250000 1274 254.9

*-Assuming 5G consumption per month


Bharti Airtel, Vodafone and Idea Cellular have deployed significant amount of resources for voice and do not have a pan-India all-IP network like Reliance Jio. This means the current capacity for these operators is lesser than Jio. We have calculated the capacities (above) for the leading telecom operators based on a simple metric where a 3G site can cater to 30Gb data per day/per carrier/sector (during peak hours) and a 4G site can cater to 60Gb data per day/per carrier/sector. In the above data capacity calculation, we have assumed that 15% of sites carry 50% of the total data load. Already installed capacity is capable of addressing more than 2.5bn GB per month (seen chart above). Bharti Airtel and Idea + Vodafone have similar broadband data carriers as Reliance Jio, and hence are capable of ramping up their capacity without any significant additional purchase of expensive spectrum. We believe that the Indian telecom industry may not buy expensive spectrum from the government to augment capacity. The current spectrum held by telecom operators is sufficient for providing high-quality data services until 2022-23.



Bharti Airtel (BHARTI IN)

Sound strategy in times of disruption

INDIA | TELECOM | Company Update

24 April 2017

Bharti Airtel was the first telecom operator to fully anticipate Jio’s disruption. While Jio has clearly established the technology benchmarkfor the industry, Bharti has been able to establish the service standards. It has prepared well, by buying spectrum and creating capacity well in advance to meet changing consumer needs. Bharti has the most well thought out strategy to tackle Jio’s onslaught and has built capacity for the future. With industry growth likely to be in double digits, we expect Bharti to grow in-line with the industry in medium term and gain market share in the long-term. Our estimates for Bharti are conservative, as we have built for only marginal market share gains. we value the company on DCF-based methodology at Rs 420. Our key reasons are as follows: Solid spectrum bank for future data needs: While Bharti Airtel’s wisdom was questioned in spectrum accumulation in recent auctions, and market participation, after Jio’s launch, it is very clear that Bharti has bought spectrum to cater to the enormous data surge that the market is seeing. Bharti’s spectrum bank is clearly unmatched – best quality that can cut acoss product lines ranging from 2G, 3G, and 4G. Bharti has 150 broadband data carriers similar to Reliance Jio and the Vodafone + Idea combination. This means that future spectrum needs will be limited. The quality spectrum bank will ensure that it has the capability to address all types of consumer needs. Market share gains in the medium to long term: Bharti launched 4G services a year ahead of competition as it was able to anticipate the fast changing technological landscape. In the short term Bharti could lose some market share to Reliance Jio because of the latter’s ultra aggressive plans, but Bharti’s focus is very clear – product and network quality. This, combined with its first-mover advantage is likely to garner market share for the telecom major in the medium to long term. With the acquisition of Telenor India’s business, Bharti will gain market share inorganically. The Vodafone + Idea merger transition is likely to result in market share gains for Bharti in circles where players will have to bring down market share below 50% to meet regulatory requirements over the next two years. Robust capital allocation policy; balance sheet strength to weather short-term headwinds: Over the last three years, Bharti has focused on the Indian wireless business – its core competence, which translated into sustained market share gains and improvement in margin performance and growth. It is consistently selling non-core businesses – towers in Africa, stake sale in Bharti Infratel. We believe Bharti’s debt will peak in FY18 and reduce thereafter as market structure and cash flow profile will see significant improvements. Subdued valuations and muted expectations; Recommend Buy with PT of Rs 420: Bharti is currently trading at 7x EV/EBIDTA on FY19E EBIDTA and FY16 EBIDTA – not great valuations because its margins are currently under pressure and its investments in its data spectrum are not fully monetised. As the market structure improves, its monetisation capability will improve. The stock is at the bottom of its revenue cycle and expectations are significantly beaten down. We believe that there is immense scope for positive surprises as revenue growth in an market-improvement cycle generally tends to be non-linear. We value the company on DCF at Rs 420 with explicit projections till 2022 and an exit EV/EBIDTA multiple of 8x. Considering significant upside from current levels, we recommend Buy at current levels.

BUY (Maintain) CMP RS 343

TARGET RS 420 (+22%) COMPANY DATA

O/S SHARES (MN) : 3997

MARKET CAP (RSBN) : 1372

MARKET CAP (USDBN) : 21

52 - WK HI/LO (RS) : 401 / 284

LIQUIDITY 3M (USDMN) : 31.1

PAR VALUE (RS) : 5

SHARE HOLDING PATTERN, %

Mar 17 Dec 16 Sep 16

PROMOTERS : 67.1 67.1 67.1

FII / NRI : 15.2 15.1 15.7

FI / MF : 11.2 11.3 10.7

NON PRO : 0.6 5.8 5.8

PUBLIC & OTHERS : 5.9 0.7 0.7

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS -1.8 7.2 -3.8

REL TO BSE -1.2 -1.3 -17.1

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY17E FY18E FY19E

Net Sales 972 992 1,061

EBIDTA 335 322 350

Net Profit 27 17 24

EPS, Rs 6.7 4.4 5.9

PER, x 50.9 77.8 57.2

EV/EBIDTA, x 7.6 7.9 7.3

P/BV, x 2.0 1.9 1.9

ROE, % 3.9 2.4 3.3

Debt/Equity (%) 174.3 174.3 174.6

Source: PhillipCapital India Research Est.


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Apr-16 Oct-16 Apr-17

Bharti BSE Sensex


BHARTI AIRTEL COMPANY UPDATE

Robust long-term strategy: QoS and cost efficiency With Gopal Vittal at the helm of its Indian business, Bharti Airtel has been very consistent with its strategy – focused on market share gains through better product quality while keeping a keen eye on operating costs. The consistency of this strategy is reflected in its market communication, network capex (project Leap), and margin improvement. Needless to say, these initiaves are yielding results, with Bharti consistently ranked as the operator with the best data speeds.

Overall network comparison

Source: OpenSignal

According to OpenSignal, Bharti Airtel has topped on most critical parameters of network quality. While India’s 4G speeds are significantly below global speeds at 17Mbps, Bharti’s speeds are significantly above the closest competitor Vodafone India and many times higher than Reliance Jio.

Network speed comparison

Source: OpenSignal

Cost efficiency is a key focus area Bharti’s focus on improving quality of service has not increased its cost structure, even though it has consistently gained market share over the last four years. Cost measures have been very stringent with a cost inflation of 7% over the last five years, notwithstanding significant increase in data network coverage.



Chart on incremental market share

Source: Company, PhillipCapital India Research

Thus, we clearly see Bharti’s India strategy progressing very well – where the company has managed to not just grow market share based on improved quality of services but also at a very reasonable cost. Even though the spectrum costs have been very high, if we exclude them, Bharti has managed to deliver value at a very reasonable cost.

Operating cost growth


28.5%

43.9% 40.3%

35.3%

48.7%

0%

10%

20%

30%

40%

50%

60%

FY12 FY13 FY14 FY15 FY16

Incremental RMS market share

8.4%

11.9%

5.3%

3.1%

7.7%

0%

2%

4%

6%

8%

10%

12%

14%

0

50000

100000

150000

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300000


Operating expenditure(ex-Access charges and license fees) (in Rs mn)

% change yoy(RHS)



Product differentiation holds the key for long-term market share gains Airtel has always been viewed as a premium brand, but there was very limited scope for product differentiation for voice. However, data is an altogether different ball game where network quality and branding will have long-term ramifications. Gopal Vittal with his immense experience of branding and marketing with Hindustan Unilever, where he was instrumental in developing the personal care business, has focused on branding through network quality. Bharti launched project leap in November 2015 where the company indicated that they will spend US$ 9bn over the next three years on the Indian business to improve network quality and services. Apart from capex, the company has taken quite a few initiatives to engage with customers on network issues. Bharti has been the first telecom operator to launch 4G operations and clearly see the product potential, which led to buying of big chunks of 4G spectrum in the auctions and from the market.

4G market communication focused on product differentiation based on QoS

With first mover advantage in 4G product and consistent market communication on network quality, Bharti will be able to differentiate on product quality and consistently gain market share in forthcoming years. We expect Bharti to lose market share in the short term to Jio because of ultra-low tariffs by Jio, but customers typically seek value more than price. Bharti is also offering significant amount of data at prices similar to Jio. As Bharti is clearly focused on providing the right experience to subscribers, we believe it will start gaining market share in the medium to long term. It has adequate spectrum to deliver on product quality and with a combination of inorganic (Telenor India acquisition) and organic means, we expect it to first claw back lost market share and then gain market share in the long term from Vodafone-Idea, as they ramp up capacity and get their act together.



Market share


Valuation

EV 2022 calculation Segments (Rs mn) EBIT EV EV/EBIT EV/EBITDA

Wireless services 159,193 2,026,099 12.7 7.3

Home services 9,404 94,044 10.0 6.3

Airtel business services 36,390 363,902 10.0 7.1

Passive Infrastructure 53,501 832,235 15.6 8.8

Africa 67,362 523,926 7.8 4.4

Intersegment (34,210) (266,074) 7.8 5.1

Total 291,641 3,574,132 12.3 7.1 Source: Company, PhillipCapital India Research Estimates

Explicit cash flow projection Cash Flows (Rs mn) FY16 FY17E FY18E FY19E FY20E FY21E FY22E

NOPLAT 111,194 99,834 86,186 107,702 112,562 117,641 122,949

Depreciation 174,498 185,138 199,588 215,443 233,209 236,707 240,257

Capex 369,811 298,694 239,294 221,194 195,594 185,814 176,524

FCF (84,119) (13,722) 46,480 101,951 150,176 168,533 186,682

% conversion (51) (9) 38 76 107 115 121

Discount factor

1.0 0.9 0.8 0.7 0.6

PV

46,480 91,028 119,720 119,958 118,640

NPV

46,480 137,508 257,227 377,186 495,826 Source: Company, PhillipCapital India Research Estimates

Target Price derivation Rs mn/ Rs per share Value

Enterprise value-2022 3,574,132

NPV Intermediate FCF 495,826

Net cash- end of FY2018 (1,197,930)

Return requirement 12%

EV - DTH business 110,000

EV Future value end of FY2018 2,877,251

Target value end of FY2018 1,679,321

Target value per share 420

CMP 342

Upside 22.8% Source: Company, PhillipCapital India Research Estimates

32.6 32.8

31.4

29.9

30.4 30.5 30.7

31.3

28

29

30

31

32

33

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Revenue market share(%)



Financials

Income Statement Y/E Mar, Rs bn FY16 FY17e FY18e FY19e

Net sales 966 972 992 1,061

Growth, % 5 1 2 7

Total income 966 972 992 1,061

Other Operating expenses -625 -636 -670 -711

EBITDA (Core) 341 335 322 350

Growth, % 8.8 (1.6) (3.9) 8.7

Margin, % 35.3 34.5 32.5 33.0

Depreciation -174 -185 -200 -215

EBIT 166 150 123 135

Growth, % 5.3 (9.6) (18.4) 9.9

Margin, % 17.2 15.5 12.4 12.7

Interest paid -70 -85 -69 -69

Other Non-Operating Income 0 0 0 0

Pre-tax profit 107 77 66 80

Tax provided -60 -40 -37 -42

Profit after tax 47 37 29 38

Others (Minorities, Associates) -8 -10 -12 -14

Net Profit 39 27 17 24

Growth, % (34.7) (31.5) (34.6) 36.1

Net Profit (adjusted) 39 27 17 24

Unadj. shares (bn) 4.0 4.0 4.0 4.0

Wtd avg shares (bn) 4.0 4.0 4.0 4.0

Balance Sheet Y/E Mar, Rs bn FY16 FY17e FY18e FY19e

Cash & bank 37 -1 61 78

Debtors 73 74 75 80

Inventory 2 2 2 2

Other current assets 110 110 112 119

Total current assets 222 185 250 279

Gross fixed assets 2,859 3,157 3,397 3,618

Net fixed assets 1,703 1,785 1,780 1,737

Non-current assets 210 203 203 203

Total assets 2,364 2,433 2,538 2,575

Current liabilities 581 587 606 620

Total current liabilities 581 587 606 620

Non-current liabilities 1,075 1,103 1,154 1,178

Total liabilities 1,656 1,690 1,761 1,797

Paid-up capital 20 20 20 20

Reserves & surplus 636 667 702 702

Shareholders’ equity 708 743 778 778

Total equity & liabilities 2,364 2,433 2,538 2,575

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mna FY16 FY17e FY18e FY19e


Depreciation 174 185 200 215

Chg in working capital -97 8 7 -30

Total tax paid -60 -40 -37 -42

Other operating activities 0 0 0 0

Cash flow from operating activities 125 230 236 223

Capital expenditure -552 -268 -194 -172

Chg in marketable securities 32 -1 -2 -7

Cash flow from investing activities -541 -256 -182 -159

Equity raised/(repaid) 0 0 0 0

Debt raised/(repaid) 298 29 51 22

Other financing activities 0 0 0 0

Cash flow from financing activities 294 23 39 8

Net chg in cash -123 -3 93 72

Valuation Ratios

FY16 FY17e FY18e FY19e

Per Share data EPS (INR) 9.8 6.7 4.4 5.9

Growth, % (34.7) (31.5) (34.6) 36.1

Book NAV/share (INR) 164.1 171.8 180.5 180.5

FDEPS (INR) 9.8 6.7 4.4 5.9

CEPS (INR) 53.4 53.0 54.3 59.8

CFPS (INR) 50.1 52.7 55.7 65.7

Return ratios Return on assets (%) 4.7 4.2 3.3 3.6

Return on equity (%) 5.9 3.9 2.4 3.3

Return on capital employed (%) 5.5 5.0 3.8 4.1

Turnover ratios Asset turnover (x) 0.8 0.7 0.7 0.7

Sales/Total assets (x) 0.5 0.5 0.5 0.5

Sales/Net FA (x) 0.6 0.6 0.6 0.6

Working capital/Sales (x) (0.4) (0.4) (0.4) (0.4)

Fixed capital/Sales (x) 1.9 2.0 2.0 1.9

Working capital days (149.8) (150.7) (153.6) (143.9)

Liquidity ratios

Current ratio (x) 0.4 0.3 0.4 0.5

Quick ratio (x) 0.4 0.3 0.4 0.4

Interest cover (x) 2.4 1.8 1.8 2.0

Total debt/Equity (%) 177.7 174.3 174.3 174.6

Net debt/Equity (%) 172.0 174.5 165.9 163.8

Valuation

PER (x) 34.8 50.9 77.8 57.2

Price/Book (x) 2.1 2.0 1.9 1.9

EV/Net sales (x) 2.6 2.6 2.6 2.4

EV/EBITDA (x) 7.3 7.6 7.9 7.3

EV/EBIT (x) 15.0 17.0 20.9 18.9



Idea Cellular (IDEA IN)

Synergy benefits will be higher than expectations

INDIA |TELECOM | Company Update

24 April 2017

Idea Cellular has lost more than 50% market value in the last two years because of rising capex requirements and launch of Jio operations even though its historical execution track record has been inspiring. With rising capacity requirements, Idea Cellular and Vodafone India have announced a merger, which will not only lead to immense capacity creation but translate into huge synergy benefits. The NPV of the merger’s synergy benefits at Rs 670bn (Rs 93 per share). While there are challenges in the medium term (till merger benefits start accruing) because of capacity constraints and a stretched balance sheet, we believe the market is underestimating Idea’s business-model resilience. We find Idea significantly undervalued at current levels and upgrade its price target to Rs 130, taking into account significant synergy benefits. Our key ideas are as follows: Capacity constraints addressed with merger; interim capacity manageable in leadership circles: Idea’s currently capacity is 150-200mn GB per month, which is meagre compared to Jio’s (6-8x ihigher, maybe more). With the Idea-Vodafone merger, their combined capacity will be at least similar to Jio, if not more, considering that the entity will have significantly higher broadband carriers (163 vs. Jio’s 140). The merger will take time; in the interim, Idea is well placed in its leadership circles to maintain market share, as it has secured adequate spectrum in those circles. In weaker circles, it could lose market share; but after the merger, market share wins are more likely. Idea Cellular’s solid execution will help the merged entity maintain #1 position: We believe the merged entity is more likely to be run by Idea Cellular’s CEO, Himanshu Kapania, who has an exceptional track record in delivering operational performance. Idea Cellular has been the fastest growing telecom operator in the last five years and it has gained 570bps revenue market share. Idea’s capex productivity is higher compared to industry leader Bharti Airtel which has significantly higher economies of scale indicating the management’s execution capability. Merger will lead to value creation on multiple front: We believe the synergy benefits (guided by the two companies) are conservative. This is because Vodafone’s cost structure is significantly higher than peers and Idea will be able to bring significant operational efficiencies – adding to merger-cost synergies. Apart form internal cost savings, the telecom sector is moving to high-concentration (based on HHI) from high-competition – because of the Idea-Vodafone merger. This adds more than 600 points to the HHI index of the sector. With this degree of increase in market concentration, pricing gains are likely over the long term, and Idea-Vodafone, being the largest player, will benefit the most. Immense scope for positive surprises; maintain buy with PT of Rs 130: Idea Cellular’s stock price is astoundingly close to its pre-merger levels, as the market is quite focused on near-term results, which will see a deterioration in key performance indicators, translating into stressed financial performance. However, historically, Idea has managed to deliver better-than-expected results, and its financial stress has reduced as operating performance has been consistently ahead of the market. We value the company based on DCF, translating into a target price of Rs 130 (earlier 110) taking into consideration 25% of the guided synergy benefits. Considering significant upside, we recommend Buy.


TARGET RS 130 (+52%) COMPANY DATA



MARKET CAP (USDBN) : 4.8

52 - WK HI/LO (RS) : 128 / 66

LIQUIDITY 3M (USDMN) : 64

PAR VALUE (RS) : 10



PROMOTERS : 42.4 42.5 42.2

FII / NRI : 27.2 24.5 25.2

FI / MF : 6.7 6.7 6.5

NON PRO : 21.2 23.9 23.8



1MTH 3MTH 1YR

ABS -8.2 19.5 -27.1

REL TO BSE -7.7 11.0 -40.4

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 365,055 367,334 383,688

EBIDTA 107,246 91,945 94,290

Net Profit -4,173 -27,805 -25,529

EPS, Rs (1.2) (7.7) (7.1)

PER, x (74.2) (11.1) (12.1)

EV/EBIDTA, x 6.9 8.9 8.3

P/BV, x 1.2 1.4 1.6

ROE, % (1.7) (12.5) (13.0)

Debt/Equity (%) 170 237 270



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Apr-16 Oct-16 Apr-17

Idea BSE Sensex


IDEA CELLULAR COMPANY UPDATE

Big capacity leap after merger Presently, Idea Cellular and Vodafone individually have much lower capacity vs. Reliance Jio or even Bharti Airtel. However, as they pool their resources, capacity enhancement will be quite significant because of increased number of carriers. Idea Cellular has around 65 broadband carriers, which is significantly lower than Reliance Jio. Apart from lower number of carriers, its deployed cell sites are also lower, which further reduces its capacity vs. Jio and Airtel. While Idea will continue to augment its data network, its overall capacity will still be much lower than Jio. However, the merged entity’s capacity will be significantly higher than and (mostly) will exceed Jio’s capacity, depending on reutilisation of frequencies and carrier aggregation.

Combined capacity

No of broadband

carriers

No of broadband

cell sites

Data capacity

(mn GB/month)

Data subscribers

capacity*(mn )

Vodafone 73 89000 187 37.4

Idea 65 100615 198 39.7

Vodafone+Idea 163 189,000 825 165.1

Vodafone+Idea* 163 250000 1141 228.1 Source: PhillipCapital India Research, * with cell sites similar to Jio

While the merger is sometime away and there are limited doubts on the combined’s entity capability, the challenge will be in the interim period. We believe Idea Cellular will be able to manage this challenge, especially in its leadership circles (c. 70% of revenues), reasonably well. A closer look at the broadband carriers in these circles reavealed that Idea has accumulated substantial spectrum there. While its number of broadband carriers are not as numerous like Jio, they are enough to deliver across product lines. Considering its solid spectrum footprint in the leadership circles, we believe Idea is more likely to maintain its revenue market share over 12-18 months. Once merger benefits start accruing, market share gains are likely (medium to long term) as capacity augmentation will be very high.

Idea vs. Jio in Idea’s leadership circles Total broadband carriers Idea JIO

Maharashtra 6.0 6.5

Kerala 5.0 6.5

M.P. 6.0 6.5

Punjab 3.0 5.0

Haryana 4.0 5.0

Andhra Pradesh 3.0 6.5

UP (W) 4.0 5.0

Gujarat 4.0 6.5 Source: PhillipCapital India Research, Company, DoT



Merged entity likely to be run Idea management Idea Cellular’s execution track record over the last five years has been superior to Vodafone India. It has gained more than 570bps in revenue market share and has been the fastest growing telecom major in India. A lot of this can be attributed to its highly capable management. In the same period, Vodafone India’s market share gains have been much smaller at 200bps.

Idea’s market share, incremental market share


While market share gains have been inspiring, the critical aspect for Idea Cellular has been the cost at which they have managed to scale the business. Even when compared to industry leader Bharti Airtel, which has significantly higher economies of scale and bargaining power, Idea Cellular has higher capital productivity.

Idea’s capital productivity vs. Bharti Airtel (adjusted for spectrum capex)


Considering that Idea has scored over the industry peers on most performance parameters, we believe the merged entity will be run by Idea –and Himanshu Kapania (current CEO and MD of Idea Cellular) will be the CEO of the merged company. Also, as the merged company will be listed, Idea’s current management has vast experience in dealing with institutional investors.

11.1 12.4

13.2 14.3

15.0 16.2

17.5 18.8

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Revenue market share(%)

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Bharti Idea



Idea: Incremental market share


Other merger benefits could be even more significant Duplication of resources between the two companies presents obvious synergy benefits and would be included in the guidance provided by the two companies. However, we believe other critical synergies could come from running the combined assets more efficienctly. Idea has a bigger rural subscriber base and a smaller revenue base compared to Vodafone, but Idea’s EBIDTA margins have been superior over the last three years (due to the management’s capabilities in drawing efficiencies from similar assets). We believe that with Idea at the helm of the merged entity, it will be able to deliver on efficiencies far more effectively and margin gains over the years could be significant.

Idea : EBITDA margin (%)


Apart from the benefits of running the company more efficiently, we believe that the big consolidation will have a huge impact on the pricing power in the market and industry churn. With reduction in number of players, supply inevitably reduces and pricing moves up. For a country as large as India, 3 or 4 telecom networks means, supply at some stage is likely to be constrained translating into prices moving up to attain equilibrium. Thus, we thus believe that Idea-Vodafone merger benefits transcend most of typical merger benefits and the unquantifiable benefits could spring huge positive surprises in the future.

31.8% 31.5%

26.8% 29.0%

39.2%

31.9%

0%

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50%

FY11 FY12 FY13 FY14 FY15 FY16

28 30 30

29

32 34

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Vodafone Idea Cellular (standalone)



Valuation

Explicit cash flow projection Cash Flows (Rs mn) FY17E FY18E FY19E FY20E FY21E FY22E

EBIT 22,026 (3,575) (2,440) 2,985 21,356 35,722

NOPLAT 14,317 (2,324) (1,586) 1,940 13,668 22,505

Depreciation 85,221 95,520 96,730 97,286 98,082 98,762

Capex 148,667 144,781 71,258 74,929 75,180 75,539

FCF (49,130) (51,584) 23,886 24,298 36,569 45,728

% conversion

(979) 814 171 128

Discount factor

0.9 0.8 0.7 0.6

PV

21,327 19,370 26,029 29,061

NPV

21,327 40,697 66,727 95,788 Source: Company, PhillipCapital India Research Estimates

Target Price derivation EV 2022calculation(Rs mn) FY22E

EBITDA 134,484

Exit EV/EBITDA multiple 8

Exit EV 1,075,870

Rs mn/ Rs per share Value

Enterprise value-2022 1,075,870

NPV Intermediate FCF 95,788

Net cash- end of FY2018 (506,901)

Return requirement 12%

EV value end of FY2018 779,523

EV tower business 119,114

Synergy benefit 83,750

Target value end of Mar 2018 475,487

Target value per share (end March 2018) 131 Source: Company, PhillipCapital India Research Estimates



Financials

Income Statement

Y/E Mar, Rs mn FY16 FY17e FY18e FY19e

Net sales 359,549 365,055 367,334 383,688

Growth, % 14 2 1 4

Total income 359,549 365,055 367,334 383,688

Other Operating expenses -229,510 -257,808 -275,388 -289,398

EBITDA (Core) 130,040 107,246 91,945 94,290

Growth, % 20.3 (17.5) (14.3) 2.6

Margin, % 36.2 29.4 25.0 24.6

Depreciation -66,508 -85,221 -95,520 -96,730

EBIT 63,532 22,026 -3,575 -2,440

Growth, % 15.3 (65.3) (116.2) (31.7)

Margin, % 17.7 6.0 (1.0) (0.6)

Interest paid -18,816 -32,845 -43,822 -41,686

Pre-tax profit 46,987 -6,419 -42,777 -39,275

Tax provided -16,447 2,247 14,972 13,746

Profit after tax 30,539 -4,173 -27,805 -25,529

Net Profit 30,539 -4,173 -27,805 -25,529

Growth, % (4.4) (113.7) 566.4 (8.2)

Net Profit (adjusted) 30,539 (4,173) (27,805) (25,529)

Unadj. shares (m) 3,595 3,602 3,602 3,602

Wtd avg shares (m) 3,595 3,602 3,602 3,602

Balance Sheet


Cash & bank 21,546 551 22,592 23,991

Marketable securities at cost 36,139 36,139 36,139 36,139

Debtors 11,776 10,952 11,020 11,511

Inventory 1,065 1,095 1,102 1,151

Loans & advances 11,990 12,173 12,249 12,795


Total current assets 82,537 60,931 83,123 85,608

Gross fixed assets 1,071,805 1,220,472 1,365,253 1,436,511

Less: Depreciation -334,340 -419,561 -515,081 -611,811

Add: Capital WIP 6,500 6,500 6,500 6,500

Net fixed assets 743,965 807,411 856,672 831,200

Total assets 777,156 818,996 890,450 867,462

Current liabilities 83,866 85,150 85,682 89,497

Total current liabilities 83,866 85,150 85,682 89,497



Paid-up capital 36,005 36,005 36,005 36,005

Reserves & surplus 221,670 216,224 187,146 160,344

Shareholders’ equity 257,676 252,229 223,151 196,349



Cash Flow


Pre-tax profit 46,987 -6,419 -42,777 -39,275

Depreciation 66,508 85,221 95,520 96,730

Chg in working capital 11,464 1,895 380 2,729

Total tax paid 19,099 2,247 14,972 13,746

Cash flow from operating activities 144,058 82,943 68,095 73,930

Capital expenditure -403,670 -148,667 -144,781 -71,258

Chg in marketable securities 7,071 0 0 0

Cash flow from investing activities -396,599 -148,667 -144,781 -71,258


Debt raised/(repaid) 199,653 46,002 100,000 0

Cash flow from financing activities 198,418 44,738 98,736 -1,264

Net chg in cash -54,124 -20,986 22,050 1,408

Valuation Ratios


Per Share data

EPS (INR) 8.5 (1.2) (7.7) (7.1)

Growth, % (4.4) (113.6) 566.4 (8.2)


FDEPS (INR) 8.5 (1.2) (7.7) (7.1)

CEPS (INR) 27.0 22.5 18.8 19.8

CFPS (INR) 39.4 21.8 17.6 19.2

Return ratios Return on assets (%) 5.9 1.9 (0.1) (0.0)

Return on equity (%) 11.9 (1.7) (12.5) (13.0)

Return on capital employed (%) 7.6 2.3 (0.1) (0.0)



Sales/Net FA (x) 0.6 0.5 0.4 0.5


Fixed capital/Sales (x) 3.0 3.3 3.7 3.7


Liquidity ratios

Current ratio (x) 1.0 0.7 1.0 1.0

Quick ratio (x) 1.0 0.7 1.0 0.9

Interest cover (x) 3.4 0.7 (0.1) (0.1)


Net debt/Equity (%) 140.5 170.1 227.2 257.5

Valuation

PER (x) 10.1 (74.2) (11.1) (12.1)

Price/Book (x) 1.2 1.2 1.4 1.6

EV/Net sales (x) 1.9 2.0 2.2 2.0

EV/EBITDA (x) 5.2 6.9 8.9 8.3

EV/EBIT (x) 10.6 33.5 (228.5) (319.3)



Bharti Infratel (BHIN IN)

Towering data prospects ahead

INDIA | TELECOM | Company Update

24 April 2017

After being an outperformer since its listing, Bharti Infratel has underperformed the

broader indices over the last two years. The Indian telecom tower industry saw a low-growth phase due to consolidation of telecom operators, closure, and partial exit of smaller operators, which resulted in lower-than-anticipated tenancy growth for the industry. Over the last few quarters, we have seen the exit of Uninor, Videocon, and the merger announcement of Vodafone and Idea. This consolidation has helped strengthened the position of the top-3 telecom service providers. We believe that most of the investments henceforth will be towards improving quality of service and supplementing data footprint across circles, thereby resulting in significant demand for fresh tenancy. We believe that Bharti Infratel is well positioned to capture this rise in data-only cell sites and will post EBITDA/earnings CAGR of 12% over FY17-20. We reiterate our BUY rating with a March 2018 revised TP of Rs 400 (Rs 450 earlier). Current dividend yield of ~4% and FCFE yield of ~7% also makes it an attractive dividend-yield stock and provides a cushion to valuation.

Well placed to gain from consolidation in telecom towers; ROEs to improve: Due to strong parentage and lower historical M&A activity, Bharti Infratel has a net cash balance sheet, while its peers are highly leveraged. With most operators looking to sell their tower businesses, Bharti Infratel is well positioned to capitalise on this opportunity, which will improve its ROEs. Idea and Vodafone have already articulated their intent to sell their tower businesses (tower/tenancy count) and also their stake in Indus Tower. Infratel’s business model is characterised by low risks, but its capital structure is inefficient because of high cash on its balance sheet, which has depressed return ratios visa-a-vis its global peers. We believe this provides an opportunity for Infratel to buy Vodafone and Idea’s stake in Indus and make it a wholly owned subsidiary – a move that would increase ROEs and savings on dividend distribution tax.

A strong play on accelerated data usage growth in India: Top-three telecom operators (i.e., Idea, Vodafone, and Bharti Airtel) account for ~85% of Infratel’s total tenancies. Hence, it is relatively immune to the exit of smaller operator in the near term (also, most smaller operators have already exited the business). We estimate that ~20% tenancies could have a Vodafone/Idea overlap for Indus and ~15% for Infratel. We assume that 20-25% of the overlapping tenancies will be cancelled in the medium term, resulting in 5% tenancies loss. Given Reliance JIO’s massive rollout plan, fresh tenancy demand from JIO could more or less compensate for the tenancy loss from Idea and Vodafone.

Deployment of data-only sites will trigger next leg of tenancy growth: Recent auctions have separated serious players from new entrants, and incumbents now have a substantial data footprint across frequency bands. Current wireless broadband subscribers stand at ~25%, hence most of the operators are loading on existing voice sites, resulting in muted tenancy addition from incumbents. However, we expect that the wireless broadband subscribers CAGR at 32% with 52% CAGR in data volumes over the next three years, which will result in significant demand for data-only sites from incumbents. Additionally, we expect Reliance Jio’s entry to also result in accelerated rollouts from incumbents.

Reiterate BUY with a revised TP of Rs 400: Infratel may not spring huge earnings surprises over the medium term, but consistent high dividend payouts and improving revenue visibility will translate into a rerating and a valuation catch-up with global peers. We believe it will continue to benefit from accelerated data rollouts and new revenue opportunities such as in-building solutions and small cells. We maintain our BUY recommendation with a price target of Rs 400.


TARGET Rs 400 (+14%) COMPANY DATA




52 - WK HI/LO (RS) : 414 / 282

LIQUIDITY 3M (USDMN) : 10

PAR VALUE (RS) : 10



PROMOTERS : 61.7 72.0 72.0

FII / NRI : 34.3 24.9 25.2

FI / MF : 1.7 1.2 1.0

NON PRO : 1.4 1.2 1.3



1MTH 3MTH 1YR

ABS 11.8 -0.8 -5.7

REL TO BSE 12.4 -9.2 -19.0

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 84,732 88,529 93,335

EBIDTA 58,942 61,502 65,153

Net Profit 26,398 28,609 31,727

EPS, Rs 14.3 15.4 17.1

PER, x 25.3 23.3 21.0

EV/EBIDTA, x 10.3 9.6 8.8

P/BV, x 4.0 3.9 3.7

ROE, % 15.7 16.6 17.8

Debt/Equity (%) 11.3 11.5 11.7



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Apr-16 Aug-16 Dec-16 Apr-17

Bharti Infra BSE Sensex


BHARTI INFRATEL QUARTERLY UPDATE

Valuations

Explicit cash flow forecast Valuation of Bharti Infratel FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E

EBIT 30,967 36,281 38,444 41,765 45,725 50,413 55,769 61,263

Capex (17,759) (16,927) (18,095) (17,201) (18,279) (19,427) (20,648) (21,947)

Wcap changes (3,983) 36,556 2,699 541 (3,558) 1,994 2,093 2,578

Depreciation 22,693 22,661 23,057 23,388 23,658 23,927 24,193 22,809

Tax on EBIT (10,405) (12,190) (12,917) (14,033) (15,364) (16,939) (18,739) (20,584)

Reduced in CF - - - - - - - -

FCFF 21,513 66,381 33,188 34,460 32,182 39,968 42,669 44,119

Discount rate 1.00 1.00 1.00 0.90 0.81 0.73 0.66 0.59 Source: Company, PhillipCapital India Research Estimates

Target Price derivation FCF of intermediate cash flow 140,680

Terminal value at discounted rate 523,652

Enterprise value 664,331

Net debt (end FY17) (75,747)

Equity value 740,079

O/s shares 1,849

Value per share 400 Source: Company, PhillipCapital India Research Estimates


BHARTI INFRATEL QUARTERLY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY16 FY17e FY18e FY19e

Net sales 77,875 84,732 88,529 93,335

Growth, % 9 9 4 5

Other income 45,209 49,325 52,719 56,308

Total income 123,084 134,057 141,248 149,643

Raw material expenses -10,548 -11,431 -12,335 -13,219

Employee expenses -4,316 -4,592 -4,886 -5,199

Other Operating expenses -54,560 -59,092 -62,525 -66,072

EBITDA (Core) 53,660 58,942 61,502 65,153

Growth, % 7.2 9.8 4.3 5.9

Margin, % 68.9 69.6 69.5 69.8

Depreciation -22,693 -22,661 -23,057 -23,388

EBIT 30,967 36,281 38,444 41,765

Growth, % 9.8 17.2 6.0 8.6

Margin, % 39.8 42.8 43.4 44.7

Interest paid -2,198 -1,945 -2,042 -2,134

Other Non-Operating Income 7,438 5,601 6,879 8,368

Pre-tax profit 36,207 39,937 43,281 47,998

Tax provided -12,387 -13,539 -14,672 -16,271

Profit after tax 23,820 26,398 28,609 31,727

Net Profit 23,820 26,398 28,609 31,727

Growth, % 19.6 10.8 8.4 10.9

Net Profit (adjusted) 23,820 26,398 28,609 31,727

Unadj. shares (m) 1,897 1,852 1,852 1,852

Wtd avg shares (m) 1,897 1,852 1,852 1,852

Balance Sheet Y/E Mar, Rs mn FY16 FY17e FY18e FY19e

Cash & bank 31,916 79,166 96,644 115,080

Marketable securities at cost 14,844 0 0 0

Debtors 1,916 5,238 5,528 5,875

Other current assets 8,865 10,177 10,628 11,182


Investments 4,703 5,292 5,574 5,554


Add: Capital WIP 2,245 2,161 2,181 2,207

Net fixed assets 147,113 134,849 125,750 114,347

Non-current assets 50,442 29,204 28,612 28,050

Total assets 269,189 275,431 283,251 290,918


Provisions 11,663 15,856 14,933 14,174




Paid-up capital 18,967 18,523 18,523 18,523





Cash Flow Y/E Mar, Rs mn FY16 FY17e FY18e FY19e

Pre-tax profit 36,207 39,937 43,281 47,998

Depreciation 22,693 22,661 23,057 23,388

Chg in working capital -6,038 34,976 1,615 -998

Total tax paid -12,385 -9,751 -13,225 -14,667

Cash flow from operating activities 40,477 87,822 54,728 55,721

Capital expenditure -19,425 -10,397 -13,957 -11,985

Chg in investments 585 -589 -282 20

Chg in marketable securities 16,596 14,844 0 0

Cash flow from investing activities -2,244 3,858 -14,240 -11,966

Free cash flow 38,233 91,681 40,488 43,756

Equity raised/(repaid) 29 -20,444 0 0

Debt raised/(repaid) -4,896 -2,190 863 907

Dividend (incl. tax) -8,135 -21,797 -23,873 -26,227

Cash flow from financing activities -13,002 -44,431 -23,010 -25,320

Net chg in cash 25,231 47,250 17,478 18,436

Valuation Ratios


Per Share data

EPS (INR) 12.6 14.3 15.4 17.1

Growth, % 19.4 13.5 8.4 10.9


FDEPS (INR) 12.6 14.3 15.4 17.1

CEPS (INR) 24.5 26.5 27.9 29.8

CFPS (INR) 15.8 32.1 25.5 25.2

DPS (INR) 3.0 9.2 10.1 11.2

Return ratios Return on assets (%) 9.3 10.1 10.7 11.5

Return on equity (%) 13.0 15.7 16.6 17.8




Sales/Net FA (x) 0.5 0.6 0.7 0.8


Receivable days 9.0 22.6 22.8 23.0


Liquidity ratios

Current ratio (x) 1.9 2.1 2.4 2.8

Quick ratio (x) 1.9 2.1 2.4 2.8

Interest cover (x) 14.1 18.7 18.8 19.6

Dividend cover (x) 4.2 1.5 1.5 1.5


Net debt/Equity (%) (6.8) (36.0) (44.6) (53.0)

Valuation

PER (x) 28.7 25.3 23.3 21.0

PEG (x) - y-o-y growth 1.5 1.9 2.8 1.9

Price/Book (x) 3.7 4.0 3.9 3.7

Yield (%) 0.8 2.6 2.8 3.1

EV/Net sales (x) 8.6 7.2 6.7 6.1

EV/EBITDA (x) 12.5 10.3 9.6 8.8

EV/EBIT (x) 21.6 16.7 15.3 13.7



Reliance Industries Ltd (RIL IN)

Jio "Primed" for growth

INDIA | CONGLOMERATE | Company Update

24 April 2017

The launch of its Rs 303+ monthly subscriber plan eased fears of margin-destructive price wars. RIL indicated 72mn subscriber conversions to Jio Prime (versus 100mn under previous free offers) by the end of March and it has continued aggressive offers at Rs 309 indicating the push for higher ARPU. The management has set a target of 50% RMS in a Rs 3tn market (in 3-4 years) along with a strong 50% EBITDA margin. While we find Jio’s target very aggressive, the Indian telecom sector is heading towards major consolidation, and that in the next 5-10 years, it will be a four-player market, enhancing pricing power/ARPU, data usage, and incumbents’ earnings. We build a conservative Rs 180 ARPU for Jio in FY18 on a 90mn average subscriber base, but expect it to touch Rs 270+/300mn+ by FY25, implying revenue/EBITDA/margin of Rs 1tn/460bn/45%. While we will wait for execution, competitor action, and ARPU/costing data, to reassess our estimates, for now we value Jio at 8x FY25 EBITDA, discounted to FY18-end at an EV of Rs 2.2tn. Jio’s launch was a success with 72mn effective users while pricing continues to be aggressive: There is little doubt now that Reliance Jio’s launch was a roaring success. It has redefined the Indian telecom landscape, both in terms of technology and product. A 100mn subscriber base with an effective conversion of 72mn to paid services (at the end of March 2017) was ahead of expectations. Jio Prime's plans offer a simplified tariff structure with no hidden charges, which make them attractive, aiding conversion and dependency. RIL sets steep targets for Jio – aggressive strategy in place Jio is clearly in it for the long haul. In a recent analyst meet, it laid out a comprehensive strategy. Its key targets were 50% RMS and 50% EBIDTA margin. Some salient points of its strategy: (1) Reducing the voice market, thereby pushing data usage. (2) RIL management expects given the right pricing, the Indian data market will expand and become around 5bn GB per month in the next 3-4 years. Assuming a pricing of Rs 50/GB, the market size will be around Rs 3-3.5tn annually. (3) With its strong capacity and investment plan, Jio will target 50% RMS; higher ARPU and scale would result in EBITDA margin of ~50%. Our assumptions are conservative, but Jio will create value Execution and network stability will be key; maintenance of high data speed, voice quality, and attractive offerings can boost usage and subscribers' preference for Jio. For now, we take a more conservative stance – Rs 180 blended ARPU in FY18 on a 90mn average subscriber base. Based on our primary thesis of industry consolidation to a four-player market, we expect this to touch Rs 270+/300mn+ by FY25, implying revenue/EBITDA/margin of Rs 1tn/460bn/45% for Jio. Although much lower than RIL's targets, our estimates imply an EV of Rs 2.2tn for Jio, which is an equity value of almost Rs 1tn. Core business capex cycle almost over RIL’s major core projects including ethane sourcing, PX, ROGC and DTA refinery petcoke gasification are complete with pre-commisisoning currently underway while the only remaining SEZ refinery gasification project is likely to be completed by Q2FY18. We expect these projects to add value from 2HFY18 and add significantly to earnings from FY19 onwards post stabilisation. We estimate core business EBITDA to grow at 20% CAGR during FY17-19E. Maintain Buy with a revised target of Rs 1,650 We value Jio at 8x FY25 EBITDA, discounted to FY18 end, and maintain our SOTP-based target for RIL at Rs 1,650 with telecom valuation of Rs 2.2tn EV. Reiterate Buy.

BUY (Maintain) CMP RS 1,417/ TARGET RS 1,650 (+16%)

COMPANY DATA




52 - WK HI/LO (RS) : 1449 / 926

LIQUIDITY 3M (USDMN) : 518.2

PAR VALUE (RS) : 10



PROMOTERS : 46.3 46.5 46.5

FII / NRI : 22.7 16.0 13.0

FI / MF : 11.8 18.5 21.3

NON PRO : 7.5 7.2 7.3

PUBLIC & OTHERS : 11.6 11.8 12.0


1MTH 3MTH 1YR

ABS 11.0 36.7 34.7

REL TO BSE 11.5 28.3 21.4

PRICE VS. SENSEX


KEY FINANCIALS

Rs bn FY17E FY18E FY19E

Net Sales 3,047 3,769 4,358

EBIDTA 460 573 715

Net Profit 295 256 297

EPS, Rs 100.0 86.7 100.3

PER, x 14.2 16.3 14.1

EV/EBIDTA, x 12.8 11.5 9.3

P/BV, x 1.6 1.4 1.3

ROE, % 11.0 8.8 9.4

Debt/Equity (%) 81.7 98.6 90.9


Sabri Hazarika (+ 9122 6667 9756) [email protected]

Naveen Kulkarni, CFA, FRM (+ 9122 6246 4122) [email protected]

Manoj Behera (+ 9122 6246 4118) [email protected]

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Rel Inds Rel. to BSE


RELIANCE INDUSTRIES COMPANY UPDATE

Expect strong revenue and EBITDA growth

Expect Jio's subscriber base and ARPU to improve as the market expands and consolidates


For FY18, we build a blended ARPU of Rs 180, as we await conversion statistics among lower income groups to Prime (these may primarily stick to calls, which Jio is offering for free). We assume an average subscriber base of ~90mn, based on which we estimate revenue close to Rs 200bn in FY18. Our cost estimates imply an EBITDA margin of 10% in FY18, which is commendable in the first year of operation, implying an EBITDA of almost Rs 20bn.

Estimate Rs 1tn revenue and Rs 460bn EBITDA in FY25


Jio's growth going forward will be strong. We expect its ARPU to rise to Rs 270+ by FY25 as the telecom industry consolidates to four players (Jio, Vodafone-Idea, Airtel, and BSNL/MTNL), improving pricing power and data usage (300mn+ subscribers for Jio), thereby pushing earnings. Higher ARPU would also aid in EBITDA margin expansion – we estimate these to reach almost 45% by FY25. We expect Jio to save on network sites (aided by the RCOM deal), low SAC, and lower bundled service costs due to bulk offerings. We have assumed 14-paise inter-connection charges, which could be reduced to zero, thereby lowering industry cost.

90 113

157

195

226

255

284

313

180 183 188 198 211

232 256

274

0

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150

200

250

300

350

FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Average subscribers (mn) ARPU (Rs/month)

195 248

355

463

573

710

871

1029

19 46 90

140 197

274

369

459

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19%

25%

30%

34%

39%

42% 45%

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10%

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30%

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50%

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400

600

800

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1200

FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Revenue (Rs bn) EBITDA (Rs bn) EBITDA margin



Valuation

SOTP Valuation Rs.bn (FY19E, Consol) Method Head Multiple EV EV/sh

Refining EV/EBITDA 348 6.5 2,259 764

Petrochemicals EV/EBITDA 267 6.5 1,734 587

Upstream Oil & Gas DCF-EV/EBITDA 54 7.5 405 137

Organised Retail EV/Sales 301 0.5 151 51

Others EV/Sales 97 1.0 97 33

Telecom EV/EBITDA - Discounted 8x to FY25 EBITDA 2,241 758

Total

6,887 2,329

Adj. Net Debt (FY18E End)

2,007 679

Equity Value

1,650

Shares O/S (mn) 2,957


RIL's snapshot Y/E, March 31, Consol. FY14 FY15 FY16 FY17E FY18E FY19E

Revenues (Rs.bn) 4,345 3,754 2,765 3,047 3,769 4,358

EBITDA (Rs.bn) 348 374 443 460 573 714

Reported PAT (Rs.bn) 225 236 276 295 256 296

Adjusted PAT (Rs.bn) 225 236 272 295 256 296

Growth 8% 5% 15% 9% -13% 16%

Reported EPS (Rs.) 76.5 80.1 93.7 100.0 86.7 100.1

Adjusted EPS (Rs.) 76.5 80.1 92.3 100.0 86.7 100.1

Adjusted PE (x) 18.0 17.2 14.9 13.7 15.9 13.7

PB (x) 2.0 1.9 1.7 1.5 1.4 1.3

EV/EBITDA (x) 13.5 13.4 12.1 12.5 11.3 9.1

RoE 11% 11% 11% 11% 9% 9%

RoCE 7% 6% 7% 7% 6% 7%

Debt:Equity (x) 0.7 0.7 0.7 0.8 1.0 0.9

Book Net Debt (Rs.bn) excl LT Inv. 670 973 1,299 1,703 2,385 2,441

Average GRM ($/bbl) 8.1 8.6 10.8 10.7 10.2 13.4

Petchem Production (mmt) 12.0 12.2 14.4 14.7 18.8 18.8

Petchem EBITDA/mt ($) 147 149 146 166 208 213

Domestic+Shale Gas Output (mmscmd) 20.8 22.5 21.7 21.2 20.9 22.8

Growth -17% 8% -4% -2% -1% 9%

Telecom EBITDA - - 19 46




Financials

Income Statement Y/E Mar, Rs bn FY16 FY17e FY18e FY19e

Net sales 2,765 3,047 3,769 4,358

Growth, % -26 10 24 16

Other income 0 0 0 0

Total income 2,765 3,047 3,769 4,358

Raw material expenses 1,891 2,095 2,474 2,880

Employee expenses 77 83 88 95

Other Operating expenses 355 409 634 670

EBITDA (Core) 443 460 573 714

Growth, % 18 4 24 25

Margin, % 16.0 15.1 15.2 16.4

Depreciation -129 -113 -230 -273

EBIT 313 347 343 441

Growth, % 21 11 -1 29

Margin, % 11.3 11.4 9.1 10.1

Interest paid -36 -45 -96 -142

Other Non-Operating Income 78 100 104 106

Non-recurring Items 4 0 0 0


Tax provided -83 -106 -95 -109

Profit after tax 277 295 256 296

Others (Minorities, Associates) -1 0 0 0

Net Profit 276 295 256 296

Growth, % 17 7 -13 16

Net Profit (adjusted) 272 295 256 296

Wtd avg shares (bn) 3 3 3 3

Balance Sheet Y/E Mar, Rs bn FY16 FY17e FY18e FY19e

Cash & bank 112 135 156 132

Marketable securities at cost 399 359 323 291

Debtors 49 54 67 77

Inventory 470 517 664 768

Loans & advances 355 389 476 550



Investments 370 374 377 381


Less: Depreciation 1,454 1,568 1,797 2,071

Add: Capital WIP 2,499 2,524 1,515 303

Net fixed assets 4,250 5,133 5,448 5,582

Non-current assets 0 0 0 0

Total assets 6,062 7,026 7,591 7,873


Provisions 35 40 45 50




Paid-up capital 62 62 63 63




Source: Company, PhillipCapital India Research Estimates, FY16 is IGAAP

Cash Flow Y/E Mar, Rs bn FY16 FY17e FY18e FY19e


Depreciation 129 113 230 273

Chg in working capital -5 164 -600 -126

Total tax paid -86 -96 -85 -99

Cash flow from operating activities 398 582 -104 453

Capital expenditure -486 -1,000 -549 -411

Chg in investments 65 40 36 32

Chg in marketable securities 38 100 104 106

Cash flow from investing activities -383 -861 -409 -272

Free cash flow 15 -279 -513 181


Debt raised/(repaid) -32 302 534 -205

Cash flow from financing activities -28 302 534 -205

Net chg in cash -13 23 20 -24

Valuation Ratios


Per Share data

EPS (INR) 92.3 100.0 86.7 100.1

Growth, % 15.3 8.4 (13.3) 15.4

Book NAV/share (INR) 826.5 910.8 982.5 1,064.2

CEPS (INR) 134.7 138.3 164.4 192.3

CFPS (INR) 293.4 188.0 (51.3) 113.0

Return ratios

Return on assets (%) 5.4 4.9 4.3 4.9

Return on equity (%) 11.2 11.0 8.8 9.4


Turnover ratios

Asset turnover (x) 0.9 0.8 0.8 0.9


Sales/Net FA (x) 0.7 0.6 0.7 0.8


Receivable days 6.5 6.5 6.5 6.5

Inventory days 62.0 62.0 64.3 64.3

Payable days 96.2 96.2 96.2 96.2


Liquidity ratios

Current ratio (x) 0.7 0.7 0.9 0.9

Quick ratio (x) 0.5 0.4 0.5 0.5

Interest cover (x) 8.7 7.6 3.6 3.1


Net debt/Equity (%) 69.7 76.7 93.2 86.7

Valuation

PER (x) 14.9 13.7 15.9 13.7

PEG (x) - y-o-y growth 1.0 1.6 (1.2) 0.9

Price/Book (x) 1.7 1.5 1.4 1.3

EV/Net sales (x) 1.9 1.9 1.7 1.5

EV/EBITDA (x) 12.1 12.5 11.3 9.1

EV/EBIT (x) 17.1 16.6 18.8 14.8



Stock Price, Price Target and Rating History (Bharti Airtel)

Stock Price, Price Target and Rating History (Idea Cellular)

Stock Price, Price Target and Rating History (Bharti Infratel)

B (TP 390)

B (TP 400)

B (TP 515)

B (TP 450)

B (TP 450)

B (TP 450)

B (TP 475) B (TP 450)

B (TP 450)

B (TP 450) B (TP 450)

B (TP 450) B (TP 450)

B (TP 380)

B (TP 360)

B (TP 410)

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250

300

350

400

450

500

M-14

M-14

J-14 A-14 S-14 N-14 D-14 F-15 M-15

M-15

J-15 J-15 S-15 O-15 D-15 J-16 M-16

A-16 J-16 J-16 S-16 O-16 D-16 J-17 F-17 A-17

B (TP 165) B (TP 180)

B (TP 200) B (TP 200)

B (TP 325)

B (TP 215) B (TP 200)

B (TP 175) B (TP 165)

B (TP 130) B (TP 130)

B (TP 90)

B (TP UR) N (TP 111)

B (TP 111)

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250

B (TP 165)

J-14 J-14 S-14 N-14 D-14 F-15 M-15 M-15 J-15 A-15 S-15 N-15 D-15 F-16 M-16 M-16 J-16 A-16 S-16 N-16 D-16 F-17 M-17

B (TP 240)

B (TP 290)

B (TP 325)

B (TP 430) B (TP 450)

B (TP 505)

B (TP 492) B (TP 490) B (TP 490) B (TP 450) B (TP 450)

B (TP 450)

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A-14 J-14 J-14 S-14 O-14 D-14 J-15 M-15 A-15 J-15 J-15 S-15 O-15 D-15 J-16 M-16 A-16 J-16 J-16 S-16 B (TP 450)

D-16 J-17 M-17



Stock Price, Price Target and Rating History (Reliance Industries)

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

B (TP 1160)

B (TP 1160)

B (TP 1190) B (TP 1190)

B (TP 1650)

800

850

900

950

1000

1050

1100

1150

1200

1250

1300

1350

1400

1450

1500

M-16 A-16 J-16 J-16 S-16 O-16 D-16 J-17 M-17



Management Vineet Bhatnagar (Managing Director) (91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6246 4101

Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles

IT Services

Pharma & Specialty Chem

Dhawal Doshi (9122) 6246 4128

Vibhor Singhal (9122) 6246 4109

Surya Patra (9122) 6246 4121

Nitesh Sharma, CFA (9122) 6246 4126

Shyamal Dhruve (9122) 6246 4110

Mehul Sheth (9122) 6246 4123

Banking, NBFCs

Infrastructure

Strategy

Manish Agarwalla (9122) 6246 4125

Vibhor Singhal (9122) 6246 4109

Naveen Kulkarni, CFA, FRM (9122) 6246 4122

Pradeep Agrawal (9122) 6246 4113

Aashima Mutneja, CFA (9122) 6667 9764

Paresh Jain (9122) 6246 4114

Logistics, Transportation & Midcap

Telecom

Consumer & Retail

Vikram Suryavanshi (9122) 6246 4111



Media

Manoj Behera (9122) 6246 4118

Jubil Jain (9122) 6246 4117

Manoj Behera (9122) 6246 4118

Technicals

Preeyam Tolia (9122) 6246 4129

Metals

Subodh Gupta, CMT (9122) 6246 4136

Cement

Dhawal Doshi (9122) 6246 4128

Production Manager

Vaibhav Agarwal (9122) 6246 4124

Yash Doshi (9122) 6246 4127

Ganesh Deorukhkar (9122) 6667 9966

Economics

Mid-Caps & Database Manager

Editor

Anjali Verma (9122) 6246 4115

Deepak Agarwal (9122) 6246 4112

Roshan Sony 98199 72726

Shruti Bajpai (9122) 6246 4135

Oil & Gas

Sr. Manager – Equities Support

Engineering, Capital Goods

Sabri Hazarika (9122) 6667 9756

Rosie Ferns (9122) 6667 9971

Jonas Bhutta (9122) 6246 4119

Vikram Rawat (9122) 6246 4120

Sales & Distribution

Corporate Communications Ashvin Patil (9122) 6246 4105

Sales Trader

Zarine Damania (9122) 6667 9976

Shubhangi Agrawal (9122) 6246 4103

Dilesh Doshi (9122) 6667 9747

Kishor Binwal (9122) 6246 4106

Suniil Pandit (9122) 6667 9745

Bhavin Shah (9122) 6246 4102

Ashka Mehta Gulati (9122) 6246 4108

Execution

Archan Vyas (9122) 6246 4107

Mayur Shah (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd

250 North Bridge Road, #06-00 RafflesCityTower,

Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd

B-3-6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur

Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong

Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd

4-2 Nihonbashi Kabutocho, Chuo-ku

Tokyo 103-0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia

ANZTower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, OceanTower Unit 2318

Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, VorawatBuilding, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050

The Chicago Board of TradeBuilding

Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia

Level 10, 330 Collins Street

Melbourne, VIC 3000, Australia

Tel: (61) 3 8633 9800 Fax: (61) 3 8633 9899

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA

PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.-regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain

business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker-dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer.

If Distribution is to Australian Investors This report is produced by PhillipCapital (India) Pvt Ltd and is being distributed in Australia by Phillip Capital Limited (Australian Financial Services Licence No. 246827).

This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with

these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.

PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

http://www.phillipcapital.in/

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INSTITUTIONAL EQUITY RESEARCH India Telecombackoffice.phillipcapital.in/Backoffice/Research... · Source: PhillipCapital India Research, TRAI, RBI In FY17, Indian telecom services