Wireless subscriber base in India is soaring. Whereas 4.6m subscribers were added per month over H1CY06, 6.3m subscribers have been coming to the fold since then. Traditionally a price sensitive market, India has broken the mould with subscriber additions stepping up even sans tariff cuts. With infrastructure sharing facilitating rapid rollouts and thus wider coverage, increasing affordability would drive market expansion. We expect the wireless subscriber base to reach 504m by 2012. But for a tariff cut due to lower regulatory costs, we do not see any tariff wars in the offing despite Vodafone’s acquisition of Hutch. Hence, profitability of operators is likely to remain intact with an estimated 40% earnings CAGR for our wireless universe over FY07-09. However, spectrum unavailability could be a dampener. We rate Bharti Airtel and Reliance Communications as Outperformers and Idea Cellular as Neutral.
Indian wireless market – the floodgates have opened: The government has set a stiff target of expanding the current wireless subscriber base of 159m to 584m by 2012. While regulatory costs are set to fall and make tariffs more affordable, infrastructure sharing, still at a nascent stage, would facilitate faster coverage of rural areas. We expect India to have 504m subscribers by 2012 (25% CAGR from the current base).
Operators to see sustained profitability: The incremental 345m subscribers would largely come from rural areas. Though ARPU in rural areas would be lower, we believe coverage would induce increased usage from existing subscribers. Thus, we expect EBITDA margins to expand by 200bp over FY07-09 for our wireless universe on the back of higher outgoing usage and cost benefits arising from infrastructure sharing.
Buy Bharti and RCOM; Neutral on Idea: While lower tariffs make usage more affordable, rapid population coverage would increase the addressable market. At an estimated EBITDA CAGR of 40% over FY07-09 for Bharti and RCOM, the stocks trade at 10.1x and 8.5x FY09E EBITDA respectively. While Idea trades at a 28% premium to RCOM, we find the premium unjustified given that operations are restricted to 11 circles and NLD business would be fully operational only by end-FY08. Thus, we rate Bharti and RCOM as Outperformers and Idea as Neutral.Download here