The Indian mobile telecom industry is witnessing a robust growth in subscriber additions.
Over the past five years, the mobile subscriber base in India has increased by a whopping 30 times from a mere 65 lakh subscribers in 2002 to over 20 crore in August 2007. Much of the ongoing subscriber growth is being witnessed in the prepaid segment.
Despite the huge growth in the subscriber base, the mobile penetration in India still remains around 17%, far below the global average of 44%, thus providing significant growth opportunity in the times ahead.
The high intensity of competition in the mobile industry has resulted in tariff wars, leading to a sharp decline in tariff rates. The falling tariff rates are affecting average revenue per user (ARPU) of the operators, but we believe the higher volume growth is more than offsetting the fall in the ARPU thereby leading to robust growth in revenues.
We believe the Indian mobile telecom industry is in a growth phase and provides extremely strong growth visibility in future earnings. Declining tariffs and nationwide expansion in network coverage are the prime factors that would continue to provide growth opportunities for the sector.We initiate coverage with a buy rating on Bharti Airtel and Reliance Comm, and accumulate on Idea Cellular.
Bharti Airtel: Bharti has consistently increased its market share to the current 23.7% in August 2007, up by 330 basis points from 20.4% in 2005-6. We expect Bharti’s market share to increase from 23.7% now to 25.6% in 2009-10. At the current market price of Rs 1,019, the stock trades at 12.5 times EV/EBITDA and 20.7 times 2008-9 estimated earnings. We believe the current price does not fully factor the robust growth in free cash flows.We recommend a Buy on Bharti Airtel with a price target of Rs 1,334.
Reliance Communications: Rcom’s mobile business, the primary driver of revenue growth, is expected to grow at a 34% CAGR over 2007-10E. The company plans to separately list two of its subsidiaries, Flag Telecom and RTIL, which would result in value unlocking for shareholders. At current levels, the stock trades at 12.7 times EV/EBITDA and 23.8 times 2008-9 estimated earnings.We recommend Buy on RCom with a price target of Rs 878.
Idea Cellular: The growth in the Indian telecom industry is largely driven by GSM technology, which contributes 75% of overall mobile subscribers in India. Idea Cellular, being a pure GSM operator, has consistently improved its monthly subscriber additions and market share. On 2008-9 valuations of 11.6 times EV/EBITDA, the stock trades at 8% discount to Bharti. Our price target for the stock is Rs 165.
