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Calling for growth

The Indian mobile market is in the sweet spot with regard to growth.

Print Edition: December 28, 2006

UBS Investment Research says that the Indian mobile market is in the sweet spot with regard to growth in a report on the Indian Telecom sector dated November 8, 2006. The report incorporates an interesting comparison between two of India’s leading telecom service providers, Bharti Airtel and Reliance Communications and the largest mobile TSP in the world, China Mobile:

“Our analysis of mobile market evolution in developing markets such as China, the Philippines and Thailand leads us to believe that the Indian mobile market has hit the growth sweet spot, which is likely to stimulate further acceleration of mobile penetration in India. We think consensus earnings forecasts could be exceeded. We expect India’s mobile user base to triple from 127 million currently to 385 million by March 2010. Additionally, we forecast mobile service revenues as a percentage of GDP to rise from 0.95% in 2005-6 to around 2.19% by 2009-10. We believe the spectrum shortages facing the industry, and irrational competition among existing players present the biggest risks to our positive view and ratings onIndian mobile companies.

Our earnings forecasts for Bharti Airtel (Bharti) and Reliance Communication (RCOM) are significantly higher than consensus. We initiate coverage of RCOM with a Buy rating and a 12-month price target of Rs 480. We maintain our Buy rating on Bharti with a revised price target of Rs 675 (from Rs 490). Our earnings forecasts for Bharti are 4-24% higher than consensus for 2007-10. For RCOM, our estimates are 6-21% higher than consensus.

Our head-to-head comparison of China Mobile with Bharti and RCOM indicates the potential for Indian operators to catch up with China Mobile.

RCOM BUY: We initiate coverage of RCOM with a Buy rating and 12-month price target of Rs 480 (current price is Rs 463). We believe RCOM’s push for GSM spectrum is a sensible move that will be positive. We expect RCOM to enjoy benefits from economies of scale, leading to gradual expansion in EBITDA. Our price target is discounted cash flow-based with a weighted average cost of capital of 11.05% and a terminal EV/EBITDA multiple of 6x.

Bharti BUY: We believe Bharti is uniquely positioned to benefit from India’s rising mobile penetration. Bharti has a strong management team that excels in execution, a nationwide footprint, GSM technology, strong brand and wide distribution. We maintain our Buy and raise our price target from Rs 490 to Rs 675 (current price is Rs 647). Our price target is DCF-based with WACC of 10.2% and a terminal EV/EBITDA multiple of 6x.”

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