Sector Update

Price performance (%)

Bharti Airtel RCOM Idea 1M 2.1 -4.4 -4.4 3M -9.7 -28.0 -24.8 6M -11.1 -14.0 -7.3 12M -23.0 -33.5 -2.5

June 28, 2012

Telecom
Uncertainty continues...
With only about two months remaining for the August 31, 2012 Supreme Court (SC) deadline of conducting the spectrum auction, things are pretty uncertain right now as the industry tries to reach a consensus on various contentious issues pertaining to reserve price of 2G spectrum, spectrum re-farming, one-time spectrum charges, spectrum liberalisation, etc. Also, the auctioneer for conducting the auction has not been finalised as yet. Even the presidential reference, through which the government was going to ask for SCs advice on crucial matters relating to cancellation of licenses, is pending. To make matters worse, the EGoM on spectrum pricing has been left in a limbo with Pranab Mukherjee resigning from government to contest the presidential election. We believe it may be very difficult to meet the August 31 deadline. Moreover, no easy solution to the spectrum row is in sight since various stakeholders are acting from different view points. Reserve price undecided Trai had come up with a pan-India reserve price of | 3622 crore for 1 MHz of spectrum. DoT, correcting Trai, has increased the reserve price to | 4245 crore. While the operators have protested against such a huge reserve price arguing that it could result in a tariff hike of 24-90 paisa, Trai is of the opinion that such a reserve price would only lead to a tariff hike of 3-6 paisa. Eventually, the Empowered Group of Ministers (EGoM) is going to decide on the reserve price. New operators will be hugely affected by huge reserve price as DB Etisalat, STel and Loop (excluding Mumbai) have decided to shut down their operations while Uninor and SSTL have made it clear that they would not participate in the auctions should the EGoM accept Trais recommendations on the reserve price. Incumbents to pay prospectivelybut how much? Another uncertainty prevalent in the industry is whether operators should be charged one-time spectrum fees over the remaining life of the license to liberalise the spectrum or should it be liberalised as and when licenses come up for renewal. Also, the government is unclear on the amount of spectrum beyond which one-time spectrum fees should be imposed. According to media reports, it is evaluating three options to impose one time spectrum fees viz. 1) on the entire spectrum held by an operator, 2) beyond start-up spectrum of 4.4 MHz for GSM and 2.5 MHz for CDMA and 3) beyond contractual spectrum of 6.2 MHz for GSM and 5 MHz for CDMA. However, the liberalisation would happen only after the operator pays the auction discovered price of the spectrum it holds.

Valuation summary - Bharti Airtel

P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) FY11 19.6 26.4 8.9 2.4 12.4 8.6 FY12 27.8 37.5 7.8 2.3 8.4 8.4 FY13E 19.1 25.7 6.5 2.1 11.0 10.4 FY14E 13.7 18.5 5.4 1.8 13.4 12.5

Valuation summary - Reliance Communication

P/E Target P/E EV / EBITDA Price /BV RoNW (%) RoCE (%) FY11 9.9 11.0 5.6 0.3 3.3 2.4 FY12 14.3 16.0 8.8 0.4 2.9 2.3 FY13E 26.0 29.1 8.1 0.4 1.6 2.7 FY14E 14.6 16.3 7.2 0.4 2.8 3.3

Valuation summary - Idea Cellular

P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) FY11 28.5 31.3 10.0 2.1 7.3 5.5 FY12E 35.5 38.9 7.6 2.0 5.6 8.0 FY13E 21.0 23.0 5.8 1.8 8.6 10.8 FY14E 13.4 14.6 4.7 1.6 11.9 14.2

Price movement (Stock vs. Nifty)

6,000 5,000 4,000 3,000 2,000 1,000 Jul-11 Bharti Oct-11 Jan-12 RCom Apr-12 Idea 510 410 310 210 110 10 Jun-12 Nifty (L.H.S)

Valuation
Until further clarity emerges on the situation, we rate Bharti and Idea (due to a sharp correction in the stock) as BUY and RCom as HOLD in spite of the correction in the stock, due to higher sensitivity to regulatory risks. Exhibit 1: Valuation Ratios
Company Bharti Airtel Idea Cellular RCom Target Price 420 85 67 Rating Buy Buy Hold EPS (|) FY13E FY14E 16.3 22.7 3.7 5.8 2.5 4.4 PE FY13E 18.7 20.1 25.4 FY14E 13.4 12.8 14.2 EV/EBITDA FY13E FY14E 6.4 5.3 5.6 4.5 8.0 7.2

Analysts name
Karan Mittal karan.mittal@icicisecurities.com Anil Shenoy anil.shenoy@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

To make matters worserefarming!!! The EGoM has favoured refarming of spectrum in the 800/900 MHz, which would be a huge blow to the incumbents. Commerce Minister Anand Sharma has also criticised Trai for its recommendations on refarming as it would lead to an investment of ~ | 100,000 crore becoming redundant. A final decision on refarming is also awaited. The impact If existing operators are required to pay for all the spectrum they hold for the remaining period of their licenses, Bharti, Idea and RCom would witness a financial outgo of | 11404.4 crore, | 9910.6 crore and | 21958.0 crore, respectively, at the recommended reserve price. However, AUSPI has protested against charging the operators for the remaining period of their licenses as it would be unfair to dual tech operators, whose licenses are relatively new when compared to that of incumbent GSM operators. It does appear though that dual tech players are at a disadvantage as they have to pay a higher amount for retaining their spectrum should the one-time license fees be charged. However, though it is unclear, we feel that even though existing GSM operators would pay a lower amount as one-time licenses fees, they will have to pay a higher amount to renew their licenses at the auction discovered price once their licenses start hitting the expiration date. To create a level playing ground for new operators against incumbents, DoT is also evaluating giving an option to operators to pay for the licenses up front for the next 20 years, which would lead to Bharti, Idea and RCom witnessing a financial outgo of | 48253.1 crore, | 30263.0 crore and | 52443.2 crore, respectively, at the recommended reserve price. Exhibit 2: Bharti All Spectrum Charged
Bharti Current Spectrum Total 900 1800 MHz MHz MHz 10.0 8.0 2 9.2 0.0 9.2 8.0 6.2 1.8 8.2 0.0 8.2 6.2 0.0 6.2 10.0 7.8 2.2 10.0 7.8 2.2 9.2 6.2 3 6.2 0.0 6.2 7.8 7.8 0 6.2 0.0 6.2 6.2 6.2 0 7.2 6.2 1 8.2 6.2 2 8.0 0.0 8 6.2 4.4 1.8 6.2 6.2 0 9.2 6.2 3 8.0 6.2 1.8 6.2 1.8 4.4 6.2 4.4 1.8 6.2 6.2 0 168.8 97.8 71 Reserve Price ( As per Trai April Reco.) 900 1800 | crore | crore 1434.5 717.3 1404.3 702.1 235.4 117.7 544.0 272.0 465.4 232.7 593.9 296.9 683.3 341.6 633.6 316.8 135.2 67.6 139.3 69.6 96.3 48.1 222.3 111.2 157.7 78.8 138.8 69.4 111.7 55.9 53.5 26.7 16.1 8.1 88.0 44.0 42.0 21.0 17.9 9.0 18.3 9.2 13.1 6.6 7244.4 3622.2 Spectrum One time Financial Outgo for validating Renewal License Date Fees spectrum for 20 years 900 1800 Total | crore | crore | crore | crore 11476.2 1434.5 12910.7 FY15 1291.1 0.0 6459.7 6459.7 FY22 2906.9 1459.4 211.8 1671.2 FY15 167.1 0.0 2230.3 2230.3 FY22 1003.6 0.0 1442.7 1442.7 FY22 649.2 4632.1 653.2 5285.4 FY16 792.8 5329.6 751.6 6081.2 FY16 912.2 3928.1 950.3 4878.4 FY16 731.8 0.0 419.0 419.0 FY22 188.5 1086.2 0.0 1086.2 FY16 162.9 0.0 298.5 298.5 FY22 134.3 1378.4 0.0 1378.4 FY22 620.3 977.5 78.8 1056.3 FY24 581.0 860.8 138.8 999.6 FY17 199.9 0.0 447.0 447.0 FY22 201.1 235.3 48.1 283.4 FY24 155.9 99.8 0.0 99.8 FY16 15.0 545.5 132.0 677.4 FY24 372.6 260.2 37.8 297.9 FY24 163.9 32.3 39.5 71.8 FY26 46.6 80.5 16.5 97.0 FY26 63.0 81.2 0.0 81.2 FY24 44.7 32463.0 15790.1 48253.1 11404.4

Bharti would witness an outgo of | 11404.4 crore if onetime license fees is imposed on its existing spectrum for the remaining period of its license. However, if the company chooses to pay for spectrum for 20 years up front, it would witness an outgo of | 48253.1 crore

Delhi Mumbai Kolkata Maharashtra Gujarat AP Karnataka Tamil Nadu Kerala Punjab Haryana U.P (West) U.P (East) Rajasthan M.P West Bengal HP Bihar Orissa Assam North East J&K Total

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Exhibit 3: Idea All Spectrum Charged

Idea Current Spectrum Total 900 1800 MHz MHz MHz 8.0 0.0 8.0 4.4 0.0 4.4 4.4 0.0 4.4 9.8 7.8 2.0 6.2 6.2 0.0 8.0 6.2 1.8 4.4 0.0 4.4 4.4 0.0 4.4 8.0 6.2 1.8 4.4 0.0 4.4 6.2 6.2 0.0 8.0 6.2 1.8 6.2 0.0 6.2 6.2 6.2 0.0 8.0 6.2 1.8 4.4 0.0 4.4 4.4 0.0 4.4 4.4 0.0 4.4 4.4 0.0 4.4 4.4 0.0 4.4 4.4 0.0 4.4 4.4 0.0 4.4 127.4 51.2 76.2 Reserve Price ( As per Trai April Reco.) 900 1800 | crore | crore 1434.5 717.3 1404.3 702.1 235.4 117.7 544.0 272.0 465.4 232.7 593.9 296.9 683.3 341.6 633.6 316.8 135.2 67.6 139.3 69.6 96.3 48.1 222.3 111.2 157.7 78.8 138.8 69.4 111.7 55.9 53.5 26.7 16.1 8.1 88.0 44.0 42.0 21.0 17.9 9.0 18.3 9.2 13.1 6.6 7244.4 3622.2 Spectrum One time Financial Outgo for validating Renewal License Date Fees spectrum for 20 years 900 1800 Total | crore | crore | crore | crore 0.0 5738.1 5738.1 FY22 2582.1 0.0 3089.4 3089.4 FY27 2162.6 0.0 517.8 517.8 FY28 388.4 4243.0 544.0 4787.0 FY16 718.1 2885.4 0.0 2885.4 FY16 432.8 3681.9 534.5 4216.4 FY16 632.5 0.0 1503.2 1503.2 FY17 300.6 0.0 1393.8 1393.8 FY28 1045.4 838.0 121.6 959.6 FY16 143.9 0.0 306.4 306.4 FY17 61.3 596.9 0.0 596.9 FY16 89.5 1378.4 200.1 1578.5 FY16 236.8 0.0 488.7 488.7 FY22 219.9 860.8 0.0 860.8 FY22 387.4 692.8 100.6 793.4 FY16 119.0 0.0 117.7 117.7 FY28 88.2 0.0 35.4 35.4 FY22 15.9 0.0 193.6 193.6 FY27 135.5 0.0 92.3 92.3 FY28 69.2 0.0 39.5 39.5 FY28 29.6 0.0 40.3 40.3 FY28 30.2 0.0 28.8 28.8 FY28 21.6 15177.2 15085.7 30263.0 9910.6

Idea would witness an outgo of | 9910.6 crore if a onetime license fee is imposed on its existing spectrum for the remaining period of its license. If the company chooses to pay for spectrum for 20 years up front, it would witness an outgo of | 30263.0 crore

Delhi Mumbai Kolkata Maharashtra Gujarat AP Karnataka Tamil Nadu Kerala Punjab Haryana U.P (West) U.P (East) Rajasthan M.P West Bengal HP Bihar Orissa Assam North East J&K Total

Source: Company, ICICIdirect.com Research

Exhibit 4: RCom All Spectrum Charged

Rcom Current Spectrum (GSM) 900 1800 MHz MHz 0.0 4.4 0.0 4.4 0.0 6.2 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 0.0 4.4 6.2 0.0 4.4 1.8 6.2 0.0 6.2 1.8 6.2 0.0 4.4 1.8 6.2 0.0 0.0 4.4 39.8 73.2 Current Spectrum One time Spectrum Financial Outgo for validating spectrum for 20 Renewal License (CDMA) Date Fees years 800 900.0 1800.0 800.0 Total | crore | crore | crore | crore | crore MHz 5.0 0.0 3155.9 7172.6 10328.5 FY22 4647.8 5.0 0.0 3089.4 7021.4 10110.8 FY22 4549.9 5.0 0.0 729.7 1176.9 1906.6 FY22 858.0 5.0 0.0 1196.8 2719.9 3916.7 FY22 1762.5 3.8 0.0 1023.8 1745.2 2769.0 FY18 692.3 5.0 0.0 1306.5 2969.3 4275.8 FY22 1924.1 5.0 0.0 1503.2 3416.4 4919.6 FY22 2213.8 5.0 0.0 1393.8 3167.8 4561.6 FY22 2052.7 5.0 0.0 297.4 675.8 973.2 FY22 437.9 3.8 0.0 306.4 522.2 828.6 FY22 372.9 3.8 0.0 211.8 361.1 572.9 FY22 257.8 5.0 0.0 489.1 1111.6 1600.7 FY22 720.3 5.0 0.0 346.9 788.3 1135.2 FY22 510.8 3.8 0.0 305.4 520.7 826.1 FY22 371.7 5.0 692.8 0.0 558.7 1251.5 FY16 187.7 3.8 235.3 48.1 200.6 484.0 FY16 72.6 2.5 99.8 0.0 40.3 140.1 FY16 21.0 5.0 545.5 79.2 439.9 1064.6 FY16 159.7 2.5 111.2 0.0 44.9 156.1 FY16 23.4 2.5 80.5 16.5 45.8 142.7 FY16 21.4 3.8 260.2 0.0 157.4 417.5 FY16 62.6 2.5 0.0 28.8 32.8 61.6 FY25 36.9 92.5 2025.3 15528.7 34889.2 52443.2 21958.0

RCom would have to shell out the highest amount currently as it holds spectrum both in GSM and CDMA technology. RCom would be required to pay | 21958.0 crore if one-time license fees is imposed on its existing spectrum. If the company chooses to pay for spectrum for 20 years up front, it would witness an outgo of | 52443.2 crore

Delhi Mumbai Kolkata Maharashtra Gujarat AP Karnataka Tamil Nadu Kerala Punjab Haryana U.P (West) U.P (East) Rajasthan M.P West Bengal HP Bihar Assam North East Orissa J&K Total

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Exhibit 5: Vodafone - All spectrum charged

Vodafone Current Spectrum Total 900 1800 MHz MHz MHz 10 8 2 10 8 2 9.8 8 1.8 6.2 6.2 0 9.8 8 1.8 6.2 0 6.2 8 0 8 22.4 15.2 7.2 6.2 6.2 0 6.2 0 6.2 6.2 6.2 0 6.2 0 6.2 8.2 6.2 2 6.2 0 6.2 4.4 0 4.4 6.2 4.4 1.8 4.4 0 4.4 4.4 0 4.4 4.4 0 4.4 4.4 0 4.4 4.4 0 4.4 4.4 0.0 4.4 158.6 76.4 82.2 Reserve Price ( As per Trai April Reco.) 900 1800 | crore | crore 1434.5 717.3 1404.3 702.1 235.4 117.7 544.0 272.0 465.4 232.7 593.9 296.9 683.3 341.6 633.6 316.8 135.2 67.6 139.3 69.6 96.3 48.1 222.3 111.2 157.7 78.8 138.8 69.4 111.7 55.9 53.5 26.7 16.1 8.1 88.0 44.0 42.0 21.0 17.9 9.0 18.3 9.2 13.1 6.6 7244.4 3622.2 Spectrum One time Financial Outgo for validating Renewal License Date Fees spectrum for 20 years 900 1800 Total | crore | crore | crore | crore 11476.2 1434.5 12910.7 FY15 1291.1 11234.2 1404.3 12638.5 FY22 5687.3 1883.0 211.8 2094.9 FY15 209.5 3372.7 0.0 3372.7 FY16 505.9 3723.0 418.8 4141.9 FY16 621.3 0.0 1841.0 1841.0 FY22 828.4 0.0 2733.1 2733.1 FY22 1229.9 9630.1 2280.8 11910.9 FY16 1786.6 838.0 0.0 838.0 FY16 125.7 0.0 431.7 431.7 FY22 194.3 596.9 0.0 596.9 FY16 89.5 0.0 689.2 689.2 FY24 379.1 977.5 157.7 1135.2 FY16 170.3 0.0 430.4 430.4 FY16 64.6 0.0 245.8 245.8 FY27 172.1 235.3 48.1 283.4 FY24 155.9 0.0 35.4 35.4 FY27 24.8 0.0 193.6 193.6 FY27 135.5 0.0 92.3 92.3 FY27 64.6 0.0 39.5 39.5 FY27 27.6 0.0 40.3 40.3 FY27 28.2 0.0 28.8 28.8 FY27 20.2 43967.0 12757.1 56724.1 13812.3

Vodafone would witness an outgo of | 13812.3 crore if a one time license fee is imposed on its existing spectrum and | 56724.1 crore for renewing the spectrum license for the next 20 years

Delhi Mumbai Kolkata Maharashtra Gujarat AP Karnataka Tamil Nadu Kerala Punjab Haryana U.P (West) U.P (East) Rajasthan M.P West Bengal HP Bihar Orissa Assam North East J&K Total

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Outlook
The industry has been in a state of flux owing to series of ambiguous policy recommendations and announcements by Trai and DoT. With different stakeholders having varied expectations from the new telecom policy, it may be difficult to find an amicable solution to the current spectrum row. While the underlying objective of the telecom ministry and regulatory authority is to facilitate industry growth, it is driven by the misplaced principle of revenue maximisation. This has resulted in setting up reserve prices very high, which, in principle, may imply high revenue from spectrum auction. However, in our view, it ignores the possibility of low participation in the proposed auction. Moreover, even if the auction is successful at the recommended reserve price, the industrys ability to offer affordable services and continue on a growth trajectory would be compromised. This would further dent the government revenues, which it gets as revenue share and various taxes from the industry. The stocks have been marred by regulatory upheaval and may remain subdued in the immediate future. We recommend that our clients stick to stocks with strong fundamentals. We rate Bharti Airtel as BUY with a target price of | 420. The company is past its peak capex cycle and on a consolidated level would be generating free cash flow in excess of | 10000 crore each year, which would be used to repay the debt. Led by an improving operational performance and reduction in interest outgo on account of debt repayment, we expect the EPS to double to | 22.7 by FY14E from FY12 EPS of | 11.2. The company is the fastest growing domestic player in the industry and has gained the maximum revenue share in the past few years. The company is expected to post a 16.6% revenue CAGR and 62.9% PAT CAGR from FY12-14E. Reducing network rollout intensity would also help the margins, going forward. Using the DCF methodology and assuming revenue CAGR of 10.5% over FY1220E and terminal growth of 3% thereon, we have arrived at a target price of | 85 for the company. We rate the stock as BUY. RCom has been struggling with weak KPIs and lower active subscribers as compared to its peers. Also, the huge debt on its books has prompted the company to reduce its capex guidance to | 1500 crore, which is way below industry standards and raises concerns on growth. We expect PAT to decline at a CAGR of 0.9% from FY12-14E. According to media sources, DoT is currently seeking Telecom Minister Kapil Sibals approval to charge a penalty on RCom of | 600 crore (~65% of FY12 PAT) for breaching shared mobile infrastructure regulations. We have further reduced our target price for the stock due to high sensitivity to regulatory risks. Using the DCF methodology and assuming 5.6% CAGR in revenue over FY12-20E and terminal growth rate of 3%, we have arrived at a target price of | 67. We rate the stock as HOLD.

ICICI Securities Ltd | Retail Equity Research

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ICICIdirect.com coverage universe (Telecom Service Providers)

Bharti Airtel Idirect Code BHATE CMP Target % Upside 305 420 37.8% FY11 FY12 FY13E FY14E FY11 FY12 FY13E FY14E FY11 FY12E FY13E FY14E FY10 FY11 FY12E FY13E Sales (| Cr) 59467.2 71450.8 80773.9 88828.4 22430.4 19475.4 21440.5 22649.3 15438.4 19541.2 23682.2 26561.7 2098.3 2303.1 2488.4 2489.3 EPS (|) 15.9 11.2 16.3 22.7 6.5 4.5 2.5 4.4 2.7 2.2 3.7 5.8 -1.7 0.4 -2.7 -2.5 PE (x) 19.1 27.2 18.7 13.4 9.6 14.0 25.4 14.2 27.3 33.9 20.1 12.8 NA 33.5 NA NA EV/EBITDA (x) 8.8 7.6 6.4 5.3 5.6 8.7 8.0 7.2 9.7 7.4 5.6 4.5 17.1 24.1 15.4 13.3 RoNW (%) 12.4 8.4 11.0 13.4 3.3 2.9 1.6 2.8 7.3 5.6 8.6 11.9 -12.8 3.2 -20.9 -19.5 RoCE (%) 8.6 8.4 10.4 12.5 2.4 2.3 2.7 3.3 5.5 8.0 10.8 14.2 -2.8 -6.4 -0.2 0.6

MCap (| Cr) RCOM Idirect Code

115,736 RELCOM

MCap (| Cr) Idea Idirect Code

12,952 IDECEL

CMP Target % Upside

63 67 7.0%

MCap (| Cr) TTML Idirect Code

24,527 HUGTEL

CMP Target % Upside

74 85 14.5%

MCap (| Cr)

2,685

CMP Target % Upside

14 12 -14.4%

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Karan Mittal MBA, Anil Shenoy MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
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ICICI Securities Ltd | Retail Equity Research

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