Fighting over a shrinking wallet
We explore how inflation may affect telco usage. We establish that revenue
growth may be curtailed if inflation spirals, thereby limiting disposable
income on non-essential items such as telecommunications.
Inflation could hurt if it worsens and savings rate does not
decline
The inflation pinch
Indonesian inflation has seen a significant rise over the past year as a result of rising
oil prices and other commodity prices. This has been a persistent and overhanging
theme on the market (see Indonesia Strategy Flash: More trouble ahead?, of 1 April
2008). The problem with such high inflation levels is that it may affect spending on
less essential items such as telecommunications. Based on the latest available
statistical data from the National Socio Economic Survey, 53% of per capita
expenditure is on food products while another 23% of per capita expenditure is on
basic shelter-related items such as housing and utilities. Services, under which
telecommunications is classified, accounts for about 15% of total spending. However,
consumers are likely to be less price-elastic on basic needs such as food and shelter,
in our view. This means they may need to reduce spending on less essential items
such as telecommunications in order to meet basic needs should inflation levels spiral
further.

I N D U S T R Y D Y N A M I C S
Fighting over a shrinking wallet 3
We explore how inflation may affect telco usage. We establish that revenue
growth may be curtailed if inflation spirals, thereby limiting disposable income on
non-essential items such as telecommunications.
How to play high inflation 8
As inflation takes a bite out of the wallet, we believe consumers will focus more on
value propositions by the operators. Fixed wireless tariffs remains the cheapest
even with GSM price cuts, making it attractive.
Competitive heat: smoke not fire 9
Concern on the competitive environment has risen due to recent price promotions.
We think that these cuts are not as severe as what the press plays it to be and
that demand elasticity would sustain revenue trends.
Valuations remain attractive 12
While we see potential market turbulence affecting telco share price performance,
we continue to see value over the longer term. We maintain our Buy call on
Telkom and Bakrie, and our Hold call on Indosat.
C O M P A N Y P R O F I L E S
Company Profiles 15
PT Telekomunikasi Indonesia 16
PT Indosat 20
Bakrie Telecom 24