Wireless Telco Services
Read beyond the headlines
While monthly subs additions continue to grow, we expect ARPUs to come under
further pressure from growing price competition and declining demand elasticity
as macro economic factors affect usage. This, plus an increase in regulatory
costs, could affect margins. Buy Bharti for its diverse business mix; Sell Idea.
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
Bharti Airtel¹ BRTI.BO Mar 2009 Buy Rs663.55 Rs760.00 44.70 14.80
Idea Cellular¹ IDEA.BO Mar 2009 Sell Rs45.15 Rs36.00 3.08 14.70
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Source: Company data, ABN AMRO forecasts
Reported subscriber additions growing ahead of estimates…
The Indian mobile subscriber base grew 33% over 9M09. We now estimate 379.1m
subscribers by March 2009, 5% more than our earlier estimates, and raise our estimates for
FY10-15 by 5% on expected continued momentum. However, we believe numbers are now
more an indicator of SIM card sales than subscriber additions given high churn (we expect a
pick-up post launches by new operators) and growing share of lifetime validity plans (that
leads to double-counting of a subscriber).
…but the disconnect between subscriber additions and players’ revenues is growing
We expect ARPUs to decline faster as average revenue per minute (ARPM) comes under
pressure from increasing price competition and usage minutes remain subdued given the
current macro-economic environment. Note, demand elasticity is again on a declining trend
(-16bp in 3Q09 for Bharti and Idea combined) as is the share of higher-margin non-voice
business (down 45bp in fiscal 3Q09). We cut our ARPU estimates by 14% and 19% for FY10
and FY11, respectively, assuming 15% and 12% declines in ARPM.
Declining ARPUs and rising network and regulatory costs to affect profitability
Increased competition – and the possibility of MNP introduction – should keep network
operating costs high. Further, increased spectrum usage charges (up 1-2%) will be effective
from 4Q09 and the imposition of a one-time charge for operators holding 2G spectrum in
excess of 6.2 MHz is under consideration. DoT is also considering a cut in termination fees
but that would likely get passed on to subscribers and, hence, affect ARPM. We forecast an
85-360bp drop in mobile business margins for Bharti and Idea in FY10.
Bharti remains our only Buy given its diverse business mix; retain Sell on Idea
We retain Bharti as a Buy but lower our FY09-12F EPS CAGR by 1.4%. Our target price
values the stock at 14.5x FY10F EPS, a 23% premium to the Sensex. We believe our nearterm
ARPU assumptions are conservative; however, a slowdown in monthly subs adds is a
key risk to our EPS and valuations. Idea remains a Sell owing to medium-term margin
pressures from new circle launches and its higher vulnerability (than Bharti) to price
competition. New third-party business flow to Indus Towers could provide upside to our
forecasts for both Bharti and Idea. While 3G auction timelines are delayed and we see little
possibility of auction at least until end-2009, increased regulatory costs – 3G spectrum
charges are linked to total revenue – and irrational bidding are potential downside risks.

Contents
Read beyond the headlines 3
While monthly subscriber addition (rather SIM card sales) numbers remain on track
– we expect a pick-up in near-term – we see ARPUs and players’ profitability
coming under pressure from increasing price competition and subdued usage.
3
GSM subs adds: look beyond numbers 8
January data shows GSM net adds grew 15% mom to 9.3m, driven by a 246%
mom jump in BSNL's SIM card sales in Punjab, even as Idea (including Spice) grew
34%. Bharti's net adds share fell 2.7% mom as its market share in Mumbai
contracted 75bp mom to 23.5%.
8
Key sensitivities 12
Company profiles 13
Bharti Airtel 14
Idea Cellular 21
2