Asia India
Telecommunications
27 February 2009
India Telecom Sector
Challenge of the rural-urban
divide (Revised)
Srinivas Rao
Research Analyst
(91) 22 6658 4210
srini.rao@db.com
Amyn Pirani
Research Associate
(91) 22 6658 4355
amyn.pirani@db.com
Anup Kulkarni
Research Associate
(91) 22 6658 4265
anup.kulkarni@db.com
Fundamental, Industry, Thematic, Thought-leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T for investors seeking differentiated ideas. India's low telecom
penetration is lulling investors into believing that there is significant sector-wide
growth potential. However, this masks the massive gap between urban (70%) and
rural (9%) teledensity. But contrary to expectations, expanding into rural areas will
not generate excess stock returns for investors.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
Bharti Airtel Limited (BRTI.BO),INR651.80 Hold
Companies featured
Bharti Airtel Limited (BRTI.BO),INR651.80 Hold
2008A 2009E 2010E
P/E (x) 24.9 13.4 11.9
EV/EBITDA (x) 15.1 8.3 7.2
Price/book (x) 7.2 4.0 3.0
Idea Cellular Limited (IDEA.BO),INR48.80 Hold
2008A 2009E 2010E
P/E (x) 32.2 21.0 15.5
EV/EBITDA (x) 16.6 5.9 5.3
Price/book (x) 7.6 1.0 0.9
OnMobile (ONMO.BO),INR228.25 Buy
2008A 2009E 2010E
P/E (x) 50.3 15.9 13.0
EV/EBITDA (x) 24.6 7.6 5.2
Price/book (x) 5.1 1.9 1.6
Reliance Comm. (RLCM.BO),INR158.90 Sell
2008A 2009E 2010E
P/E (x) 25.9 7.6 7.4
EV/EBITDA (x) 17.2 6.1 5.5
Price/book (x) 3.6 1.0 0.8
This report changes ratings, price
targets, and/or estimates for several
companies under coverage. For a
detailed listing of these changes, see Fig
1 on page 4.
Fundamental: Indian wireless enters a lower revenue growth trajectory;
500m subs an elusive target
We see Indian wireless revenue CAGR dropping to 13% in FY13 from 70%
achieved during the last five years. Subscriber growth should fall to 17% p.a. over
the next five years from 82% in FY03-08. On our analysis using three different
methodologies, subscriber base should total only 460-500m by March 2011. In our
view, a cross-country comparison of nominal mobile tariffs is meaningless; what
matters is a global comparison of ARPU relative to GDP per capita. On this count,
India’s ARPU (c$7.5) is relatively high and will likely fall to $4-5 over five years.
Industry: Competition will depress margins and returns
Competition and a maturing industry lifecycle will accelerate the fall in tariffs. This
would alter the revenue growth trajectory and force operators to move down the
P&L curve. Cost control rather than revenue growth will become a key profit
driver. The first sign of this is already evident in the start-up of shared-passive
infrastructure companies that target network opex and capex savings.
Thematic: India’s urban-rural divide will constrain sector growth
A rising share of expenditure (3.2% in 2008 vs. 1.5% in 2002) and galloping urban
teledensity (70% currently vs. 12% in 2002) have been driving sector growth.
Urban India generates 95% of sector revenues. The next phase of telecom growth
will encounter the economic constrains of rural India – lower disposable incomes,
less access to electricity and larger household size
Thought-leading: India unlikely to emulate China
Lower urbanisation (30% vs. 45% for China) and access to electricity in rural areas
(56% vs. 100% in China) mean that India is unlikely to tread China’s path of
subscriber additions. Deceleration in sector growth will significantly impact stock
returns – sector leaders such as Bharti will likely have ‘bouts of outperformance’
rather than the sustained outperformance seen in the past. From a portfolio
perspective, we advocate a tactical approach rather than a buy and hold strategy.
Downgrade Bharti and Idea to Hold, RCOM to Sell; retain Buy on OnMobile
We cut our EPS estimates for all Indian telecom companies. Our target prices for
Bharti (TP Rs700) and RCOM (TP Rs138) are significantly below consensus.
This report amends the wrong ratings in the tables on the right-hand column
of this page in the previous version.

Table of Contents
Stock recommendations and pair trade ideas................................ 4
Executive summary ........................................................................... 6
The hyper-growth phase of Indian wireless is behind us ..........................................................6
Indian wireless has been a story of urban consumption...........................................................6
India is not the next China.........................................................................................................7
India ARPU – not low enough relative to per capita GDP .........................................................8
Industry margins and profitability – likely to trend down...........................................................9
Valuation: Need for a change in perspective...........................................................................10
Risks ......................................................................................................................................13
Indian Telecom: Past and the future – A ready reckoner.........................................................14
India Telecom: A look back............................................................. 15
Sector performance does not correlate with stock performance ...........................................15
Brace yourself for ‘normal’ growth ................................................ 17
Slowdown in subscriber growth should restrain revenue growth ..........................................17
Indian Telecom: A story of urban consumption ......................................................................18
Rural India: The next market for Indian wireless albeit a tougher one.....................................18
India is not the next China.............................................................. 21
India and China: The twain shall not converge........................................................................21
ARPU: Low… but not low enough ................................................. 25
APRU relative to GDP – The right metric of comparison.........................................................25
Tariffs: China lower than India.................................................................................................26
Minutes of usage – How much is too much? .........................................................................30
Subscriber growth: The 500m dream may remain elusive .......... 31
Multiple connections do not equal multiple subscribers.........................................................31
Subscriber forecast – Three methods, but the same answer .................................................31
Method 1: Household penetration analysis.............................................................................32
Method 2: Urban-rural teledensity analysis gives a similar range ...........................................33
Method 3: Circle-wise analysis − Going granular doesn’t help either .....................................34
What are other hurdles?..........................................................................................................35
Margins and profitability trending down...................................... 37
Pakistan: A case study in impact of competition on operator profitability ..............................37
The Indian scenario .................................................................................................................38
Infrastructure sharing – A shift in focus from revenues to cost control ..................................39
The abundance of capital and the risk of misallocation...........................................................40
Regulatory changes – a known unknown................................................................................41
Valuation: Outperformance a thing of the past ............................ 42
Bharti has provided a huge alpha in the past − but can it continue to do the same in future?42
Bharti – A change in investment theme and valuation perspective.........................................43
Hindustan Unilever: The inevitable de-rating and underperformance......................................45
Infosys: Even the best companies can underperform.............................................................47
What does this mean for Bharti? ............................................................................................49
Indian telecom – Valuation comparison ..................................................................................50

Table of Contents (Cont'd)
Indian telecom: Operator data ....................................................... 52
Bharti Airtel Limited........................................................................ 57
Reliance Comm................................................................................ 79
Idea Cellular Limited ..................................................................... 101
OnMobile........................................................................................ 115
Appendix A: Financials.................................................................. 130
Closing prices