The Indian telecom market may have broken into a phase of severe
price competition. The initial stage of this round of competition is likely to
be led by a significant decline in RPMs and margin compression, while the
endgame would be decided by regulatory flexibility.
■ We expect a 33-35% RPM decline and 600-720 bp erosion in mobile
EBITDA margins from FY3/09 through FY3/12. Despite their protests to the
contrary, the incumbent GSM players – Bharti, Vodafone and Idea – would be
sucked into a price war as they try to protect their market shares. The bestcase
scenario is stabilisation by the end of 2010, but this is not certain.
■ Severe erosion in profitability should lead to EPS declines in FY3/11 for
all operators. While Bharti’s scale could allow it to retain a respectable ROE
of 18%-plus, RCOM’s and Idea’s should be sub-10%.
■ Despite a sharp share price correction in recent weeks, we believe the
risk-reward remains unfavourable. Negative news flow, weak earnings and
consensus downgrades could continue for the next six to 12 months.
Valuations do not provide support due to YoY declines in EPS and falling
ROEs. Stocks need to fall 15-20% below our target prices (30-40%
downside from current levels) before we turn buyers. RCOM and Idea are
most vulnerable, while Bharti is also at significant risk due to its overweight
position in most portfolios.