Indian Telecom:Bharti gets to pole position in the consolidation race

Bharti buys Tata’s mobile business, sector consolidation largely over now.

    Bharti will take over the customers and assets including spectrum of TataTeleservices’ consumer mobile business in a debt-free/cash-free deal. Bhartiwould partially assume Tata’s deferred spectrum liability of around Rs 75bnand some Tata employees post an optimization exercise. The deal will addaround 35.4m active subs and 5% rev-share to Bharti (current 271.5mn subs,32.5% rev-share) and bolsters Bharti spectrum portfolio. Coupled with itsrecent acquisition of Telenor India (2.5%), Bharti is likely to reach a rev-share of39-40% and possess a market-leading spectrum portfolio. Our target price isDCF-based. At the current price, Bharti’s India business trades at 6.5xassuming 5x FY19E EV/EBITDA for Africa operations.

    Don’t miss the forest for the trees, Reiterate Bharti as BUY (TP Rs 480).

    At end-1QFY18, we estimate the mobile rev-shares of other operators as:Vodafone India (22.5%), Idea (20%), RCOM (4%), Aircel (5%), Jio (2.5%) andBSNL/MTNL (5%). We reiterate our central thesis on Bharti – the benefits ofsector consolidation will far outweigh the competitive impact of Jio’s entry.

    Jio’s entry precipitated exits by the weaker players and a merger of smallerincumbents (Idea & Vodafone). Since Jio’s entry, incumbents have seen areduction of 30-35% in EBITDA and 800-1000 bps in margins as they havetactically matched Jio’s tariffs. Bharti’s reported financials should remain softover the next 6-12 months due to the additional impact of the termination ratecut from 1/Oct/17. However we would urge investors to look at Bharti’sstrengthening competitive position rather than near-term financials. It hasleveraged the current environment to the maximum by acquiring spectrum andcustomers of marginal players at minimal enterprise value. We believe Bhartihas the cost position and spectrum portfolio to defend its margins and cashflows against Jio. Please see our recent note dated 27/Aug “Sectorconsolidation almost done; Bharti poised for rerating.”.

    Sector growth (FY17-21E ) at 8.4% p.a, Jio can’t risk a lower revenue tableWe expect growth will be underpinned by 3.4% subscriber and 4% ARPUgrowth as Jio scales down its offers, leading to a normalization of pricing. Weforecast voice and data revenues to grow at -1% and 26.8%. A contraction ofthe sector revenue-base is a significant risk for Jio and it is unlikely in our viewto persist with any pricing strategy which reduces market size.