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Indian Telecom Sector:MTR cut higher than expected but removes a major event risk

类型:投资策略  机构:德意志银行   研究员:德意志银行研究所  日期:2017-10-11
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Termination rate cut by 57% to INR 0.06/min from 1st Oct/17and zero fromJan/2020

    The cut is higher than our expectation of INR0.10/min. The move benefitsReliance Jio as the entrant and negative for incumbents (Bharti, Idea andVodafone).The estimated EBIDTA impact based on the new rate is around 5%for Bharti (consolidated) and 10% for Idea respectively. Based on pastprecedents, it is likely that the incumbents would mount a legal challenge tothe MTR cut though the probability of any changes in the recommendation isfairly low (based on outcome of previous cases).

    Short term impact is material, but NPV impact is more muted

    The MTR cut has assumed materiality in India due to its unique set ofcircumstances. The entry of Reliance Jio with unlimited voice plans aggressivelaunch pricing created significant traffic asymmetry and reduced the revenuetable of the sector. Thus the cut in MTR will magnify the impact onincumbents’ EBITDA which has already fallen c20% as they have tacticallyresponded to Jio’s offers. Nevertheless a progressive increase in Jio’ssubscriber share and normalization of its pricing will reduce the trafficasymmetry and hence the impact of the rate cut.

    Retain our ratings, minimal event risks in the medium term

    The potential cut in MTR was a significant overhang on the stock prices ofBharti and Idea. However the announcement also resolves one of the lastremaining event risks for the companies, especially Bharti. While the regulatorhas embarked on a process to lay the ground for a new auction, it is unlikely tobe completed over the next 18months. We believe the probability of asuccessful auction is fairly low unless the reserve prices are significantlyreduced. We maintain that the gains from sector consolidation outweigh thecompetitive impact of Jio’s entry. Bharti (BUY, Target Price Rs 480), Idea (BUY,Target Price Rs 120).

    Regulator makes change in the methodology to estimate the termination rate

    TRAI has used LRIC methodology, which disregards spectrum costs tocalculate the new termination rate. We note that the previous rate of INR0.14,prescribed from Mar/2015was based on LRIC+ methodology which includedthe impact of spectrum costs. Further, the regulator has used subscriber datafor Dec/2016, traffic data for 4QCY16and busy hour data for 1-7th Feb/2017asa basis for calculation of the MTR. We note that this period covers the ‘freelaunch offer’ from Jio which would have distorted these metrics.

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