India Telecoms Sector: Data ... Is Here and Now!

23 May 2011 Asia Pacific Equity Research Telecommunication Services
India Telecoms Sector

Research Analysts Sunil Tirumalai 91 22 6777 3714 sunil.tirumalai@credit-suisse.com
THEME
Data ... is here and now!

Figure 1: Expect data to drive over half of incremental revenues over next three years
R s bn 2,500 2,000 1,500 1,000 500 F Y 3 /0 8 F Y 3 /1 1 F Y 3 /1 4 I n d i a n te l e c o m i n d u s t r y r e v e n u e s O v e r F Y 1 1 - F Y 1 4 , d a t a c o u l d c o n t r i b u te : 5 1 % o f i n c r e m e n t a l re ve n u e s 5 0 0 b p s to r e v e n u e C A G R D a ta V o ic e
Source: Company data, Credit Suisse estimates
On the verge of data revolution. We believe that in the current decade, data will transform the Indian telecom industry the way voice did in the previous decade. Over the next three years, data could more than double in size to a US$14 bn industry, contributing over half the incremental industry revenue and add 500 bp CAGR to an otherwise slowing voice industry. Recent experience from China and datapoints from India, which we analyse in this report, indicate to us that the data story is set to become a reality sooner than current investor expectations. Supply chain problems falling in place. We analyse the entire data access supply chain to identify critical areas of shortage that have so far prevented India from experiencing the Internet/data uptake seen in other parts of the world. Encouragingly, we see signs of easing in almost all these bottlenecks. As the 3G ecosystem develops, we expect all the missing parts to fall into place and trigger data uptake in India. Looking at the China experience and recent datapoints from India, we increase our near-term 3G estimates, leading to a 05% increase to the EPS of Bharti and Idea. Bharti/ Idea could benefit most. We see Bharti and Idea with their higher quality subscriber bases benefiting the most from the impending data revolution. Further, Bharti, with its integrated business model, can benefit from being present in all parts of the data access supply chain. While the companies have gained in recent months from the benign competitive environment in India, the coming quarters could see greater excitement in these stocks as data revenues start contributing materially to the overall business. Our new target prices imply 20% (Rs450) and 40% (Rs95) potential upside, respectively, for Bharti and Idea. We reiterate our OUTPERFORM rating on these stocks. We also look at a blue-sky valuation scenario for Bharti of Rs500 (implying 35% potential upside).
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, 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.
23 May 2011
Focus charts and table

Figure 2: Data contribution to Indian telecom industry revenues is unsustainably low
Non voiceas % of telecom industry revenues 60%
52% 50% 43%
Figure 3: Internet penetration in India is far behind world average

Worldwide internate usage penetration 100%
50% 40% 30% 20% 10% Japan Singapore
Shaded bars are EM telcos

41% 37 % 36% 33%
80% 60% 40%

18%
83% 81% 79% 78% 77%
69% 65%
33% 32% 29%
29% 12% 10% 10% 6%

Ind ia
20% 0%
UK SK ore a Ge rma n y Ja pa n US
US
Malaysia
UK
Korea
China
India
Fr anc e M a lays ia World C hin a Nig e ria World Ind one sia P ak a ve ra ge avera g e (ex-Ind ia)
Ke nya
Source: Company data, Telecom regulators, Credit Suisse estimates
Source: ITU, Credit Suisse estimates
Figure 4: History shows India can quickly adopt new technology
Figure 5: We see a number of bottlenecks in data supply chain easing (like terrestrial optic fibre bandwidth)
Tot al national bandwidth(GB)
60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000
Mobile penetration
600
C hin a
500
1 y ea r
2.3x increase in bandwidth over the last 12M
400 300
Ind ia 5 y ea r s
200 100
2001
2002
2003
2004
2005
2006
2007
20 08
2009
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Figure 6: China has shown the impact of data 84% of incremental revenues in past three years came from data
1,400 1,200 1,000 800 600 400 200 2 006 2007 2008 2009 2010 2011E 2012E 2013E 2014 E 201 5E 3G la unch Dat a acco unted for 84 % of in cremental revenues last 3 yrs RMB bn And expected to contribute 74% to next three yrs incr. 2007-2010 revenue CAGR: With Dat a: 6.4% Without Data: 1.4% 2010-2013 revenue CAGR: With Dat a: 7.3% Without Data: 2.9%
Figure 7: We expect India to follow suit. Data could add 500 bp to the industry revenue CAGR over three years
2,500,00 0 Rs mn ind ustry revenu es And e xpected t o co ntribu te 51% to next 3 yrs incr. reven ues Retail da ta D ata accou nted for 3 3% o f increme ntal re venu es last 3 yrs FY0 8-FY11 C AGR: With Da ta: 12 .4% Withou t Data: 10.1% FY1 1-FY14 C AGR: With Da ta: 13 .2% Withou t Data: 8.5% E nterprise data F ixed line d ata 3G launch Mobile da ta - dongle Mobile da ta - handse t F ixed line voice Mobile vo ice FY3 /08 FY3/0 9 FY3 /10 FY3/11 FY3/1 2 FY3/13 FY3/ 14
2,000,00 0
1,500,00 0
1,000,00 0
Wireless Data - large screen Wireless Data - small screen Wireless Voice Wireline Data Wireline Voice
500,00 0
Figure 8: Bharti changes to 3G estimates

Old Total 3G subs (mn) As % of total subs 3G ARPU 3G contribution to mobile EBITDA (%) Consol EPS (Rs) Stock fair value (Rs) Source: Company data, Credit Suisse estimates 5.6 2.8 79.6 1.6 26 418 12.3 5.6 78.8 2.4 34 20.2 8.6 78.1 4.4 42 8.9 4.5 119.5 4.4 26 448 New 25.2 11.5 94.6 5.8 36 42.0 17.9 74.9 8.5 43 % change 60.0 50.0 -0.4 7.2 103.9 20.0 3.0 108.3 -4.0 4.6 FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E
23 May 2011
Show me the data!

The data/broadband story in India has always remained just a nice story. While the telecom industry in the rest of the world obtains 35-50% revenues from non-voice services, India derives only 18% of sales from non-voice/ data services. We see a number of key factors of the data supply chain falling in place and believe India is on the verge of a data revolution. Data growth could help offset the slowdown in voice revenues for the industry, by adding 500 bps to revenue CAGR over the next three years. We believe Bharti and Idea could benefit most from the impending data revolution. Our target prices for these companies rise 9% and 12%, respectively, implying upside of 20% and 40% from current levels. We reiterate our OUTPERFORM ratings on these stocks. The data story is set to become a reality sooner than current investor expectations, in our view
Data to add 500 bp to industry CAGR

Encouragingly, China presents a recent emerging market example of how this could happen. Over the past three years, data contributed 84% incremental revenues and 500 bps to revenue CAGR for the Chinese telecom industry. While India is currently six years behind China in Internet penetration, history shows that the country can quickly catch up on new technology adoption. Further, we note that India launched 3G only two years after China. We believe that we are at the start of a similar data revolution in India, and expect data to add 500 bps to the industry revenue CAGR over the next three years offsetting slowing voice revenues. We see Bharti and Idea as best positioned to capture this opportunity. India has earlier displayed a potential to adopt new technologies quickly
The bottlenecks are easing

While the data potential of the Indian telecom market has always been appealing, we believe that it is only now that the right set of factors are falling in place to enable strong data uptake. This is not just about the launch of 3G services. We identify a number of supply constraints across the data value chain in India which we believe have hindered broadband/data growth in the country so far. Compared to the average Chinese Internet user, an Indian user has a third of international bandwidth access, faces 2x higher access tariffs, 5x higher device prices and has virtually nil locally relevant content. While these constraints are significant, we also see encouraging signs of improvement in some of them (especially over the past 12 months), and expect the rest to fall in place as the overall 3G ecosystem develops. Indians have long suffered from weak data access infrastructure now this is changing
Integrated players can benefit from entire value chain

Our current 3G estimates are quite conservative, going by Chinas experience and recent datapoints from India. We thus build in a stronger ramp-up in 3G near term, causing 3Gs contribution to mobile EBITDA to rise to 9-13% (from less than 5%) by FY3/14. Idea Cellular, being fully leveraged to the mobile business, is obviously more sensitive to these changes. However, we believe that integrated operators like Bharti can tap into even those parts of data supply chain that pure-play mobile firms cannot. Our changes lead to 0-5% EPS increases for Bharti and Idea over the next three years. While the benign competitive environment is helping incumbents, such as Bharti and Idea, to continue to consolidate their revenue market share, we believe that further upside from data is not being factored in by investors. We reiterate our OUTPERFORM ratings on Bharti and Idea. Bharti and Idea, with higher quality subscribers, could take headstart in data revenues
23 May 2011
Sector valuation table

Figure 9: Asian telecoms valuation summary
Close 20 May 11 AIS AXIATA Bakrie Bharti Airtel China Mobile DiGi Excelcom FarEasTone Globe Idea Cellular Indosat LGT Maxis M1 NTT DoCoMo PT Telkom RCOM SKT SmarTone StarHub TAC Taiwan Mobile Average Ticker ADVANC TB AXIATA MK BTEL IJ BHARTI IN 941 HK DIGI MK EXCL IJ 4904 TT GLO PM IDEA IN ISAT IJ 032640 KS MAXIS MK M1 SP 9437 JP TLKM IJ RCOM IN 017670 KS 315 HK STH SP DTAC TB 3045 TT Ccy Bt RM Rp INR HK$ RM Rp NT$ P INR Rp W RM S$ Rp INR W HK$ S$ Bt NT$ price 94.0 5.0 375.0 373.9 69.3 28.6 6,500.0 44.0 853.0 67.5 5,350.0 5,740.0 5.4 2.4 146,000.0 7,650.0 83.9 167,500.0 12.9 2.8 55.8 75.0 Mkt cap (US$ bn) Rating 9.2 13.9 1.3 31.5 178.7 7.4 6.5 5.7 2.6 4.7 3.4 2.7 13.4 1.8 78.3 17.6 3.8 12.5 1.7 3.8 4.4 9.9 N O U O N O O N O O Target 100.0 6.3 205.0 450.0 86.0 29.6 7,200.0 40.0 930.0 95.0 Norm. P/E (x) 11.3 14.3 255.6 14.5 9.2 17.0 14.0 17.0 13.2 15.4 24.3 7.0 17.4 13.4 11.8 12.0 6.3 7.6 14.6 15.2 13.6 15.2 12.2 10.6 12.8 218.5 10.5 9.1 16.0 12.2 16.2 12.3 10.1 14.2 6.4 17.2 12.5 11.5 11.1 4.9 7.2 12.4 14.2 15.9 14.6 11.3 EV/EBITDA (x) 5.4 6.8 8.9 7.9 3.5 8.6 6.1 5.5 4.9 6.4 5.1 3.2 10.2 7.4 3.7 5.5 5.2 3.8 8.9 8.2 4.9 10.8 4.9 5.3 6.1 8.3 6.2 3.2 8.2 5.4 5.3 4.6 5.1 4.3 2.8 10.1 7.0 3.5 5.1 4.2 3.5 7.2 7.8 5.2 10.4 4.5 P/B (x) 6.7 2.2 2.1 2.6 2.0 16.5 4.7 1.8 2.4 1.6 1.6 0.7 4.7 7.2 1.3 2.7 0.4 1.1 4.8 -472.9 1.9 3.3 -1.9 6.8 2.0 2.0 2.3 1.8 16.4 3.9 1.8 2.4 1.4 1.5 0.7 5.3 6.5 1.2 2.4 0.3 1.0 4.8 -224.6 1.9 3.2 0.2 price FY3/12E FY3/13E FY3/12E FY3/13E FY3/12E FY3/13E
O 7,900.0 N 6,600.0 O 6.1 N 2.7 N 150,000.0 O 9,750.0 N 120.0 O 201,000.0 U 12.0 U 2.3 N 50.0 O 69.0
Source: Bloomberg, Company data, Credit Suisse estimates
23 May 2011
Data to add 500 bp to industry CAGR

The data/broadband story in India has always remained only a nice story. While the telecom industry in the rest of the world obtains 35-50% of revenues from non-voice services, India derives only 18% of sales from non-voice/ data services. We believe these levels are not sustainable and expect a strong growth in data revenues for the sector. Encouragingly, China presents a recent emerging market example of how this could happen. Over the last three years, data contributed 84% incremental revenues and 500 bps to revenue CAGR for the China telecom industry. While India is currently six years behind China in Internet penetration, history shows that the country can quickly catch up on new technology adoption. Further, we note that India launched 3G only two years after China. We believe that we are at the start of similar data revolution in India, and expect data to add 500 bps to industry revenue CAGR over the next three years offsetting slowing voice revenues. We see Bharti and Idea as best positioned to capture this opportunity.
Data uptake in India is low by global standards

Globally, the telecom industry obtains only 50-65% of its revenue from plain voice services. The rest of revenues (35-50%) comes from non-voice services (SMS, retail and corporate data, Internet, VAS etc.). As seen in the Figure 10 below, this is true even of EMs like China and Malaysia. However, India seems an outlier with less than 18% of telecom industry revenues coming from non-voice services. This manifests in the form of low Internet/ broadband penetration. We believe this is an unsustainable position, and data revenues should start picking up, taking India closer to world averages especially given the recent launch of 3G services in the country.
Figure 10: Data contribution to Indian telecom industry revenues is unsustainably low
Non voice as % of telecom industry revenues 60%
52% 50% 43%
Globally, the telecom industry obtains 35-50% of its revenue from non-voice services. For India this is less than 18%
50% 40% 30% 20% 10% Japan Singapore

41% 37 % 36% 33%
18%
US
Malaysia
UK
Korea
China
India
Note: The non-voice revenues above includes enterprise/corporate data services Source: Company data, country telecom regulators, Credit Suisse estimates
Going deeper, across various indicators of data penetration, India lags the emerging world. Revenue contribution to both mobile and integrated telcos lower than world average Low data contribution to mobile revenues is well known before the launch of 3G services there was no real mechanism to offer a reasonable data experience to mobile subscribers.
23 May 2011
Figure 11: Indian telcos are yet to enjoy the data revolution of other emerging markets
Non-voice revenue s as % of sales for mobile operato rs 60% 50% 40% 30% 20% 10%
54% 42% 39% 34% 34%
Shaded bars a re EM telcos

31% 31% 28% 25% 21% 20% 19% 19%
15%
However, what is often missed is the low contribution of data to even integrated telcos. This implies low data penetration even into the enterprise/ corporate segments.
Figure 12: Traditional integrated telcos have 30-50% data revenues, but not in India
Non-voice revenues as % of sales for integrated telecom operators 60% 50% 40% 30% 20% 10% SingTel Optus Singapore Australia AT&T US Maxis PT Telkom China * Malaysia America Movil Bharti Airtel (exAfrica) BSNL
* The China data above is the cumulative of three operators China Mobile, China Unicom and China Telecom to obtain an overall integrated industry view. Source: Company data, Credit Suisse estimates
Low Internet/ broadband penetration Unlike the rapid uptake in mobile voice telephony by India in recent years (penetration 68%), the broadband industry remains a poor cousin of its mobile voice counterpart. Internet penetration is struggling to even reach 10% a third of the world average of 29%. In fact given its size India is actually helping pull down the world average by around 400 bps. Internet penetration in India is struggling to reach even 10%
So ftb an k( J M ax apa n is Ma ) la Vo y da sia fon eU Ve r iz K o Te lko n U ms S e C h l In d Vo ina o da Mo fon e G b ile er m an SK y Te Vo Am le co da fon e ric m a e EM M o (e vil M x-O ne In di a MT S in g ) ap Nor So e ut hA fric AI S Th a ail Bh and ar ti A ir t el
52 % 51% 47% 43% 33%

33% 2 9% 1 8% 1 6%
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Figure 13: Internet penetration in India is far behind the world average
Worldwide internate usage penetration 100% 80% 60% 40% 20% 0%

UK SKorea Germa ny Ja pan US France Malaysia World Chi na Nigeria W orld Ind onesia P ak a verage ave rage (ex-Ind ia) Kenya India
83% 81% 79% 78%
77% 69% 65%
33%
32%
29%
29% 12% 10% 10% 6%
Note: Based on ITUs definition of Internet user those having used Internet at least once Source: ITU, Internet Worldstats, TRAI, Credit Suisse estimates.
The contrast is even starker when we consider the broadband penetration.

Figure 14: Broadband is yet to take off in India
Broadband connections / 1 00 population 30% 29% 27% 22% 20% 21% 21% 21%
10%
9%
7% 0.7%
0%
SKorea US UK Japan Germany France China World average India
Source: ITU, Credit Suisse estimates
Chinese experience shows the surge can be quick

It has been a little over two years since China Mobile launched commercial 3G services in April 2009 (with other operators launching within the subsequent six months). We believe a close look at the progress of data revenue in China could provide a number of clues on the possible path ahead for India. We refer to experiences from China throughout the report at various points. Growth in non-voice revenues in China has been strong in recent years, with data contributing to over 84% of incremental industry revenues over the last three years. The contribution is significant even if we focus only on the wireless business with over 50% incremental revenues in recent years coming from data. Data revenues now account for 33% of sales for the China telecom industry (up 1,000 bps in three years). Data has contributed to over 84% of incremental telco revenues over last three years in China
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Figure 15: Data accounted for 84% incremental revenues over past three years for the China telecom industry
1,400 1,200 1,000 800 600 3G launch 400 200 2006 2007 2008 2 009 2010 2011E 2012E 201 3E 2014E 2015 E Wireless Da ta - large screen Wireless Da ta - small scree n Wireless Voice Wireline Data Wireline Voice Data accounted for 84% of incremental reve nues la st 3 yrs RMB bn And expected to contribute 74% to next three yrs incr. revenues 2007-2010 revenue CAGR: With Dat a: 6.4% Without Data: 1. 4% 2010-2013 revenue CAGR: With Dat a: 7.3% Without Data: 2. 9%
Figure 16: A chart similar to the above, focusing on the mobile industry alone
1,000 900 800 700 600 500 400 300 200 100 2 006 2007 2008 20 09 2010 2011 E 2012E 2013E 2014E 2015E 3G launch Wireless Dat a - large screen Wireless Dat a - small screen Wireless Voice Data accounted for 50% of incremental re venues last 3 yrs RM B bn And expected to contribut e 64% to next three yrs incr. re venues 2007-2 010 revenue CAGR: W it h Data: 11. 2% W it hou t Data: 7.7 % 2010-2 013 revenue CAGR: W it h Data: 10. 0% W it hou t Data: 5.6 %
India has shown it can catch up fast on new technology

As shown in Figure 17, India is at least six years behind China on Internet penetration.
23 May 2011
Figure 17: India is six years behind China on Internet penetration levels
35% 30% 25% 20% 15% 10% 5% 0% 1996 1997 1998 1999
Internet user penetration
China
India 6 years
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Worldbank Database Credit Suisse estimates
However, experience from the mobile penetration trend indicates India is capable of catching up quickly. The gap behind China in terms of mobile penetration shrunk from five years to one year between 2005 and 2009.
Figure 18: Despite late start, India caught up quickly with China on mobile penetration
Mobile uptake showed that India can catch up quickly on new technology adoption
60% 50% 40% 30% 20% 10% 0% 1996 1997 1998 1999 2000
Mobile penetration
China
1 year
India 5 years
2001
2002
2003
2004
2005
2006
2007
2008
2009
Note: The chart stops at 2009, as the penetration in India beyond this point is coloured by a surge in duplicate SIMs. Source: Company data, TRAI, Credit Suisse estimates
Importantly, we note that India is only two years behind China in the launch of 3G services. Further, a younger population in India (versus China) lends itself to a better adoption of new technologies.
Expect data to add 500 bp to the industrys CAGR over next three years
One could argue that the data revolution has already started in India in some way, with revenues from non-voice services contributing 33% to the industrys incremental revenues over the last three years (CS estimates). However, this is largely on the back of 2G nonvoice revenue streams like SMS and VAS. With the launch of 3G services, we expect true data services to contribute meaningfully to growth. We expect data to account for 51% of incremental revenues for the industry over the next three years. While data added 230 bp to the industry CAGR over the last three We expect data to account for 51% of incremental revenues for the industry over the next three years.
23 May 2011
years (over and above voice CAGR of 10%), the coming years could likely see data add nearly 470 bp to industry CAGR offsetting a slowdown in voice growth.
Figure 19: Data to contribute to more than half of incremental revenues for the industry
2,500,0 00
Rs mn in dustry revenues And expe ct ed to con tribu te 51% to next 3 yrs incr. reven ues Ret ail d ata Data accoun ted for 33 % of incremental re ve nue s last 3 yrs
FY08-FY 11 CAGR: W it h Data: 12.4% W it hout Data: 10. 1% FY11-FY 14 CAGR: W it h Data: 13.2% W it hout Data: 8.5 % En terprise da ta
2,000,0 00
1,500,0 00
1,000,0 00 3G laun ch
Fixed line dat a Mob ile d ata - don gle Mob ile d ata - han dset Fixed line voice Mob ile voice FY 3/12 FY 3/13 FY3/14
500,0 00
FY3/0 8 FY3/0 9 FY3/1 0 FY3/1 1
Source: Company data, TRAI, Credit Suisse estimates
Retail data wireless to drive growth

Similar to the path followed in voice telephony, where mobile access is the primary means through which Indians talk, we believe most Indians will experience the Internet for the first time through their mobile phones. China has recently shown the sustainability of this path.
Figure 20: China has circumvented PC/wireline shortage through wireless access
100% 80% 60% 40% 20% 0%
79.7% 65.0% 49.6% 26.3% 5.6% US China 25.5% 3.2% 3.2% India
PC penetration
Wireline penetration
% of internet users who use mobile access 2009
Source: World Economic Forum, Nielsen, Credit Suisse estimates
3G encouraging signals from China Numbers from China show that despite a slow start in the initial months of 3G launch, the uptake is picking up rapidly. While the overall industrys 3G penetration at 7% total subs two years after launch is discouraging, this number is dragged down by China Mobiles constraints of technology TD-SCDMA is patronised by no other operator in the world thus impacting the overall ecosystem (for further details, please read Colin McCallums Chinese Telecoms Sector: Tipping point published on 15 April 2011). The other two operators (which use commercially stronger WCDMA/ EVDO) have achieved 11-16% 3G conversion within 18-23 months. In fact, China Unicom has guided to ~37 mn 3G China Unicom and China Telecom have 11-16% of subscribers on 3G within 1823 months
10
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subscribers by December 2011 (i.e., 26 months from launch), which would work out to ~19% of total subscribers as per CS analyst Colin McCallums estimates. We note that China Unicom reduced the minimum monthly commitment on its 3G packages from the initial Rmb66 to Rmb46 in December 2010.
Figure 21: China Unicom and China Telecom have seen good 3G conversion rates among subscribers
20% 15% 10% 5% 0% -5%
3G subscribers as % of tot al subs
China Unicom Dec-11 gu idance China Telecom China Un icom
China Unicom launch China Telecom launch
China Mobile launch
China Mobile
Jan-09 Apr-09
Jul-09
Oct-09 Jan-10 Apr-10
Jul-10
Oct-10 Jan-11 Apr-11
Jul-11
Oct-11
Additional details on 3G ARPU (provided only by Unicom as of now) indicate a reasonably high level of ARPU from the initial subscribers. The 3G ARPU is 2x regular 2G ARPU even after crossing the 10% 3G conversion.
Figure 22: China Unicom 3G operating metrics
(Rmb) China Unicom 3G subs as % of total China Unicom 3G ARPU China Unicom 2G ARPU China Mobile Blended ARPU Source: Company data, Credit Suisse estimates Mar-10 3.2 140 59 69 Jun-10 4.8 128 57 74 Sep-10 6.5 124 57 73 Dec-10 8.4 115 55 77 Mar-11 10.6 116 58 66
China Unicoms 3G ARPU nos. are encouraging
Positive datapoints on India 3G uptake While it is still early days of 3G in India, initial datapoints and comments by managements indicate good uptake among subscribers. Recent media reports (Business Line) indicate over 9 mn 3G subscriptions countrywide in four months of launch. Bharti management indicated incremental 3G ARPUs of $3-4 at the CS AIC (refer to our note Bharti Airtel: Notes from AIC - pricing power to return soon published on 28 March 2011).
Figure 23: Recent datapoints on 3G uptake in India
Operator Tata Bharti Idea Aircel No. of 3G subs 1.5 mn as of Mar-11 2 mn within 45 days of launch 1 mn within one month of launch % of subs base 1.7 1.2 1.1 Other comments by management Incremental ARPU of US$3-4 Expect 30% conversion in 3-4 years
Media articles talk of 9 mn 3G subs in India within four months
Source: Company data, Media articles, Credit Suisse estimates
3G will drive growth through both small screen and large screen access So far we have been quite conservative in our 3G estimates for Indian telcos, building:
11
23 May 2011
only 15% subscriber conversion three years after launch in 3G spectrum circles; no inter-operator roaming arrangements in circles where there is no spectrum hence no 3G services in these circles; and Rs80 incremental data ARPU (less than US$2).
FY3/11 0 0 FY3/12 6 5 3 80 40 FY3/13 12 10 6 79 40 FY3/14 20 15 9 78 40
Figure 24: Old estimates for 3G uptake Bharti Airtel

Bharti 3G subscribers (mn) As % of subscribers in 3G circles As % of total subscribers Incremental data ARPU (Rs) As % of 2G blended ARPU Source: Company data, Credit Suisse estimates
Considering the China experience and early indications/comments from India, these assumptions are clearly conservative. We revise our estimates and now expect ~18% of industry subscribers to start subscribing to 3G services by March 2014 (i.e., three years from launch), including an assumption of inter-operator roaming arrangements starting FY13. We also increase near-term 3G ARPU estimates, starting at Rs110 (US$2.4) for the early high-end customers who would convert (and falling off sharply as more customers convert we build 40% ARPU erosion in two years versus 5% earlier). While the mass market data/Internet uptake is expected to be through handset-based access, the PC-based large screen market could also continue to grow, owing to its inherent advantages over the small screen devices. Even here, we expect 3G-based dongles to grow in market share, gaining over the wireline and CDMA 1x options available.
12
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Figure 25: Retail data revenue breakdown for India telecom industry (by access technology)
FY3/09 Small-screen access SMS+VAS ARPU (Rs) % YoY Revenues (Rs mn) % of mobile revenues % YoY 3G handset based Subs (mn) As % of total mobile subs Incremental data ARPU as % of blended mobile ARPU Revenues (Rs mn) % YoY Large-screen access PC penetration households (%) 3G dongle based Subs (mn) As % of PCs in India ARPU (Rs) % YoY Revenue (Rs mn) % YoY Fixedline DSL Subs (mn) As % of PCs in India ARPU (Rs) % YoY Revenue (Rs mn) % YoY Others (Cable modem, Dial-up) Subs (mn) As % of PCs in India Revenue (Rs mn) % YoY Total retail data market Rs mn Of which 3G % Source: Company data, Credit Suisse estimates 8 18.1 21,577 0.3 133,849 0 8 16.2 21,333 -1.1 159,793 0 8 13.3 21,083 -1.2 206,919 0 9 11.6 21,073 0.0 272,008 14 9 10.3 21,469 1.9 369,560 32 10 9.5 21,882 1.9 450,758 42 5 12.5 488 25,302 8 15.4 463 -5.0 36,035 42.4 10 16.6 440 -5.0 47,330 31.3 14 18.3 352 -20.0 50,813 7.4 18 20.3 282 -20.0 53,499 5.3 22 22.1 225 -20.0 54,567 2.0 0.0 0.0 0.0 5 6.7 317 9,510 15 17.0 254 -20.0 30,432 220.0 30 29.5 203 -20.0 54,778 80.0 3.7 4.2 5.2 6.2 7.2 8.2 0.0 0.0 0.0 0.0 0.0 0.0 44 4.9 110 80.0 29,916 116 12.0 87 64.0 88,269 195.1 186 18.2 69 51.2 134,534 52.4 22 86,970 8.5 0.0 18 -21.2 102,425 9.6 17.8 17 -3.7 138,506 11.6 35.2 16 -6.0 160,696 11.4 16.0 16 -1.3 175,889 11.0 9.5 16 -1.3 184,997 10.7 5.2 FY3/10 FY3/11 FY3/12E FY3/13E FY3/14E FY08-11 CAGR (%) FY11-14 CAGR (%)
16.8
10.1
43.3
4.9
-0.7 18.4
1.2 29.6
Potential winners We believe that two factors could determine which operators take the lead in 3G conversions: Higher paying subscribers: operators with higher paying subscribers would see quicker 3G conversions in their subscriber bases. In the table below, we see that Bharti, Loop, Vodafone and Idea have ARPUs significantly ahead of the industrys average level, indicating a more lucrative subscriber base. Scale of operations: At the same time, operators with scale can leverage this to provide better services (ex. better negotiation with content providers etc.). On this metric, Bharti, Vodafone, Idea and RCOM score high in terms of revenue market share. Operators with scale and higher paying subs should benefit
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Looking at the above results, we believe that Bharti, Vodafone and Idea (in that order) could be best positioned on the 3G opportunity.
Figure 26: Potential winners in the 3G race
CY2010 ARPU (Rs) 226 198 190 180 147 120 114 110 100 97 76 45 44 23 151 Rank on ARPU 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Revenue market share (%) 31.7 0.6 21.2 13.0 0.0 0.1 8.4 4.6 8.3 11.1 0.5 0.5 0.1 0.1 100.0 Rank on RMS 1 8 2 3 14 11 5 7 6 4 10 9 13 12 Subscriber market share (%) 20.0 0.4 16.6 11.0 0.1 0.0 11.0 6.8 12.0 16.8 1.2 2.8 0.3 0.9 100.0 Rank by subscriber mkt share 1 11 3 5 13 14 6 7 4 2 9 8 12 10
Operator Bharti Loop Vodafone Idea Etisalat HFCL TTSL Aircel BSNL/MTNL RCOM Sistema Shyam Uninor S Tel Videocon Industry
Note to maintain uniformity across operators, the ARPU here is derived from the revenue and subscriber figures that operators report to TRAI on a quarterly basis. This could be different from numbers reported to shareholders in some cases. Source: TRAI, Credit Suisse estimates
Where would RIL fit in? We continue to retain our view (please refer to our 8 July 2010 note, Indian Telecom Sector: the night is darkest before dawn) that RILs impact could be limited given it is a late entrant and does not have a 2G business as of now. Further, while an entry by RIL would definitely be large scale, we see little possibility of the launch happening within two years time. In the meantime, with our improved 3G expectations in this note, we are reminded of China Mobiles handicap of having weak 3G technology while competitors with commercially strong 3G technologies are enjoying a significant headstart in the data market RIL has no 3G operations (for further details, please see Colin McCallums Chinese Telecoms Sector: Tipping point, published on 15 April 2011) Further, in our models (which we describe later) we exclude any upside for the companies from the dongle market an area we believe will be the primary area of operation for RIL in the initial years of its launch.
Enterprise data India still playing catch-up

Indias enterprise data market has seen a strong ~25% CAGR over the past three years. However, we believe that the penetration of digital connectivity in our corporates is still low. Below, we compare Indias overall enterprise data spend as a percentage of nonagricultural GDP with other countries which shows India clearly lags. While the momentum of growth in this segment should continue, given the low penetration, we expect further impetus from the overall growth in Internet/broadband uptake in the consumer market. Growth in e-commerce and Internet awareness could encourage corporates to adopt new-age communication techniques. Building the revenue CAGR to remain at 25% over next three years, we expect the enterprise data market in India will grow to over US$4 bn by FY3/14 (from US$1.6 bn in FY10). Note that this would still imply that less than 3% of the ~900,000 corporates
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registered with the Indian Ministry of Corporate Affairs would have taken a 100Mbps line at current BSNL rates.
Figure 27: Enterprise data spend in India is below global levels
Ent erprise data spen d a s % o f no n-agricultural GDP 0 .5% 0 .4% 0 .3% 0 .2% 0 .1% 0 .0% Ma la ysia UK Ja pan USA In dia FY3 /14 (CS) India FY3/1 0 0 .39% 0.3 8% 0.33% 0.27 % 0. 20% 0.13 %
Source: Company data, US FCC, Ofcom, Tulip Telecom, CIA World Factbook, Credit Suisse estimates
Figure 28: Enterprise segment growth to sustain

Enterprise data services Revenues (Rs mn) % YoY FY3/09 60,512 24.6 FY3/10 75,358 24.5 FY3/11 93,169 23.6 FY3/12 115,657 24.1 FY3/13 145,224 25.6 FY3/14 184,270 26.9 FY08-FY11 CAGR (%) 24.3 FY11-FY14 CAGR (%) 25.5
Source: Company data, Tulip Telecom, Credit Suisse estimates
Potential winners The enterprise data services market is quite concentrated, with the top-three players accounting for a 50% plus market share, and the top-five players having a 75% plus share. The key success factors, in our view, are access to international and national fibre connectivity, good last-mile presence, and (increasingly) managed services capabilities. We believe Bharti Airtel, RCOM and Tulip Telecom have the right strengths as seen in the table below.
Figure 29: Key players in the enterprise data services market
Operator Tata Comm. Bharti Airtel Reliance Comm. BSNL Tulip Telecom Others FY3/10 enterprise data market share (%) Strengths 21 Leading market share in international connectivity 17 Strong presence in international connectivity (access to seven submarine cable systems worldwide), third largest NLD fibre network (~126,000km) and last-mile presence in ~90 cities 14 International connectivity (FLAG), second-largest NLD fibre network (190,000km), fibre connectivity to over 1 mn buildings across 44 cities in India 14 Largest NLD fibre network of ~615,000km, legacy infrastructure being the incumbent fixed-line operator 11 Wide presence across ~2,000 cities through a mix of both fibre and wireless last mile, leader in managed services and MPLS/VPN 23
Source: Tulip telecom presentation, Credit Suisse estimates
Voice business recovering from competition, but still slowing down

We do not change our expectations on the voice business in this report. We believe that with the peak of competition well behind us, FY3/12 should be the first full year of rebound for the industry, followed by gradually falling growth rates, as penetration rates mature. We
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expect the mobile voice industry to deliver a 10% CAGR over the next three years, as shown below.
Figure 30: Voice business growth rates to slow down further
Mobile voice Subscribers (mn) Net adds / month (mn) Penetration (%) ARPU (Rs) % YoY Revenues (Rs mn) % YoY Fixed-line voice estimates Subscribers (mn) Revenues (Rs mn) % YoY Total industry voice Revenues (Rs mn) % YoY 1,049,501 21.2 1,077,036 2.6 1,155,157 7.3 1,311,340 13.5 1,416,226 8.0 1,476,046 4.2 10.1 8.5 38 117,794 -8.3 37 108,346 -8.0 36 99,646 -8.0 35 86,726 -13.0 34 75,828 -12.6 33 66,242 -12.6 -8.1 -12.7 FY3/09 390 11 33.6 239 931,707 26.4 FY3/10 581 16 49.4 166 -30.5 968,690 4.0 FY3/11 782 17 65.6 129 -22.4 1,055,511 9.0 FY3/12 902 10 74.6 121 -6.0 1,224,614 16.0 FY3/13 964 5 78.8 120 -1.3 1,340,399 9.5 FY3/14 1,024 5 82.7 118 -1.3 1,409,804 5.2 FY08-FY11 CAGR (%) FY11-FY14 CAGR (%)
13.8
10.4
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Topic of interest #1: Can data revenues increase profitability?

Current prices allow greater revenues to be made from data than from voice for a given capacity. As shown in the simplistic GSM-GPRS calculation below for incremental carrier additions, data provides 80% more revenue per unit capacity than voice at current pricing. However, data tariffs have not seen the kind of price erosion in voice over the past few years. We believe that it will not be too long before data tariffs fall to bridge this gap and then the trade-off could disappear.
Figure 31: Revenues from voice and data from incremental unit capacity
GSM Voice Capacity of one channel Unit tariff Revenues per second per channel 1 call 1 p/sec 1.0 p GPRS Data 9.4 kbps 30p / 20 KB 1.8 p
Note: This calculation represents a decision made at the point of adding an incremental carrier of 8 channels to an existing cell site. Source: Company data, Credit Suisse estimates
However, even beyond the revenue-level trade-off shown above, data can add to profitability in many ways: Segmentation: Unlike with a plain voice service where it is difficult to provide different gradations of service and packages data renders itself very well to segmentation to target-specific customer groups. The segmentation could be in the form of size of packages, download speeds etc. Below, is a summary of data tariffs offered by Bharti to its 3G customers. Note that the smaller sized packages which could become the most popular are also the most profitable.
Download limit (MB) 10 65 100 250 600 2,048 At 30p per 20 KB Validity (days) Revenue per MB (Rs/MB) 1 3 30 30 30 30 0.80 0.94 1.01 0.80 0.75 0.37 15.36
Figure 32: 3G data tariffs of Bharti highlights the ability to segment offerings
Pack amount (Rs) 8 61 101 201 450 750 Beyond download limit
Growth sustainability: There is a limit for voice volumes (i.e., the amount of time people talk on their phones). Once the country reaches mature penetration levels, voice revenues may not grow by much. However, the amount of data downloaded by a user could continuously rise as bandwidth requirements of applications increase (the user may still be spending the same time on his phone/laptop). As long as Indian telcos do not offer unlimited download plans (and they have shown this discipline so far on 3G), data services could help sustain growth rates for operators.
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Topic of interest #2: So how did China Mobile pull it off?

An interesting observation from the previous section is that China Mobile has seen strong growth in data revenues, despite low 3G uptake. We see below that the surge in data revenues for China Mobile started at least three years before 3G was commercially launched. Even now, 3G subscribers form less than 5% of overall mobile subs, and hence are unlikely to be the cause of continued growth in data. We have discussed the companys issues concerning 3G technology earlier. So, how did China Mobile see such growth in data? GPRS played the role of providing last-mile data access for China Mobile.
Figure 33: China mobile data growth has happened without much help from 3G
China Mobile data revenues as % of total 45% 40% 35% 30% 25% 20% 15% 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E Data surge t ook off in 2006 it self 3G launched only in 2009 3G conversion less than 5% even aft er two years
The key takeaway from this illustration is that 3G is not synonymous with data growth. 3G happens to be only a part of the data access supply chain. The entire supply chain needs to develop in order for data growth to take place. We extend this thought further in the following chapter.
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The bottlenecks are easing

While the data potential of the Indian telecom market has always been appealing, we believe that it is only now that the right set of factors are falling in place to enable strong data uptake. This is not just about the launch of 3G services. We identify a number of supply constraints across the data value chain in India which we believe have hindered broadband/data growth in India so far. Compared to the average Chinese Internet user, an Indian user has a third of international bandwidth access, faces access tariffs 2x higher and device prices 5x higher and has virtually zero locally relevant content. While these constraints are significant, we also see encouraging signs of improvement in some of them (especially over the past 12 months) and expect the rest to fall in place as the overall 3G ecosystem develops.
Supply constraints exist across the data supply chain but these are easing
Popular perception is that the lack of last-mile access was the key hurdle that telcos were unable to cross in order to drive data/broadband penetration. Hence, the release of 3G spectrum and the subsequent launch of services are considered a panacea for all ills plaguing data uptake in India. However, this is a very narrow view of the industry, in our opinion. Our analysis below shows that supply constraints are glaringly evident across the data services supply chain. We identify the five key parts of the data access supply chain in the chart below, and explore Indias current standing on these parts versus global levels. Encouragingly, we note that the supply bottlenecks seem to be easing in recent years.
Figure 34: The data access supply chain
Supply constraints are glaringly evident across the data services supply chain
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Bottleneck #1: International connectivity

The part of the data supply chain that is farthest from the user is the submarine cable connecting a country to the rest of the world. But that in no way makes it the least important part of the supply chain. International connectivity is essential for international voice telephony and cross-border data access (Internet, corporate networks etc). The extent of international bandwidth available determines the usage experience of Internet/data users in a country and is especially relevant in countries where cross border data/Internet access is high. We can compare the availability of international bandwidth across countries by looking at bandwidth per unit of population. As the chart shows below, Indias international connectivity is significantly below global levels. A person accessing the Internet in China has more than 3x the international bandwidth at his disposal compared to a person in India. The comparison is even worse compared with other emerging markets, such as Brazil and Malaysia.
Figure 35: India's international connectivity is abysmal compared to other countries
Int ernational bandwidth (Mbps/ 10000 pop) 450 400 350 300 250 200 150 100 50 397 294
A person accessing the Internet in China has more than 3x the international bandwidth at his disposal compared to a person in India
257
113 61 58 51 21 Brazil 7 China 4 Kenya 2 India 1 P ak Nigeria

35% 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 20 08 200 9
Fra.
SKorea
Source: World Economic Forum (2009), Credit Suisse estimates
While Chinas bandwidth capacity is 3x, as seen above, we note that this is a recent surge in capacity. Bandwidth capacity in China was similar to current Indian levels just three years ago.
Figure 36: Chinas international connectivity has grown hand-in-hand with Internet penetration
1,000,000 800,000 600,000 400,000 200,000 b and width mbps Int ern ation al bandwidth up 3 x in the last three years penetra tion %
International outlet bandwidth (mbps)
Malay.
UK
Japan
Germ.
US
China internet penetration
Source: China Internet Network Information Center, Credit Suisse estimates
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What is changing? Data from TRAI shows a surge in new submarine capacity investments out of India with bandwidth going up more 2x in the past 12 months. This is reminiscent of the surge in international bandwidth in China in the run-up to the rise in Internet penetration. An updated bar in Figure 35 would show a value of 5.4 Mbps/10,000 population for India.
Figure 37: Recent surge in international bandwidth as per TRAI data
Total International bandwidth (GB) 700 600 500 400 300 200 100 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 2.2x increase in bandwidth over the last 12M
Source: TRAI, Credit Suisse estimates
Bottleneck #2: Core network/Backhaul fibre bandwidth

The next leg of the data supply chain is the terrestrial, in-country fibre-optic network (both core and backhaul). This determines the bandwidth available from the mobile tower to the core network of the operator and beyond. Traditionally in India, the mobile backhaul is provided through microwave and fixed-access backhaul is through fibre/copper. The core network is usually in the form of fibre. While microwave as backhaul technology for mobile networks was sufficient in a 2G/voice environment, it may prove a bottleneck if there is a pick-up in data traffic on mobile networks. Hence, it is important that fibre backhaul is provided even in the mobile networks. Thus, the amount of fibre-optic bandwidth in a country indicates core/backhaul capacity. Quantifying the fibre-optic bandwidth in a country is a difficult exercise, due to limited data. In limited cases, we have data on the number of route kilometres of cables installed in countries. To adjust for the differences in population and land areas, we could use cable km / mn population / mn sq. km as a measure of penetration of fibre optics in the country. On this metric, Indias fibre-optic penetration is 10% behind Chinas and roughly half of the penetration in the US. Compared to China, this does not seem like a significant bottleneck.
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Figure 38: Terrestrial fibre-optic penetration

In-la nd fib re installed (rout e km / mn pop / mn sq km) 60 0 50 0 40 0 30 0 20 0 10 0 In dia Ch ina US 269 3 03
527
The limitation of this metric is that all terrestrial optic fibre cables may not be of the same bandwidth they could range from a single pair of fibres to a cable of 96 pairs. However, our discussion within the telecom industry indicates that for large countries the average bandwidth in the cable works out to 48 pairs of fibre (true even in the case of India). What is changing? Similar to the surge in international fibre, TRAI data shows that the national bandwidth has been rising sharply recently up 2.3x in the past 12 months as seen below.
Figure 39: National terrestrial bandwidth has gone up 2.3x in the past 12 months
Total national bandwidth (GB) 600 500 400 300 200 100 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 2.3x increase in bandwidth over the last 12M
TRAI data shows that the national bandwidth has been rising sharply recently up 2.3x in the past 12 months.
Source: TRAI, Credit Suisse estimates
In addition, the government. is drafting the national broadband plan with the intention to roll out optic fibres to all habitation centres with a population of 500 plus over the next three years, at a cost of US$13-14 bn (largely funded from the Universal Service Obligation Fund). While these targets seem aggressive, even a partial achievement on these targets could help improve the terrestrial fibre infrastructure in the country, in our view.
Bottleneck #3: End-user devices

We now move closer to the end user to be precise into their hands. Availability of affordable devices, which are capable of providing a good browsing/data usage experience, is the third factor we consider in the supply chain.
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Based on our analysis, given the lower income levels in India, an entry-level 3G handset for an Indian consumer is 5x more expensive than for his Chinese counterpart.
Figure 40: India does not enjoy cheap device ecosystems like other emerging economies
Ent ry level 3 G ha ndset ASP/GDP per capita 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 8. 8%
An entry-level 3G handset for an Indian consumer is 5x more expensive than for his Chinese counterpart
3 .1%
3 .0%
2.5%
1.6 % 0.4 % 0. 3% UK 0.2% US
In don esia
Malaysia
Thaila nd
Note: We have taken the retail, full value (i.e non-contract) price of the cheapest 3G handset available in a country to prepare the chart below. Wherever data is hard to obtain, we have relied on the inputs from CS analysts in these countries. Source: Company data, Credit Suisse estimates
We believe that a comparison of retail prices for entry-level PCs/notebooks would also have a similar pattern as above since the manufacturing ecosystem for both the categories of devices is weak in India. Case study: Mexico in 2000 Private telcos have addressed the problem of affordable devices by offering easy credit facilities to customers. The features included instantaneous credit approval and low finance costs. Almost 100% of PC sales also generated Internet subscriptions
Figure 41: Mexico: Private sector financing is helping PC sales
25.0%
20.0% Telmex launched PC financing scheme with t wo year PC financing. Optional int ernet connection at 25% discount
Service positioning: Instant credit approval, no credit card is required, reasonably priced PCs with low-cost financing; subscription to broadband optional Nearly 100% of PC sales also generated internet subscriptions
15.0%
10.0%
5.0%
0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Mexico internet penetrat ion

Source: Forbes, Credit Suisse estimates
Singapore
Ind ia
Chin a
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What is changing? Our industry meetings indicate that 35% plus of handsets sold today are 3G enabled. While 3G handsets start at Rs4,500 (US$100) and Smartphones start at Rs9,000 (US$200), these prices are falling and Smartphones at US$100 are expected in about 1218 months. In addition, recent media articles (Business Standard) talk of Indian handset vendors (like Spice Mobiles, Bharti Teletech, Karbonn, Lava) working on low-priced tablet PCs (priced Rs10,000-20,000) to be launched by September 2011. This could stimulate the dongle market, in our view. An important point to note is that India has enjoyed low prices in the GSM handset ecosystem because the GSM market in China had grown to scale already (GSM was the technology followed by China Mobile, the dominant market leader) helping reduce prices of GSM handsets globally. However, there is no common 3G technology in China and globally accepted standards like WCDMA are not used by the dominant leader. It is likely that with India adopting a common WCDMA platform, the related handset industry could benefit from scale too. Our estimate of 44 mn WCDMA subscribers in India within a year of launch is higher than the 37 mn guidance of China Unicom (the only operator using WCDMA in China) two years after launch. The WCDMA handset ecosystem could benefit from the scale that India is expected to offer
Bottleneck #4: Last mile

In addition to the affordability of devices, the cost of connection should also be within affordable limits of the end user. One metric to compare across countries is the cost of downloads expressed as a percentage of GDP per capita. Below, we compare the cost of a 1GB download in a basic 3G tariff plan as a percentage of GDP per capita across countries. The tariffs used here are currently offered by the market leading mobile operator in each country. We thus see that in the context of lower income levels, an Indian consumers data download costs twice as much as his Chinese counterparts.
Figure 42: Data downloads are twice as expensive in India as in China
Cost o f 1G d ata / GDP pe r ca pita 3% 3%
2.0%
An Indian consumers data download costs twice as much as his Chinese counterparts
S haded bars are EM telcos
2% 2%
1.0%
1% 1% 0% India Ch ina Malaysia Indonesia Japan UK US

0.5% 0.4% 0.1% 0.0% 0.0% 0.0%
Singap ore
We note that Indian mobile operators who launched 3G services have largely matched the pricing of the prevalent wireline DSL and wireless CDMA dongle tariffs. What we expect to change We believe that the introductory 3G offers where operators have matched existing fixed line/CDMA tariffs are testing grounds for operators. With usage surprising on the upside,
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we would not be surprised to see operators lowering tariffs. In our 3G models, we build 3G ARPUs to fall by 40% plus over the next two years.
Bottleneck #5: Content

Finally, we come to the part of the supply chain which is the key reason for the user to access data services in the first place content. The perceived large size of the Englishliterate population in India could make one believe that the global content is sufficient to encourage Indians to go online. However, we would argue that the presence of locally relevant content in native languages is important to encourage people to go online. For this, we would point to the readership pattern of Indian newspapers as an indicator of language preferences of Indias population. All the top-ten newspapers by readership in India are in local languages, and there is only one English daily in the top 20 (Times of India). The largest English newspaper by circulation has less than a quarter of the circulation of the largest Hindi newspaper.
Figure 43: Top print newspapers by circulation in India
Name Dainik Jagran Dainik Bhaskar Amar Ujala Hindustan Lokmat Daily Thanthi Dinakaran Ananda Bazaar Patrika Rajasthan Patrika Eenadu Times of India Malayala Manorama Daily Sakal Punjab Kesari Dinamalar Punya Nagari Mathrubhumi Gujarat Samachar Vijay Karnataka Bartaman Source: Indian readership Survey 2009, Credit Suisse estimates Language Hindi Hindi Hindi Hindi Marathi Tamil Tamil Bengali Hindi Telugu English Malayalam Marathi Hindi Tamil Marathi Malayalam Gujarati Kannada Bengali Readership (mn) 55 34 29 27 21 20 17 16 14 14 13 13 11 11 10 10 9 9 9 8
There is almost nil local language content for Indians
However, a similar look at the top websites in India shows a completely different picture. All the top-ten websites accessed by Indians are in English. Of these, only two (#9 and #10 in the table below) are homegrown (also in English). On the other hand, eight out of the top-ten popular websites accessed by Chinese Internet users are homegrown Chinese websites.
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Figure 44: Top-10 popular websites

China Baidu.com QQ.com Sina.com Taobao.com Google HK 163.com Google.com Sohu.com Soso.com Youku.com Source: Alexa India Google India Google Facebook Yahoo! Youtube Blogspot Wikipedia Twitter Rediff.com Indiatimes.com US Google Facebook Yahoo! Youtube Amazon Wikipedia Blogspot Twitter eBay Craigslist.org
In fact, India seems to be only large economy where Internet users have almost zero local language content.
Figure 45: Distribution of web pages viewed by language
Source: comScore, Credit Suisse estimates
China saw an explosion in local language Internet content accompanying its Internet penetration surge. We believe that a similar content explosion is required for India, to encourage voice subscribers to try accessing the Internet on their phones.
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Figure 46: Chinas Internet usage surge was accompanied by a local content explosion
3,500 3,000 2,500 2,000 1,500 1,000 500 200 2 2003 2004 2005 2006 20 07 200 8 2009 A n explo sion of Chinese websites attracted new internet use rs No. Chinese websites ('00 0s) penetration % 35 % 30 % 25 % 20 % 15 % 10 % 5% 0%
No. web sites in China ('000s)
China interne t penetration
Source: China Internet Network Information Centre
Case study: Brazil In Brazil, the government gave a massive push to e-governance making this an anchor content for Internet penetration. By 2002, over 70% of government services and 93% of all tax filings were conducted on-line. In 2005-06, the government also offered easy PC financing schemes to retailers, causing an increase in PC penetration.
Figure 47: Brazil: the government provided anchor content for Internet access
350 Individual credit (BRL bn) penetration % 40. 0% 35. 0% 300 2005-06: Govt.'s easy PC financing program to retailers - By 2002, 70% of government services to population provided online - 93% of federal tax filings done online in 2002 30. 0% 25. 0% 20. 0% 15. 0% Some stores saw 400% increase in PC sales 10. 0% within 2 weeks of launch of t he program 5.0% 0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
250
200
150
100
Credit for individuals (BRL bn)
Internet penetration
Source: Central Bank of Brazil, Credit Suisse estimates
What we expect to change This is probably the weakest link in the entire data supply chain for India and suffers from the classic chicken-and-egg problem (content versus Internet penetration). We note here that the telecom operators have tried to stimulate demand through various mobile applications we sample below some of the ~100,000 apps found on Bhartis Airtel App Central. We believe that with the growing Internet ecosystem around 3G services, more content developers would be attracted to develop locally relevant native language content.
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Figure 48: Sample Apps from 'Airtel App Central'

Name of App Wattpad Spice Sangeet Snaptu Stretch on the go Pearson CATGuru Smart Pilot Cost (Rs) Features Free Free Free 25 50 199 eBook community of readers with over 100,000 books Music store with over 100,000 songs Suite of social networking and lifestyle portals, including Facebook, Twitter Daily exercise guide with illustrations and instructions Practice tests and solutions for the CAT (for admission to Indian B-schools) Road navigation tool
Further, some of the handset vendors intending to bring out low-priced tablets (which we discussed in an earlier section) plan to have localised applications on these tablets to suit Indian needs.
And not to forget good old GPRS

Until the foreseeable future, a large proportion of handsets used by Indian subscribers may not be 3G ready, but a significant number could be GPRS capable. The GPRS usage in India has been largely dormant so far and each of the five bottlenecks in India described above were equally applicable to GPRS as they are for 3G. We have earlier seen from the Chinese example that GPRS is a viable last-mile alternative in emerging economies. It is highly likely that with the evolution of the 3G/data ecosystem, GPRS usage will pick up as well. If this happens, this could turn out to be a far larger ecosystem than 3G in the near term. Simultaneously, we are also seeing some app developers bringing out apps which do not require either 3G or GPRS: Last week, Bharti launched an USSD-based service to access Facebook, which can be used by subscribers with 2G-only phones (no GPRS). While the basic service is free, some premium features (posting on friends walls, finding and adding friends etc) will be charged Rs1. Shorthand Mobile Inc., is offering text-based apps for portals like Facebook, Orkut, Twitter etc, using only SMS as access technology. This can be used by any subscriber with a feature phone.
We are not building these upside possibilities into this note.
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Topic of interest #3: Will VoIP spell doom for traditional telcos?
Over the long term, data-based communication technologies can threaten the regular voice revenues of traditional telcos. This impact is already being felt by some of the western telecom operators. In a recent survey, our European telecoms team (Justin Funnel, Paul Sidney in their 31 March 2011 note Mobile survey: More evidence of voice cannibalisation) found that 40% of European telcos were seeing cannibalisation of voice revenues by data-based smartphone communication technologies. Thus, voice revenue cannibalisation from new communication streams like VoIP, messaging etc. is a real threat that Indian telcos should be aware of over the longer term. However, we believe that this is not an immediate concern in India, due to the following reasons: Regulations do not allow VoIP calls originating in India to terminate on another phone in India (PC-to-PC calls are fine). In future, the restriction may be relaxed but the government will always be wary of security issues with respect to tracking of calls. Further, while VoIP-VoIP calls are seemingly free, they do consume bandwidth which is paid for. As we show below, the voice calls in mature markets are relatively more expensive, leading to a favourable trade-off towards data communication.
All the above issues could change over the long term it is reasonable to expect: 1) data tariffs to fall (faster than voice tariffs) and 2) smartphones to become cheaper. But that gives telcos enough time to cultivate the data habits of their subscribers so that any loss in voice revenues is overcome by data revenue growth.
Figure 49: Data versus voice trade-off is the worst in India

Cost of 1MB data / cost of 1min call 2
1.68
2 1 1 0
0 .11 0 .62 0.62
0.10
0.08
0 .04
0.01
India
Malaysia
China
US
UK
Indonesia
Japan
Singapore
Based on entry level monthly 3G data packs offered by leading mobile operators in these countries Source: Company data, Credit Suisse estimates
In addition to low data tariffs, we also need to see the availability of affordable VoIP capable smartphones
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23 May 2011
Integrated players can benefit from the entire value chain

Our current 3G estimates are quite conservative, going by the experience of China and recent datapoints from India. We thus build in a stronger ramp-up in 3G near term, causing 3Gs contribution to mobile EBITDA to rise to 9-13% (from less than 5%) by FY3/14. Idea cellular, being fully leveraged to the mobile business, is obviously more sensitive to these changes. However, we believe that Bharti and RCOM with their integrated business models can tap into the parts of data supply chain that pure-play mobile firms cannot. Our changes lead to 0-5% EPS increases for companies over the next three years. While the benign competitive environment is helping incumbents, such as Bharti and Idea, to continue to consolidate their revenue market share, we believe that further upside from data is not being factored in by investors. We reiterate our OUTPERFORM rating on Bharti and Idea.
Bharti, RCOM may benefit from integrated operations

A look at the revenue profile of telcos under our coverage shows that Idea is the most leveraged to wireless data revenues (13% of consolidated sales) and hence its earnings could have the highest upside from rapid data uptake. However, as we have seen in the previous section, the data access supply chain is not restricted to the last mile alone. Operators like Bharti and RCOM, as we see below, have significant presence across the key parts of the supply chain which could indirectly benefit from the growth in overall industry data revenues.
Figure 50: Data exposures and infrastructure capabilities of telecom operators
% revenue contribution Wireless voice Wireless data Wireline voice + data Others (including non-India businesses) Infrastructure capabilities 3G spectrum NLD fibre (km) ILD bandwidth (market share of installed bandwidth) (%) 13 circles 126,357 48 13 circles 190,000 15 11 circles n.a n.a Nil 40,000 32 Bharti 50 9 8 33 RCOM 75 6 12 6 Idea 87 13 0 0 TCOM 0 0 18 82
Idea has most exposure to mobile business and hence could have highest upside
Note: 1) The long-distance segment revenues have been included in Others for Bharti (3% of sales) and RCOM (6%),. The split between data and voice revenues in this segment are not available. 2) ILD bandwidth market shares are as per TRAI 2007 data Source: Company data,TRAI, Credit Suisse estimates
Increasing near-term 3G estimates

As discussed in earlier sections, we believe that our current 3G estimates for operators are conservative and hence we increase our near-term 3G subscriber and ARPU estimates as shown below. By FY3/14, we expect 3G data revenues to contribute a meaningful 9-13% of mobile EBITDA up from less than 5% expected earlier. This leads to 0-5% EPS increases to EPS estimates. Correspondingly our DCF-based fair value for the stocks go up by 7-8%.
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23 May 2011
Figure 51: Bharti changes to 3G estimates

Old 3G subs in 3G-spectrum circles (mn) As % of total subs in 3G spectrum circles 3G subs in non 3G-spectrum circles (mn) As % of total subs in non 3G spectrum circles Total 3G subs (mn) As % of total subs 3G ARPU 3G contribution to mobile revenue (%) 3G contribution to mobile EBITDA (%) 3G Fair value per share Rs (including spectrum fee) Consol EPS (Rs) Stock fair value (Rs) Source: Company data, Credit Suisse estimates New % change FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E 5.6 12.3 20.2 8.9 18.5 26.9 60.0 50.0 33.3 5.0 10.0 15.0 8.0 15.0 20.0 6.7 15.1 0.0 0.0 0.0 0.0 7.0 15.0 5.6 12.3 20.2 8.9 25.2 42.0 60.0 103.9 108.3 2.8 5.6 8.6 4.5 11.5 17.9 79.6 1.2 1.6 11 26 418 78.8 1.7 2.4 34 78.1 2.8 4.4 42 119.5 2.8 4.4 43 26 448 94.6 3.8 5.8 36 74.9 5.4 8.5 43 50.0 20.0 -4.0
279 -0.4 7.2 3.0 4.6
Figure 52: Idea - changes to 3G estimates

Old 3G subs in 3G-spectrum circles (mn) As % of total subs in 3G spectrum circles 3G subs in non 3G-spectrum circles (mn) As % of total subs in non 3G spectrum circles Total 3G subs (mn) As % of total subs 3G ARPU 3G contribution to mobile revenue (%) 3G contribution to mobile EBITDA (%) 3G Fair value per share Rs (including spectrum fee) Consol EPS (Rs) Stock fair value (Rs) Source: Company data, Credit Suisse estimates New % change FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E 3.3 7.4 5.3 11.1 60.0 50.0 5.0 10.0 8.0 15.0 2.0 0.0 0.0 0.0 7.0 3.3 7.4 5.3 13.1 60.0 76.5 3.5 7.3 5.6 12.8 CS estimates will be published after 4Q11 results 68.0 0.7 1.9 5 4.3 86 67.4 2.1 5.3 6.4 102.1 1.7 4.4 16 4.4 93 80.9 4.3 9.9 6.7 CS estimates will be published after 4Q11 results 50.0 20.0
251.4 1.7 8.1 4.2
What about capex?

Bharti management has given a guidance of US$1.9 bn for India capex for FY3/12. Given that it had earlier indicated a plan of launching 3G services in 400 cities by March 2012, we believe that management guidance already captures a fairly aggressive roll-out (please refer to our note Bharti Airtel: Notes from AIC pricing power to return soon, published 28 March 2011). In particular, we note that on the newer 2G base stations, upgrading to 3G would involve only a software upgrade leading to negligible incremental capex. We believe that the US$900 mn buffer in capex over and above guidance for Bharti that we build here is sufficient to capture any 3G overflow.
Figure 53: Capex estimates in our models build buffer for 3G overflows
US$ mn Bharti (ex-Africa) Idea FY3/12E 2,769 983 FY3/13E 1,880 821 FY3/14E Management guidance 1,587 FY3/12: US$1.9 bn in India 892 FY3/11: Rs30 bn (US$666 mn)
Bharti guidance of $1.9bn for FY12 already builds in a fairly aggressive rollout
Upgrade TP; Reiterate OUTPERFORM on Bharti, Idea

In Indias benign competitive environment, we believe strong incumbents like Bharti and Idea can consolidate revenue market share and grow margins. Further, we see in this report that these two companies are well positioned to make the best of the impending
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data growth in the market. We raise our target price for Bharti to Rs450 (20% potential upside) and Idea to Rs95 (40% potential upside). We retain our OUTPERFORM ratings on these stocks.
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Asia Pacific / India Integrated Telecommunication Services
Bharti Airtel Ltd

(BRTI.BO / BHARTI IN)
Rating OUTPERFORM* Price (20 May 11, Rs) 373.70 Target price (Rs) (from 415.00) 450.00 Chg to TP (%) 20.4 Market cap. (Rs mn) 1,419,137 Enterprise value (Rs mn) 2,033,778 Number of shares (mn) 3,797.53 Free float (%) 32.6 52-week price range 386.75 - 255.00
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months.
Data uptake to play to strengths of integrated model

Best positioned to capture data demand. We believe that Bhartis strengths of having an integrated business model and market leadership in the mobile segment should position it strongly. We now expect 18% of companys subscribers to take up 3G services by FY3/14, adding 9% to mobile EBITDA. 3G business now contributes nearly 10% to our fair value at Rs43 per share. Easing competition to help. In the voice business, we believe that Indias benign competitive environment should help a strong incumbent like Bharti to continue to gain revenue market share and improve margins over the next two years. We expect the India business to deliver ~20% EBITDA CAGR over FY11-FY14. Africa business on track to meet management targets. We retain our view that Bharti should comfortably achieve management revenue and EBITDA targets for FY3/13. Margin improvement over the past two quarters (250 bps) has been based on pure cost control and we expect these to continue. Further, the benefits from the outsourcing contracts and volume growth (scale benefits) are yet to kick in. Reiterate our OUTPERFORM: With higher 3G uptake estimates, our EPS for Bharti rise 0-5% over the next three years. Our DCF-based target price increases to Rs450, giving 20% potential upside. While the assumptions driving our target price are realistic, we believe that more upside is possible from the India mobile and Africa businesses, and we outline a blue-sky valuation of Rs500 (35% potential upside) for the stock. We reiterate our OUTPERFORM rating.
3/11A 594,672.0 199,664.0 97,598.0 52,615.6 13.87 n.a. n.a. -41.4 27.0 0.3 10.2 2.9 11.6 119.9 3/12E 728,058.2 283,717.2 168,941.4 97,762.1 25.76 -0.4 21.2 85.8 14.5 2.8 7.2 2.6 18.9 107.3 3/13E 845,036.3 349,682.0 224,057.5 134,777.0 35.52 3.0 27.8 37.9 10.5 4.4 5.7 2.3 23.2 86.2 3/14E 943,981.4 405,202.5 273,015.3 164,988.4 43.48 4.6 32.3 22.4 8.6 6.5 4.7 2.0 25.2 65.4
Share price performance

Price (LHS) 600 500 400 300 200 May- 09 Sep-09 Jan-10 May-10 Sep- 10 Jan-11
The price relative chart measures performance against the BOMBAY SE 30 SHARE SENSITIVE index which closed at 18326.09 on 20/05/11 On 20/05/11 the spot exchange rate was Rs44.95/US$1
Rebased Rel (RHS) 120 100 80 60 40
Performance Over Absolute (%) Relative (%)
1M -1.8 4.4
3M 12.9 12.2
12M 43.7 29.5
Financial and valuation metrics Year Revenue (Rs mn) EBITDA (Rs mn) EBIT (Rs mn) Net income (Rs mn) EPS (CS adj.) (Rs) Change from previous EPS (%) Consensus EPS (Rs) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
Source: Company data, Thomson Reuters, Credit Suisse estimates.
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Painting a blue-sky scenario

Our base-case estimates for Bharti incorporate a level of conservatism at various points. We outline these below and the possible upsides for each. We envisage a blue-sky fair value of Rs500 (35% potential upside):
GPRS uptake
We have earlier discussed that GPRS has been dormant due to a weak data supply chain / ecosystem in the country. Conversely, if the data supply chain improves in a 3G environment, GPRS usage could also take place. This could happen without necessarily cannibalising our 3G data assumption these would be from non-3G customers who are still over 80% of subscriber base even by FY14. In our blue-sky scenario, we build 2G data revenue contributions from 13.3% currently to 17.5% over three years (the contribution to incremental revenues going up from 13.3% to 25%) and steady thereafter. For this we model an additional US$500 mn capex over the next three years (to accommodate an additional 9% 2G network capacity to carry the extra data traffic). With these assumptions, the fair value for the mobile segment (ex. 3G) goes up by Rs26 per share, as shown below If the dormant GPRS usage picks in a improving data ecosystem, we see an additional Rs26 per share addition to fair value
Africa realistic capex

We showed in our 2 March 22 report (Bharti Airtel: Fortune favours the bold) that we are comfortable with management targets on revenues and EBITDA for FY3/13. However, we continue to build a buffer on capex to accommodate any capex over-run with an annual capex estimate of ~US$1.5 bn. Recently, management issued guidance for FY3/12 capex of US$1-1.2 bn. With the year well under way we believe managements capex visibility could be quite high, and hence our FY3/12 capex number of US$1.6 bn could prove aggressive. Bringing annual capex to US$1.2-1.3 bn levels, we believe that the Zain Africa acquisition could be fair value neutral (negative Rs24 earlier).
Figure 54: Base-case and blue-sky scenarios
Base case India 2G mobile GPRS uptake scenario 2G data (SMS/GPRS/VAS) as % of 2G revenues 2G ARPU (voice only) (Rs) 2G ARPU (voice + data) (Rs) 2G subs/2G BTS 2G revenues (Rs mn) 3G incremental data revenues (Rs mn) Total mobile revenues (Rs mn) Mobile EBITDA margin (%) Bharti ex. Africa EBITDA (US$ mn) Bharti ex. Africa capex (US$ mn) Bharti ex. Africa EPS (Rs) Mobile segment (2G only) fair value (Rs) Africa lower capex scenario Africa EBITDA (US$ mn) Capex (US$ mn) Africa DCF fair value per share (Rs) Consolidated impact Consol. EPS Consol. fair value per share (Rs) Source: Company data, Credit Suisse estimates 25.8 448 35.5 43.5 26.4 498 36.0 45.4 2.3 11.1 1.3 4.4 1,422 1,565 -24 2,070 1,350 2,524 1,457 1,422 1,348 1 2,070 1,289 2,524 1,264 0.0 -13.9 0.0 -4.5 0.0 -13.2 Blue-sky case % difference FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E FY3/12E FY3/13E FY3/14E 13.3 13.3 13.3 14.2 15.9 17.5 173 171 169 173 171 169 199 197 195 201 203 205 1.0 3.1 5.1 1,472 1,412 1,389 1,345 1,287 1,264 -8.6 -8.9 -9.0 439,181 494,742 531,220 443,639 509,861 558,513 12,758 19,332 30,203 12,758 19,332 30,203 451,938 514,074 561,423 456,397 529,193 588,716 37.1 37.8 39.4 36.5 37.0 39.2 4,899 2,769 26 339 5,723 1,880 33 6,508 1,587 40 4,969 3,086 27 365 5,801 1,944 33 6,759 1,677 42 1.0 0.0 1.0 3.1 0.0 2.9 5.1 0.0 4.9
Our current Africa capex estimates are significantly above management guidance
1.4 11.5 1.9 7.5
1.4 3.4 0.4
3.8 5.7 4.0
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Figure 55: Summary financials

Year-end 31 Mar (Rs mn) Consolidated income statement Revenue EBITDA Depreciation EBIT Finance expenses (net) Other income (net) Profit before tax Provision for tax Profit after tax Share of profits from associates Minority Interest Net income EPS (Rs) Consolidated balance sheet Cash and short-term investments Receivables and other current assets Total current assets Gross fixed assets Net fixed assets Goodwill due to Zain Investments and other assets Total assets Total current liabilities Total long term liabilities Other liabilities Total equity Minority interest Total liabilities Consolidated cash flow statement Net income Adjusted for: Depreciation Other items Change in working capital Cash flow from operation Capex Other items Cash flow from investing Change in debt and liabilities Change in equity reserves Interest expenses Change in minority interest Cash flow from financing Change in cash 84,699 47,581 14,995 -9,947 137,327 -143,444 -3,841 -147,284 21,738 -3,339 -11,613 5,932 12,718 2,761 89,768 62,832 36,410 -20,179 168,831 -155,782 -19,921 -175,703 -16,903 28,227 -178 12,711 23,857 16,985 60,468 102,066 116,807 130,327 409,668 -471,910 -513,067 -984,977 534,363 5,260 -29,665 4,753 514,711 -60,598 97,762 114,776 104,287 -40,001 276,823 -166,362 -20,063 -186,424 28,524 -39,516 -46,350 0 -57,341 33,057 134,777 125,625 46,904 24,138 331,444 -144,662 -21,043 -165,705 6,675 -62,412 -46,405 0 -102,142 63,597 164,988 132,187 48,469 20,380 366,025 -136,232 -16,279 -152,510 0 -91,527 -41,479 0 -133,006 80,509 60,699 83,379 144,079 603,093 449,498 0 10,370 603,947 217,185 53,993 18,120 303,945 10,704 603,947 77,685 17,087 50,145 113,741 194,250 60,000 107,614 119,565 137,972 153,559 137,685 124,701 169,709 251,714 347,809 917,240 1,608,487 1,705,428 1,850,090 1,986,321 542,519 912,437 894,602 913,639 917,684 0 98,982 98,982 98,982 98,982 30,736 445,818 535,244 557,182 575,736 710,940 1,581,938 1,698,537 1,821,517 1,940,210 129,243 329,923 301,873 344,418 380,385 81,474 593,098 621,622 628,297 628,297 52,998 142,686 202,054 202,054 202,054 421,940 487,668 545,915 618,280 691,742 25,285 28,563 27,074 28,468 37,733 710,940 1,581,938 1,698,537 1,821,517 1,940,210 369,615 151,677 47,581 104,097 11,613 1,302 93,786 6,615 87,171 -713 1,759 84,699 22.3 418,472 167,633 62,832 104,801 178 516 105,139 13,453 91,686 -48 1,870 89,768 23.7 594,672 199,664 102,066 97,598 29,665 1,071 76,856 17,790 59,066 -74 -1,475 60,468 15.9 728,058 283,717 114,776 168,941 46,350 -58 122,533 26,261 96,273 0 -1,489 97,762 25.8 845,036 349,682 125,625 224,057 46,405 896 178,548 42,376 136,171 1,394 134,777 35.5 943,981 405,203 132,187 273,015 41,479 2,275 233,811 59,558 174,253 9,264 164,988 43.5 FY09 FY10 FY11 FY12E FY13E FY14E
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Figure 56: Key ratios

FY09 Margins (%) EBITDA margins EBIT margins Net profit margins YoY growth (%) Revenue growth EBITDA growth EBIT growth Net profit growth Return ratios (%) ROE (average) ROIC Turns ratios (x) Working capital turns Fixed asset turns Other ratios (%) Net debt/ equity Gross debt/ equity Interest cover 19.1 39.1 3.8 5.7 24.1 6.0 127.0 48.4 3.5 112.6 48.4 7.0 90.2 43.8 8.3 69.0 39.2 9.7 -5.00 0.92 -7.10 0.84 -5.22 0.82 -4.57 0.81 -5.59 0.93 -5.44 1.03 32.2 27.3 24.7 19.6 13.3 8.2 18.9 9.6 23.2 11.8 25.2 13.6 36.8 33.4 36.2 26.4 13.2 10.5 0.7 6.0 42.1 19.1 -6.9 -32.6 22.4 42.1 73.1 61.7 16.1 23.3 32.6 37.9 11.7 15.9 21.9 22.4 41.0 28.2 22.9 40.1 25.0 21.5 33.6 16.4 10.2 39.0 23.2 13.4 41.4 26.5 15.9 42.9 28.9 17.5 FY10 FY11 FY12E FY13E FY14E
Figure 57: Mobile segment key assumptions

FY3/09A Subscribers (mn) % YoY ARPU excluding 3G (Rs/sub/month) % YoY ARPU including 3G (Rs/sub/month) % YoY Revenue per minute (ex-3G) (Rs/min) % YoY MoU (min) % YoY 94.9 53.1 323 -12.0 323 -12.0 0.63 -16.6 510 5.6 FY3/10A 131.3 38.4 244 -24.3 244 -24.3 0.53 -16.1 460 -9.9 FY3/11A 167.7 27.7 202 -17.2 202 -17.2 0.44 -16.7 457 -0.6 FY3/12E 199.9 19.2 199 -1.5 205 1.4 0.42 -5.3 476 4.0 FY3/13E 218.4 9.2 197 -1.0 205 -0.0 0.40 -3.9 490 3.0 FY3/14E 235.3 7.7 195 -1.0 206 0.7 0.39 -2.9 500 2.0
Figure 58: Consolidated DCF assumptions

Revenue growth (%) EBIT margins (%) Tax rate (%) NOPAT margins (%) Invested capital turns ROIC (%) WACC (%) Mar-12 22.4 23.2 21.4 17.7 0.52 9.6 12.0 Mar-13 16.1 26.5 23.7 19.5 0.60 11.8 Mar-14 11.7 28.9 25.5 20.2 0.67 13.6 Mar-15 9.7 30.1 27.1 20.7 0.74 15.2 Mar-16 8.5 31.3 28.4 21.1 0.80 16.9 FY3/16-3/25 4.3 28.7 29.1 20.4 1.19 24.0 Terminal 3.0 36.4 31.3 25.0 1.32 27.1
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Figure 59: Base case and blue-sky sum-of-the-parts valuation

Sum-of-part Rs/share Mobile (ex 3G) 3G Tower B'band and fixed Enterprise Zain Eliminations Cash Total Previous TP 339 11 74 37 17 -24 -34 -5 416 Base case 339 43 77 38 17 -24 -41 -1 448 Blue-sky 365 43 80 38 17 1 -41 -5 498
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Asia Pacific / India Wireless Telecommunication Services
Idea Cellular Ltd

(IDEA.BO / IDEA IN)
Rating OUTPERFORM* [V] Price (20 May 11, Rs) 67.15 Target price (Rs) (from 85.00) 95.00 Chg to TP (%) 41.5 Market cap. (Rs mn) 221,820.1 Enterprise value (Rs mn) 348,418 Number of shares (mn) 3,303.35 Free float (%) 53.0 52-week price range 77.85 - 48.90
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Market share gains should continue

Fully exposed to 3G uptake. Ideas full exposure to the mobile business makes the company an attractive route to capture the full upside from the expected 3G uptake in India. We now expect 19% of companys subscribers to take up 3G services by FY3/14, adding 13% to mobile EBITDA. 3G business now contributes nearly 17% to our fair value at Rs16 per share. Gains in voice business should continue. In the voice business, we are already seeing Idea capitalise on the weakening competition by gaining 130 bp in revenue market share over the past 18 months. This should continue, in our view, and help company improve margins. New circle growth should help margins. The EBITDA losses from new circles currently impact overall margins by 350 bp (down from 420 bp a year ago). As the businesses continue to grow and mature, we expect these losses to come down and help the company deliver 25% EBITDA CAGR over three years. Reiterate our OUTPERFORM. With higher 3G uptake estimates, our EPS for Idea goes up 0-4% over FY12-13. Our DCF-based target price rises to Rs95 (from Rs85), giving 40% potential upside. We reiterate our OUTPERFORM rating.
Share price performance

Price (LHS) Rebased Rel (RHS) 120 100 80 60 40
100 80 60 40 May- 09 Sep-09 Jan-10 May-10 Sep- 10 Jan-11
The price relative chart measures performance against the BOMBAY SE 30 SHARE SENSITIVE index which closed at 18326.09 on 20/05/11 On 20/05/11 the spot exchange rate was Rs44.53/US$1
Performance Over Absolute (%) Relative (%)
1M -1.6 4.5
3M 6.1 5.4
12M 26.1 13.7
Financial and valuation metrics Year Revenue (Rs mn) EBITDA (Rs mn) EBIT (Rs mn) Net income (Rs mn) EPS (CS adj.) (Rs) Change from previous EPS (%) Consensus EPS (Rs) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
3/10A 124,470.8 34,071.5 13,922.4 9,539.3 3.03 n.a. n.a. -14.5 22.2 0 8.7 1.9 7.7 67.0
3/11E 156,895.4 38,142.0 14,254.6 8,938.1 2.71 -0.1 2.46 -10.6 24.8 0 9.1 1.8 7.6 103.2
3/12E 189,945.0 53,745.9 24,223.9 14,433.3 4.37 1.7 2.37 61.5 15.4 0.4 6.4 1.6 11.1 91.5
3/13E 211,140.9 65,280.0 33,641.5 22,076.2 6.69 4.2 3.95 53.0 10.0 1.2 5.1 1.4 15.1 69.6
Source: Company data, Thomson Reuters, Credit Suisse estimates.
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Figure 60: Summary financials

Year-end 31 Mar (Rs mn) Income statement Revenue License and WPC charges Roaming and Access charges EBITDA Depreciation EBIT Finance expenses (net) Other income (net) Profit before tax Net Income EPS (Rs) Balance sheet Cash and short-term investments Receivables and other current assets Total current assets Gross fixed assets Net fixed assets Total assets Total long-term liabilities Cash flow statement Net income Other income (net) Change in fixed asset Cash flow from investing Change in debt and liabilities Change in equity reserves Cash flow from financing Change in cash Cash at the beginning of year Cash at the end of year Change in cash 11,622 -175 -50,933 -55,655 22,649 2,035 21,908 -13,216 18,199 4,975 -13,225 10,371 -231 -63,748 -113,850 23,968 86,827 105,850 25,880 4,975 30,864 25,889 9,539 -836 -66,452 -52,505 -10,529 -28,470 -43,005 -27,966 30,864 2,900 -27,964 8,938 0 -91,305 -91,305 68,314 0 63,598 18,019 2,900 20,917 18,017 13,647 -628 -44,247 -43,619 0 0 -8,814 1,983 20,917 22,900 1,983 19,527 -1,145 -36,967 -35,822 0 0 -8,814 16,214 22,900 39,114 16,214 4,975 10,525 15,500 110,144 78,902 127,622 65,154 30,864 22,821 53,685 178,313 133,076 262,137 89,122 2,900 33,730 36,630 270,585 181,679 232,996 78,593 20,917 35,975 56,892 304,205 191,411 320,676 146,907 22,900 43,553 66,453 348,452 209,020 344,962 146,907 39,114 48,413 87,527 385,418 217,232 371,365 146,907 67,200 6,851 11,334 22,518 7,569 14,949 2,776 175 12,347 11,622 4.42 101,313 11,239 18,442 28,134 12,473 15,661 4,945 231 10,947 10,371 3.54 124,471 13,468 18,001 34,072 20,149 13,922 4,005 836 10,754 9,539 3.03 156,895 17,051 32,520 38,142 23,887 14,255 4,716 0 9,539 8,938 2.71 189,945 20,577 40,205 53,746 29,522 24,224 8,814 628 16,037 14,433 4.37 211,141 23,194 41,460 65,280 31,639 33,641 8,814 1,145 25,972 22,076 6.69 FY3/08A FY3/09A FY3/10A FY3/11E FY3/12E FY3/13E
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Figure 61: Key ratios

FY3/08A Margin (%) EBITDA margin EBIT margin Net profit margin YoY growth (%) Revenue growth EBITDA growth EBIT growth Net profit growth Return ratios (%) ROE (average) ROE(end of period) ROIC Turns ratios (x) Working capital turns Fixed asset turns Other ratios Net debt/equity Gross debt/equity Interest cover 33.5 22.2 17.3 54.5 53.7 65.8 90.4 40.6 32.8 18.3 -6.0 1.1 1.8 1.8 5.4 27.8 15.5 10.2 50.8 24.9 4.8 -10.8 12.3 7.8 9.7 -10.7 1.0 0.4 0.7 3.2 27.4 11.2 7.7 22.9 21.1 -11.1 -8.0 7.7 8.4 6.4 -21.7 0.8 0.7 0.7 3.5 24.3 9.1 5.7 26.1 11.9 2.4 -6.3 7.6 7.3 5.5 -89.8 0.8 1.0 1.2 3.0 28.3 12.8 7.6 21.1 40.9 69.9 61.5 11.1 10.6 7.6 280.4 0.9 0.9 1.1 2.7 30.9 15.9 10.5 11.2 21.5 38.9 53.0 15.1 14.2 10.0 248.0 1.0 0.7 0.9 3.8 FY3/09A FY3/10A FY3/11E FY3/12E FY3/13E
Figure 62: Mobile business key assumptions

FY3/08A Subscribers (mn) % YoY ARPU excluding 3G (Rs/sub/month) % YoY ARPU including 3G (Rs/sub/month) % YoY Revenue per minute ex-3G (Rs/min) % YoY MoU (min) % YoY 24.0 71.3 295 -11.3 295 -11.3 0.77 -15.9 384 5.5 FY3/09A 43.0 79.2 237 -19.7 237 -19.7 0.57 -25.8 416 8.3 FY3/10A 63.8 48.4 193 -18.5 193 -18.5 0.49 -13.1 391 -6.1 FY3/11E 87.5 37.1 172 -10.6 172 -10.6 0.43 -12.4 398 2.0 FY3/12E 94.6 8.1 170 -1.4 173 0.3 0.42 -3.3 406 2.0 FY3/13E 102.0 7.9 169 -0.9 176 1.8 0.41 -2.8 414 2.0
40
23 May 2011
Companies Mentioned (Price as of 20 May 11) Advanced Info Service PCL (ADVA.BK, Bt94.00, NEUTRAL, TP Bt100.00) Axiata Group Berhad (AXIA.KL, RM4.95, OUTPERFORM, TP RM6.25) Bakrie Telecom PT (BTEL.JK, Rp375.00, RESTRICTED [V]) Bharti Airtel Ltd (BRTI.BO, Rs373.70, OUTPERFORM, TP Rs450.00) China Mobile Limited (0941.HK, HK$69.25, NEUTRAL, TP HK$86.00) Excelcomindo Pratama PT (EXCL.JK, Rp6500.00, OUTPERFORM [V], TP Rp7200.00) Far EasTone Telecom (4904.TW, NT$44.00) Globe Telecom Inc (GLO.PS, P853.00, OUTPERFORM, TP P930.00) Hutchison Telecommunications HK Holdings Ltd (0215.HK, HK$2.20, OUTPERFORM, TP HK$2.90) Idea Cellular Ltd (IDEA.BO, Rs67.15, OUTPERFORM [V], TP Rs95.00) LG Uplus (032640.KS, W5,740, NEUTRAL, TP W6,600) M1 Limited (MONE.SI, S$2.44, NEUTRAL, TP S$2.66) Maxis Berhad (MXSC.KL, RM5.40, OUTPERFORM, TP RM6.10) NTT DoCoMo (9437, 146,000, NEUTRAL, TP 150,000, OVERWEIGHT) PT Indosat Tbk (ISAT.JK, Rp5350.00, OUTPERFORM, TP Rp7900.00) PT Telkom (Telekomunikasi Indo.) (TLKM.JK, Rp7650.00, OUTPERFORM, TP Rp9750.00) Reliance Communication Ltd (RLCM.BO, Rs83.85, NEUTRAL [V], TP Rs120.00) Singapore Telecom (STEL.SI, S$3.22, NEUTRAL, TP S$3.62) Sistema (SSAq.L, $26.14, OUTPERFORM [V], TP $36.00) SmarTone Telecom (0315.HK, HK$12.92, UNDERPERFORM, TP HK$12.00) StarHub Ltd (STAR.SI, S$2.75, UNDERPERFORM, TP S$2.31) Taiwan Mobile (3045.TW, NT$75.00) Tata Communications Ltd (TATA.BO, Rs214.45, OUTPERFORM, TP Rs375.00) Total Access Communication PCL (DTAC.BK, Bt55.75, NEUTRAL, TP Bt50.00) True Corp PCL (TRUE.BK, Bt5.05, UNDERPERFORM [V], TP Bt3.30) Vodafone Group (VOD.L, 173.90 p, OUTPERFORM, TP 185.00 p, MARKET WEIGHT)
Disclosure Appendix
Important Global Disclosures I, Sunil Tirumalai, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for BRTI.BO
BRTI.BO Date 8-Jul-08 25-Jul-08 13-Mar-09 24-Jul-09 2-Oct-09 22-Oct-09 25-Jan-10 9-Jul-10 17-Sep-10 6-May-11 Closing Price (Rs) 355.95 398.225 279.35 416.95 435 337.5 331 307.5 359.5 Target Price Initiation/ (Rs) Rating Assumption 462.5 475 425 N 375 U 290 320 N 360 O 415 X
475 463 425 405 U N 375 355 320 305 290 Rs 6-May-11 255 N O 360 415
455
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Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
41
23 May 2011
3-Year Price, Target Price and Rating Change History Chart for IDEA.BO
IDEA.BO Date 8-Jul-08 29-Oct-08 3-Jun-09 27-Jul-09 22-Oct-09 25-Jan-10 9-Jul-10 26-Jan-11 Closing Price (Rs) 85.7 38.75 80.9 79.6 59.75 61.9 66.9 71.6 Target Price Initiation/ (Rs) Rating Assumption 95 60 O 70 N 72.5 45 U 50 75 O 85
106 96 86 N 76 66 56 46 Rs 36 O 60 45 70 73 U 50 75 O 95 85
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23 -M ay -0 23 8 -Ju l-0 8 23 -S ep -0 8 23 -N ov -0 8 23 -Ja n09 23 -M ar2 3 09 -M ay -0 9 23 -Ju l- 0 9 23 -S ep -0 9 23 -N ov -0 9 23 -Ja n-1 0 23 -M ar -10 23 -M ay -1 0 23 -Ju l-1 0 23 -S ep -1 0 23 -N ov -1 0 23 - Ja n23 11 -M ar -1 1
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
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23 May 2011
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23 May 2011 Asia Pacific / India Equity Research
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23 May 2011 Asia Pacific Equity Research Telecommunication Services

India Telecoms Sector

Data ... is here and now!

Source: Company data, Credit Suisse estimates

Focus charts and table

Figure 3: Internet penetration in India is far behind world average

50% 40% 30% 20% 10% Japan Singapore

Shaded bars are EM telcos

80% 60% 40%

83% 81% 79% 78% 77%

33% 32% 29%

29% 12% 10% 10% 6%

Source: Company data, Telecom regulators, Credit Suisse estimates

Source: ITU, Credit Suisse estimates

Figure 4: History shows India can quickly adopt new technology

2.3x increase in bandwidth over the last 12M

Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Figure 8: Bharti changes to 3G estimates

India Telecoms Sector

Show me the data!

Data to add 500 bp to industry CAGR

The bottlenecks are easing

Integrated players can benefit from entire value chain

India Telecoms Sector

Sector valuation table

Source: Bloomberg, Company data, Credit Suisse estimates

India Telecoms Sector

Data to add 500 bp to industry CAGR

Data uptake in India is low by global standards

50% 40% 30% 20% 10% Japan Singapore

Shaded bars are EM telcos

India Telecoms Sector

Shaded bars a re EM telcos

Source: Company data, Credit Suisse estimates

Shaded bars are EM telcos

India Telecoms Sector

Worldwide internate usage penetration 100% 80% 60% 40% 20% 0%

83% 81% 79% 78%

77% 69% 65%

29% 12% 10% 10% 6%

The contrast is even starker when we consider the broadband penetration.

Source: ITU, Credit Suisse estimates

Chinese experience shows the surge can be quick

India Telecoms Sector

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

India has shown it can catch up fast on new technology

India Telecoms Sector

Internet user penetration

Source: Worldbank Database Credit Suisse estimates

India Telecoms Sector

FY3/0 8 FY3/0 9 FY3/1 0 FY3/1 1

Source: Company data, TRAI, Credit Suisse estimates

Retail data wireless to drive growth

100% 80% 60% 40% 20% 0%

% of internet users who use mobile access 2009

Source: World Economic Forum, Nielsen, Credit Suisse estimates

India Telecoms Sector

20% 15% 10% 5% 0% -5%