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MOSL: TELECOM-Competitive intensity to persist in FY19; ARPU recovery merely delayed; retain Buy on Bharti and Idea

Telecom: Competitive intensity to persist in FY19; ARPU recovery merely delayed; retain Buy on Bharti and Idea

•  Since January 2018, telecom service providers have once again turned to market share gains at the cost of profitability. The sector might continue to see aggressive pricing for the next 12 months, leading to market share losses for the smaller players (15% currently) as well as Vodafone-Idea until the merger settles down.
• Bharti’s acquisition of TTSL and Telenor should provide INR33.8b EBITDA in FY20, a much needed buffer to mitigate the impact of ARPU downtrading. Vodafone-Idea’s INR200b cash infusion should help take care of FY19 capex, but beyond that, net debt of INR1.2t and net-debt-to-EBITDA of ~11x might necessitate further cash infusion.
• Once the three large players – Bharti, Vodafone-Idea and RJio – have similar network capability and financial wherewithal, focus should shift back to profitability. We now expect this to happen only in FY20, later than we had believed earlier.
• We cut our FY20 India wireless EBITDA estimates by 12% for Bharti and by 9% for Idea. We expect consolidated EBITDA to grow 1% for Bharti and -14% for Vodafone-Idea in FY19, and recover to 18% and 72%, respectively in FY20.
• We maintain Buy on both Bharti and Idea, but cut our target prices. Our target price is now INR581 (v/s INR680 earlier) for Bharti and INR91 (v/s INR120 earlier) for Idea. As recovery sets in in the next 3-4 quarters, strong FCF growth should re-rate the stocks.