SingTel – Kim Eng

India 3G roaming – To ban or not to ban?

Ban or no ban: who knows? India’s proposed ban on 3G roaming alliances between domestic telcos is only the latest uncertainty in a telecom market already famous for regulatory earthquakes. However, the impact is minimal for a couple of reasons. One, 3G subscribers form just 2-3% of the total number of mobile phone users in India, hence the impact on earnings is relatively small, and two, SingTel and Axiata are insulated by their minority stakes in their Indian associates. We maintain SELLs on SingTel (TP SGD3.03) and Idea (TP Rs68) and BUYs on Axiata (TP MYR7.30) and Bharti Airtel (TP Rs400). We like Bharti for its improving FCF and earnings profile, and Axiata for potential surprises in earnings and dividends.

3G roaming pact ban notices served. Bharti Airtel, along with Idea and Vodafone, said this week that they has received a notice from DoT, the Indian telecom regulator, to stop offering 3G roaming in areas (or “circles”) that it does not have 3G spectrum rights within 60 days. In 2010, Bharti won 3G licences in 13 of the total 22 telecom circles for USD2.3b. In 2011, it entered into 3G roaming agreements with Vodafone and Idea (part of Axiata), giving it a 3G presence in the whole of India. DoT claims that by doing this, the government is not receiving its just dues, and wants it stopped.

Telcos are appealing. Naturally, the telcos are appealing against the decision. They claim that there was no specific provision made against roaming pacts when the 3G licences were sold in 2010.

Not a big deal, as 3G subscribers in India are a rare breed. In total, 3G subscribers only account for 2-3% of the total number of mobile subscribers in the country, which hit 672m active users as at Aug 2012. The biggest 3G mobile telco players in India by subscriber size are Reliance Communications (RCOM), Bharti Airtel, Idea Cellular and Vodafone. We estimate Bharti has 5.1m “active” 3G subscribers, followed by Reliance with 4m and Idea with 3.1m. Vodafone has the smallest subscriber base.

Old news, but this is getting old. A possible ban on such 3G roaming pacts is not new, as there has already been numerous warnings since Dec 2011. Given that 2G roaming is allowed, Ganesh Ram our telco analyst in India believes the regulator will eventually also allow the 3G pacts to continue with some modifications. Nevertheless, this creates further uncertainty in a market fraught with regulatory stress lines, most recently being the cancellation of 122 2G licences earlier in 2012.

Minimal impact on Bharti and Idea, as well as their parent companies. If the 3G ban is implemented, Ganesh estimates the earnings impact on Bharti to be negligible. For Idea, the impact will be larger at Rs600m or Rs0.18/share, 8% of his FYMar13 forecast. Ganesh has a BUY on Bharti (TP Rs400) and a SELL on Idea (TP Rs68). As SingTel owns only 15.9% of Bharti Airtel directly and Axiata owns a mere 19.7% of Idea, the impact on SingTel (SELL, TP SGD3.03) and Axiata (BUY, TP MYR7.30) are also negligible.

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