Solid growth in the mobile space in the past few years has greatly benefited Indian telecom companies in terms of valuation. On a per subscriber basis, most Indian telecom majors are valued much higher than their international counterparts. tele.net speaks to various analysts about telecom company valuations, the factors affecting them and future trends…
How have Indian telecom companies performed in terms of valuation so far?
Dinesh Arora: The combined market capitalisation of four large listed operators ?? Bharti Airtel, Reliance Communications, Idea Cellular and Tata Communications ?? was over Rs 4,000 billion ($100 billion) at the end of December 2007. Today, it has fallen by nearly 30 per cent in rupee terms to less than Rs 2,700 billion. The fall is even more dramatic in dollar terms. However, this is more or less in line with the index, which has fallen from the all-time high by a similar percentage.
Nitin Gupta: Indian telecom stocks trade at an enterprise valuation/earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) ratio of 10-12 and a price/earning (PE) ratio of 18-21 on 2008-09 numbers. This is on an expected EBITDA compounded annual growth rate (CAGR) of 30-40 per cent over 2008-10. The EBITDA multiples coming down from the high of 18-22 over 2005-08 also reflect the end of the period of super-normal growth. Indian companies in other sectors that are expected to grow at 30-40 per cent are trading at an EV/EBITDA of 10-14. Hence, telecom companies seem to be priced in line with high-growth companies in other sectors. These multiples also show that the market expects such growth to continue at least over the next two to three years.
Namrta Sudan: No comments.
Mahesh Uppal: Speaking qualitatively, most major India telecom service companies have performed quite impressively with regard to PE, EV/EBITDA and EV/subscribers. While Airtel is the best performer, Mahanagar Telephone Nigam Limited continues to underperform. In the telecom manufacturing segment, Avaya and Sterlite have done well, while Himachal Futuristic Communications Limited has not.
What are the key factors affecting the valuation of telecom companies?
Dinesh Arora: Amongst the positive factors is sustained subscriber growth. This augurs very well for the industry in the long run. We expect that the efficiency improvements brought about by infrastructure sharing will have a marked effect on the companies’ accounts over the next few quarters.
Average revenue per user (ARPU) is continuing to decline as in the past. The drop has been taken into account in the valuations. I think that once new operators launch services and mobile number portability comes into effect, there would be a significant impact on the revenues of telecom operators. New operators could adopt predatory pricing, impacting the margins of the existing operators. I think that the next four to six quarters will prove to be very interesting.
Nitin Gupta: The key factor driving high telecom valuations is that despite the scorching subscriber additions rates achieved over the past two to three years, the penetration levels are still short of 30 per cent. Net additions from B and C circles will increase as operators expand coverage. Subscriber additions will grow on the back of increasing household income and falling handset prices and mobile tariffs. However, ARPUs are still likely to fall by 10-12 per cent over the next two years across most circles, putting pressure on EBITDA growth and hence on the multiples. The new growth areas are expected to be data, value-addedservices and 3G/Wi-Max. International forays by Indian operators are also expecTed to fuel growth.
Namrta Sudan: The key factors affecting the valuation of telecom companies are increasing revenue, supported by the steady increase in subscriber base; growth in EBITDA and its margins every year; wide network coverage; greater execution capabilities; strong brand value; dual offering strategy; sound infrastructure; increase in ARPU; etc.
The other factors are potential revenue growth in the future, capital assets, introduction of new technologies, stabilised brand value over a period of time, diversification of products and service offerings, growing infrastructural resources, etc.
The factors that may adversely affect valuation are the entry of the new players; the heavy investment required to expand networks; costs associated with investing in intangible assets like intellectual property, technical knowhow, etc. Though these factors may increase enterprise valuation, EBITDA may fall in the short term due to capital expenses.
Mahesh Uppal: The number and type of licences, size and quality of the subscriber base (including revenue generating potential), ARPU, degree of competition and, of course, the brand value are the primary determinants of a company’s valuation. The incumbents have an advantage from the revenue point of view ?? it is largely the marginal customers that remain to be connected for the new operators and the cost of churning subscribers is high.
Access to spectrum is a major concern, and companies that already have it are better off. The over-100 licences issued this year has created huge valuations for the recent entrants who are yet to start services, largely as the licence provides access to spectrum.
How do the Indian telecom companies compare with international players in terms of valuation?
Dinesh Arora: Indian telecom companies continue to enjoy a healthy premium over their international counterparts. Indian companies trade at a PE multiple of 20-30, while large international companies trade at 8-15. The difference is mainly due to the growth premium assigned to the Indian market.
Nitin Gupta: While China Mobile is trading at an EV/EBITDA multiple of about 7 on 2008-09 numbers (with an expected EBITDA CAGR of 14 per cent for 200810), China Unicom is trading at 5.3. Most Asian and African telecom companies are trading at 5-7 on the back of an estimaTed EBITDA CAGR of 6-9 per cent over 2008-10. The higher multiples of Indian companies represent the higher expected growth in terms of subscribers, revenue and thereby profit margins. In the future, the trading multiples of Indian telecom companies shall become similar to the global averages.
Namrta Sudan: The valuation of Indian telecom companies seems to be higher than that of their overseas counterparts. A comparison of the valuation on a subscriber basis reveals that apart from Verizon (in the US) and NTT DoCoMo (in Japan), Indian telecom majors are valued much higher than international companies. Bharti is valued more than Vodafone, which has the largest subscriber base in the world. Even on the stock market level, Indian telecom companies command a higher average PE than foreign players.
However, valuations on an EV/EBITDA basis would produce a more meaningful comparison. On this basis, foreign companies fare slightly better. The EV/EBITDA range of Indian companies is 10 to 13, while that of comparable foreign players is 14 to 15. However, given the fact that there is stiff competition in the Indian market, Indian telecom companies have done reasonably well.
Dr Mahesh Uppal: Most major Indian companies have better valuations than their counterparts abroad.The exception is China.
With key developments, like the entry of new players and 3G/Wi-Max spectrum auction, taking place, how are the valuations expected to change in the future?
Dinesh Arora: In the case of 3G, everything depends on the business case. Amongst the key unknown variables is the number of operators allowed for 3G and, more importantly, how much they bid for each of the circles. While the reserve price is reasonable at around $500 million (all-India), we do not know how much the companies would eventually bid. In case the bids are unreasonable, as has been the case in the past, the business case would remain a mystery.
Nitin Gupta: This period of normal growth is expected to continue till 2010-11, with EBITDA multiples likely to hover in the range of 1012. Post 2011, industry consolidation is likely, resulting in EBITDA multiples in the 7-10 range. The auctions for 3G will also have a significant impact on valuations and subsequently on the uptake of data services over 3G or Wi-Max.
Namrta Sudan: The everchanging trends in the Indian telecom industry demand that telecom companies be highly innovative. With key developments such as the entry of new players, 3G launch and spectrum auction, the valuations of telecom companies may drop initially as these incur costs on tangible and non-tangible assets to match technology trends and build adequate infrastructure.However, in the long term, these factors would increase valuation.
Mahesh Uppal: The new operators will hurt the incumbents’ valuations, but not significantly since almost all of them are expected to sell out or merge with other companies. Clearly, access to 3G spectrum, especially if it is cheap, will relieve the spectrum crunch for 2G services to a large extent. If the government remains technology neutrality ?? something that it has not done consistently in the past ?? 3G operators will have higher valuation. However, if Wi-Max spectrum is underpriced following the new rules that propose to halve the reserve price of 3G for Wi-Max and double the corresponding allocation of 3G spectrum, distortions will follow and benefit Wi-Max operators.
