Thursday, February 2, 2012

Axiata Berhad: Complicated and Challenging India

3 February 2012
Price Target: RM4.92
Share Price: RM4.73


News
# Reuters reported that India’s Supreme Court has ordered the government to revoke 122 telecoms licenses issued under a scandal tainted 2008 sale.

# Idea Cellular’s (which Axiata has 19.7% stake) 13 licenses will be revoked along with competitors’ including Unitech Wireless (22 licenses), Loop Telecom (21 licenses), Videocon Telecommunications (21 licenses), Estisalat DB Telecom (15 licenses), S Tel (6 licenses), Sistema Shyam Teleservices (21 licenses) and Tata Teleservices (3 licenses).

# These licenses were issued in 2008 under the influence of bribery and violation of rules. As a result, cost the government as much as US$36b in lost revenue.

# On the bright side, Idea may be allowed to continue operation for the next 4 months, until regulators come out with new market rules or new auctions are conducted.

Financial impact
# Idea claimed that the decision may reduce up to 4% of revenue. Pending further clarification from Axiata.

Comments
# This news will definitely have a negative impact Axiata’s investment in India pending India government’s decision going forward.

# The punishment maybe in the forms of auctioning the revoked licenses or penalty payment. We view the former option as the worst case scenario as other incumbent
players may take part and elevate the cost of the scarce spectrum.

# We would also like to highlight that Idea is also involve in another two legal disputes with the Indian government:
1. Illegal mutual roaming agreements to provide seamless nationwide 3G services.
2. Under reporting revenue to the government between 2006 and 2008. It was reported that Idea is fined US$24m.

Catalysts
- Higher smartphone penetration boosting data ARPU.
- Strong growth in low penetration developing markets.
- More cost savings from collaboration with DiGi.

Risks
Regulatory risks, FOREX fluctuations & competitive risks.

Forecasts
Unchanged.

Rating: HOLD: Target Price RM4.92
Positives
– Despite the challenging 3Q11, Axiata’s main businesses (Celcom, XL, Dialog) continue to execute well.

Negatives
– Exposure to Indian telecom market which is currently under close scrutiny by the government.

Valuation
We reiterate our HOLD call with unchanged target price of RM4.92. We opine that the robust growth story may have come to an end especially for Celcom and XL who are the main contributors as market matures and competition intensifies.



Source: HLIB Research

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