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Wednesday, October 7, 2009

Axiata (HOLD TP RM2.75)

Price war escalates in India

· One big disruptive price plan in India Reliance Communications (RCOM IN, non-rated), the second largest mobile operator in India, unleashed a disruptive price plan on Monday which allows both prepaid and postpaid subscribers to make calls at only INR0.50/min (US 1 cent/min) nationwide, believed to be among, if not the cheapest tariff in India. On average, subscribers pay US 2 cents/min for local calls, while national long-distance calls are priced at about US 3 cents/min.

Intense competition over the years has driven down tariffs and pushed mobile operators to constantly innovate and throw in extra features to reduce churn and protect market share. Barely four years ago, BSNL introduced a plan which only charged INR1.00/min.

The disruptive plan by Reliance will likely result in Axiata’s associate, Idea Cellular (IDEA IN, non-rated) facing significant pressure on margins and downside risks to revenue and subscriber growth, with the extent dependent on how Idea will respond. Lowering tariffs may help reduce churn and stimulate usage but may not fully offset the effects from a steep drop in tariffs. Idea is expected to respond quickly to avoid churn and maintain its growth trajectory, as the next several weeks coincide with Deepavali in mid-October and the wedding season in November and December. This is crucial to ensure it does not lose out as mobile usage and new subscriber additions will likely surge during this period. However, being only the fifth largest among 11 players, Idea may not have the clout to go head-to-head with Reliance in a price war. Reliance has a subscriber base of 84.8m as at August while having a far superior EBITDA margin of 39.1% in 2QCY09. In comparison, Idea has 50.1m subscribers and EBITDA margins of only 28.9%. The market leader, Bharti Airtel (BHARTI IN, non-rated) leads with 110.9m subscribers and BITDA
margins of 40.6%.

Earnings forecast trimmed
In view of intensifying competition, we have reduced our EBITDA margins, ARPU and revenue growth assumptions for Idea. Consequently, our FY09-11 EPS estimates for Axiata are lowered by 2%-4%. Maintain HOLD, TP reduced to RM2.75 We maintain our HOLD call on Axiata, while lowering our target price from RM2.85 to RM2.75 based on SOP valuation. Risks to our recommendation include (1) irrational price competition, and (2) a long and drawn-out price war in India.

Source : ECM Libra

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