2011 jul 08 - iifl - singtel

SingTel – ADD

Leadership through diversity

Financial summary (S$)Y/e 31 Mar FY10A FY11A FY12ii FY13ii FY14ii Revenues (SG$ m) 16,871 18,071 18,975 19,942 21,145 EBITDA Margins (%) 28.7 28.3 28.0 28.2 28.9 Pre‐Exceptional PAT (SG$ m) 3,907 3,835 4,195 4,595 5,133 Reported PAT (SG$ m) 3,907 3,835 4,195 4,595 5,133 EPS (SG$) 0.245 0.241 0.263 0.289 0.322 Growth (%) 13.2 ‐1.8 9.4 9.5 11.7 IIFL v/s Consensus 4.1 5.7 7.4 PER (x) 12.9 13.1 12.0 11.0 9.8 ROE (%) 17.8 16.0 17.3 18.4 19.6 Debt/Equity (x) 0.2 0.2 0.2 0.2 0.2 EV/EBITDA (x) 11.1 10.2 10.1 9.4 8.5 Price/Book (x) 2.1 2.1 2.1 2.0 1.9 Source: Company, IIFL Research. Priced as on 1st July 2011

G.V. Giri | [email protected] +91 22 4646 4676

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CMP S$3.16

12‐mth TP (S$) 3.29 (4%)

Market cap (US$ m) 40,918.0

Bloomberg ST SP

Sector

Shareholding pattern (%) Temasek 54.4Others 45.6

52Wk High/Low (S$) 3.33/2.84Shares o/s (m) 15,936.2Daily volume (US$ m) 50.9Dividend yield FY12ii (%) 8.4Free float (%) 46.0

Price performance (%)

1M 3M 1Y

SingTel ‐1.6 4.6 3.9

Rel. to ‐0.3 4.2 ‐6.1

StarHub Ltd 0.0 3.3 23.5

M1 Ltd 4.1 6.5 19.9

Stock performance

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Company update

Initiating coverage

05 July 2011 Institutional Equities

If you are looking for a telecom company with exposure to long term growth opportunities in Asia and Africa; dominant market position in many of its markets; an almost 10% EPS CAGR over a three year period, SingTel is the answer. We are between 5% and 6% above consensus EPS and rate the stock ADD (TP SG$3.29) given its strong growth prospects but near term challenges in Singapore (NBN) and Australia (competition in the wireless space).

Core operations (Singapore and Australia) stable but face varied pressures: In Singapore, SingTel is the market leader in mobile, and has outperformed peers on churn, SAC, and ARPU expansion, and marginally raised its already impressive revenue market share by 150bps to 53.5% by our estimates. But the NBN is likely to temper upsides as entry barriers to companies for providing services over fibre bring down the differentiation opportunities SingTel’s size and full-service range have traditionally afforded. Optus has the complementary opportunity in Australia, given that it is likely to use NBN (in the long run) to challenge Telstra’s supremacy, but in the near term, Telstra will step up competitive pressure in the wireless space, which is still the biggest revenue earner in Optus.

Associate earnings likely to bottom out: We project a 47% increase in the PBT of associates over a 3 year span, with Bharti delivering almost 72% of this increase, thanks to a steadily improving competitive environment and potential for 3G led revenue growth in India, and a turnaround of its African operations. Telkomsel should also most likely step up dividend sharply, assuming its continued inclusion in the SingTel associate group.

We rate SingTel ADD, with 12.6% upside: Our SOTP model, using DCF for most parts except AIS and Bharti, yields a total return of 12.6% (8.5% including only 1/2 of the spl dividend) translating to an ADD rating. Our optimism on further upside is tempered by the competitive pressure the core (Singapore + Australia) faces, though long term prospects are bright.

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SingTel – ADD

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Institutional Equities

Table of Contents 1. Introduction and background – Page 3

2. SingTel (Singapore) – Page 5

3. Optus (Australia) – Page 14

4. Telkomsel (Indonesia) – Page 19

5. AIS (Thailand) – 1

6. Bharti (India) – Page 23

7. Globe Philippines – Page 32

8. Aggregate projections – Page 34

9. Valuation – Page 35

10. Detailed financials – Page 36

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SingTel – ADD

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1. Company snapshot Strong presence in emerging markets: SingTel is the largest listed company in Singapore. It has operations in Singapore and Australia (100%-owned) and through associates in Indonesia (Telkomsel), India (Bharti Airtel), Thailand (Advanced Info Service), and the Philippines (Globe Telecom). The company also operates in Pakistan and Bangladesh.

In Singapore, SingTel has diversified operations, spanning wireless and fixed-line, voice and data, and retail and corporate customers. It also has 30% ownership of OpenNet, a network company, which provides broadband capacity in Singapore. In Singapore, SingTel is also involved in broadband and Pay TV through ADSL.

In Australia, it is the second-largest telco after Telstra, with bulk of revenue coming from wireless operations.

Leadership position in four countries: SingTel holds #1 position in Singapore; among its associates, Bharti Airtel, Telkomsel and AIS are leaders in their respective markets (India, Indonesia and Thailand). While Bharti is a diversified company in its own right, Telkomsel is majority-owned by Telkom, which is a full-range services provider in Indonesia.

Globe provides mobile, fixed-line, and broadband services in the Philippines, where it is the second-largest after PLDT.

SingTel also has small investments in PBTL (Bangladesh, 45%, acquired in 2005) and Warid (Pakistan, 30%, acquired in 2007).

Background

SingTel was incorporated in 1992 and it was listed in Singapore (through what still remains Singapore’s largest IPO) in 1993.

In 1993, SingTel invested in Globe (the Philippines), its first major overseas telco investment. Globe’s wireless operations started in 1994. SingTel followed this up with a stake in AIS Thailand in 1999.

SingTel entered the Indian and Indonesian markets in 2000 and 2001 by taking stakes in Bharti Airtel and Telkomsel, respectively.

In 2001, SingTel bought over Optus in Australia from Cable and Wireless, which had raised its stake from 24.5% in 1997 to 52.5% by buying out Bell South, listing Optus, and participating in the IPO.

In 2003, SingTel divested a majority stake in Singapore Post and it also shed its stake in other non-core businesses, emerging as a core telecom company.

In 2005, SingTel entered Bangladesh through PBTL, although it was a small investment by its standards. The company made a much bigger investment in 2007 with its US$758m purchase of a 30% stake in Warid, Pakistan, but later took a writedown on this.

Now, SingTel’s presence spans many countries in the Asean region, India and Australia. Through Bharti’s 2010 acquisition of Zain in Africa, SingTel also has an indirect play in the African market, which entails sustained growth opportunities in the long term.

Figure 1: Optus (Australia), a 100%‐owned subsidiary, is the largest revenue contributor for SingTel. Rise in Australian Dollar, the economy’s relatively strong performance through the 2008 credit crisis, and Optus’s impressive run boosted its contribution in SingTel’s revenue pie

Singtel's 1Q2011 Revenue (SGD m)

Optus (converted to SG$), 2,982,

64%

SingTel (Sing), 1,661, 36%

Source: Company, IIFL Research

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SingTel – ADD

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Figure 2: Among associates, Telkomsel and Bharti are main contributors. The 100%‐owned Singapore and Australian operations contribute to 60% of PAT

1Q2011 PAT (SGD m)

Telkomsel, 143, 14%

AIS, 56, 6%

Bharti, 127, 13%

Globe, 40, 4%

SingTel (Sing) + Optus, 622,

61%

Others, 16, 2%


Figure 3: Snapshot of SingTel’s associates – In India, Indonesia and Thailand, the associates occupy leadership position SingTel's investments Bharti Telkomsel AIS Globe PBTL Warid

Country India Indonesia Thailand PhilippinesBangla desh

Pakistan

Year of initial investment 2000 2001 1999 1993 2005 2007

Effective Shareholding % 32.30% 35.0% 21.3% 47.3% 45.0% 30.0%

Investment to date (SG$ bn) 2.31 1.93 0.87 1.02 0.238 1.31

SingTel holding (SG$ bn) 12.55 NA 2.37 1.02 NA NA

Operational Performance : Mobile penetration rate (3) 68.0% 89.0% 113.0% 93.0% 44.0% 63.0%

Market share, 31 Dec 2010 20.0% 46.4% 44.3% NAV 2.5% 17.0%

Market position (3) (5) #1 #1 #1 #1 #2 #5 #4

Mobile customers ('000)

‐ Aggregate 211,919 99,365 31,951 27,320 1,788 17,806

‐ Proportionate 68,344 34,778 6,799 12,931 85 5,342

Credit ratings ‐ Sovereign (Moody's/ S&P's) Baa3/BBB‐ Ba2/BB Baa1/BBB+ Ba3/BB Ba3/BB‐ B3/B‐ ‐ Company (Moody's/ S&P's) NA/BB+ Baa2/BBB‐ NA/A‐ NA NA NA


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SingTel – ADD

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SingTel (Singapore) – wireless and Pay TV the main growth drivers SingTel offers a full range of telecom services in Singapore. It has also taken the acquisition route to offer IT services. SingTel competes with Starhub and M1, the other major telcos. Until recently, M1 offered only wireless services, but now, it is turning into a full-services provider (see our report dated 25 April 2011, titled “Grim battle for capturing NBN upside”). Starhub offers diversified services in Singapore (see our report dated 30 May 2011, titled “Growth drivers elusive”).

Wireless services account for the largest portion of SingTel’s revenue, but a 28% contribution indicates the extent of the company’s diversification.

SingTel has a 45% share of Singapore’s mobile subscribers and a dominant presence in the premium customer segment; its ARPU in the post-paid segment, in a predominantly post-paid Singapore market, is the highest.

IT services is the next largest revenue contributor, but it includes a revenue stream relating to fibre roll-out for OpenNet, SingTel’s 30%-owned network company (substantially owned by Singapore Press Holdings, among the major holders of M1 — one of SingTel’s three competitors). This revenue stream, worth SG$70m/quarter, will wind down in FY12 as the fibre rollout will reach its completion.

SingTel offers traditional IT services, and increasingly, cloud-computing products. Its competition here is with the likes of Cisco and AT&T. The company has the largest data centre in Singapore. SingTel also competes in South East Asia; its main market outside of Singapore is Indonesia, where it is involved directly and not through Telkomsel.

Corporate data and Internet is another significant revenue stream (18%). SingTel dominates this market, with revenue being almost 4x that of the nearest competitor, Starhub. This business is

likely to undergo a transformation because of NBN, which would incrementally increase Starhub’s reach; SingTel’s reach here is already considerable and NBN may not create much of an upside.

Mio TV is SingTel’s Pay TV initiative. SingTel runs this on its ADSL lines, whereas Starhub runs an equivalent service on cable. It is a recent business and SingTel’s main strength here has been its financial muscle, which has allowed it to aggressively bag exclusive content (English Premier League) and raise its profile.

Figure 4: SingTel’s revenue is considerably diversified, even looking at only its Singapore operations. Wireless, IT, and corporate data form almost two‐third of revenue

1Q2011 Revenue (SGD m)

Mio TV, 23, 1%

Miscellaneous (5), 39, 2%

Sale of equipment, 86,

5%IT and Engg

services, 430, 27%

National telephone, 90,

5%

Corporate Data, 303, 18%

Retail Data, 112, 7%

International Telephony, 123,

7%

Mobile Communications, 455, 28%


In FY11, SingTel delivered a 6.8% revenue growth in Singapore, but EBITDA declined 2.3%. The management has guided to single-digit revenue growth and flat absolute EBITDA for FY12.

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SingTel – ADD

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Figure 5: In IT services, the base effect of the NCS acquisition has worn off and wireless and retail data delivered growth through FY11

Mobile and IT have driven revenue growth

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Wireless – expect sustained growth from the leader Figure 6: SingTel has highest subscriber share, >50% revenue share, and highest ARPUs in the post‐paid segment (Singapore is predominantly a post‐paid market) as of 31 March 2011

Singapore Wireless Subscriber market share

Singtel45%

Starhub29%

M126%

Source: Company, IIFL Research Figure 7: SingTel derives ~87% of revenue from the post‐paid segment

Wireless break‐up (4QFY11) Subscribers (‘000) ARPU

(SG$ / month) Est. Revenue

(SG$ m) Pre‐paid 1,531 15 68.0 Post‐paid 1,776 87 457.2 Total 3,307 525.2

Source: Company, IIFL Research; Note: Some portion (~12%) of wireless revenue is taken into international revenue and the company shows the rest as mobile.

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SingTel – ADD

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Figure 8: In the past three years, SingTel’s wireless sub acquisition cost increased, thanks to the iPhone; relative to competitors (who also sell iPhone now), though, its cost has pulled back

Suscriber Acqiusition Cost (SAC) comparison

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Source: Company, IIFL Research; JFM 2008 held to zero, and following period figures calculated proportionately

Singapore wireless is an undifferentiated market…: The Singapore market is now quite undifferentiated, with all three telcos offering iPhone, the most popular of all smartphones; as a category, their ASPs have been higher than for regular phones. SingTel had a period of exclusivity up to 2009 for selling iPhones, following which subscriber acquisition cost (SAC) went up for SingTel’s competitors as well.

…but SingTel outperformed peers: In FY11, SingTel’s SAC declined impressively; but with iPhone 5 due in FY12, there is some more sting in this tail. We do not expect SAC to decline further, barring the impact of a stronger S$ vs. US$ (most phones are paid for in US$, which may be weak in the coming year).

Figure 9: Revenue market shares in Singapore have been stable, although in the past 5 quarters, M1 gained at the expense of Starhub. SingTel marginally raised its share over two years Mobile Revenue Market Share

OND 2008

JFM 2009

AMJ 2009

JAS 2009

OND 2009

JFM 2010

AMJ 2010

JAS 2010

OND 2010

JFM 2011

M1 16.8% 16.6% 16.5% 16.1% 15.8% 16.1% 16.0% 16.0% 16.1% 16.4% Starhub 31.4% 31.4% 31.7% 31.7% 30.8% 31.4% 31.2% 31.3% 30.4% 30.1% SingTel 51.8% 52.0% 51.8% 52.2% 53.4% 52.5% 52.8% 52.7% 53.5% 53.5%


Figure 10: Even after competitors began selling iPhone in 2010, SingTel’s revenue growth was stronger, though the difference was not huge

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M1 Starhub SingtelY‐o‐Y mobile revenue growth (%)


Figure 11: ARPU expansion in the post‐paid segment was higher for M1 than SingTel; this, we believe, was due to the earlier (and exclusive) presence of SingTel in the iPhone selling activity YoY ARPU expansion (post‐paid) OND 2010 JFM2011 M1 5.9% 3.4% Starhub 2.8% 0.0% SingTel 3.4% 1.2%


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SingTel – ADD

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Figure 12: Churn management – SingTel has done better than peers consistently

1.1%

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M1 Starhub SingtelPost Paid monthly churn


Figure 13: SingTel has the highest ARPU in the post‐paid segment, thanks to its older customer base and early and exclusive start in the iPhone selling activity Comparison of ARPU (4Q2010) Post‐paid (SG$) Pre‐paid (SG$)M1 63.8 14.2Starhub 72.0 20.0SingTel 87.0 15.0

Source: Companies, IIFL Research

We expect steady subscriber growth and no major changes in Singapore’s teledensity, which should almost reach 154% (up from the current 144%) by FY14ii. Figure 14: A teledensity of 153.7% in Singapore by FY14ii underpins our subscriber projection for SingTel in the region Subscriber Projections (‘000) FY09A FY10A FY11A FY12ii FY13ii FY14iiPost‐paid 1,507 1,620 1,776 1,883 1,989 2,092Pre‐paid 1,469 1,496 1,531 1,610 1,680 1,742Total 2,976 3,116 3,307 3,493 3,669 3,834


Figure 15: iPhone should drive SingTel’s mobile ARPU expansion

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Prepaid PostpaidSG$ / month


We expect 8% CAGR (FY11-FY14ii) for mobile revenue: SingTel has several factors in its favour – strong performance on churn, post-paid ARPU expansion, and steady subscriber additions have driven revenue growth until now.

Going forward, nominal GDP growth in Singapore would be lower than the FY11 level of 14%; so, past revenue growth performance cannot be strictly assumed to continue, even in FY12.

However, the following should be noted:

1) In recent times, pre-paid ARPU has also expanded, as 3G products are being marketed to the segment and service sector in-roamers are being targeted – we prefer to leave this as upside to our estimates, unless this trend sustains for some time.

2) SingTel has taken the lead in introducing iPad2 and other tablets, and increasingly, it will have the content bank to leverage this opportunity more comprehensively.

3) The sustained investment in smartphones, especially iPhone, would drive ARPU expansion in the post-paid segment on a sustained basis, in our opinion.

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SingTel – ADD

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These underpin our assumption of an 8% CAGR in mobile revenue over three years.

Figure 16: Mobile revenue projections for SingTel (SG$ m)

1,445

1,6101,788

1,967 2,1102,253

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We round off our assessment of the mobile business with the observation that iPad2 and iPhone5 will likely keep EBITDA margins in check; hence, we are not surprised that SingTel guided to flat EBITDA (also based on EPL costs for full-year).

Corporate data – NBN to prevent growth for SingTel

SingTel is the market leader in corporate data (essentially fixed-line), with ~70% share, in our assessment. Starhub is the main competitor, with ~20% share. Starhub’s customers are concentrated in the CBDs, whereas SingTel is present across the spectrum. SingTel is substantially present across the ~20,000 buildings in Singapore, while Starhub has a presence only in ~5% of these.

Figure 17: SingTel’s corporate data revenue has been quite steady, but NBN is coming… FY10 FY11

Corporate Data 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Revenue (SG$ m) 283 285 285 294 286 293 290 303


Expect NBN to be a disruptive influence: With NGNBN, we expect that at the margin, Starhub should benefit from improved reach to buildings and experience in servicing corporate customers. SingTel is, however, likely to use NBN to further its ambitions and capabilities in offering cloud-based services. In FY12, in our opinion, talking about cloud-based computing is a bit premature, and hence, we build in no material revenue growth for SingTel from this avenue.

Singtel’s total subscriber base is 3.3m, of which, post-paid forms 1.8m. Of this, 90-95% is 3G, amounting to ~1.65m. This includes: (a) dongles, which Singtel does not disclose separately; (b) contracted data plans on handsets; and (c) usage-based 3G customers, who may have 3G handsets and hence, use more and contribute to 3G revenue. (a) and (b) are collectively called wireless broadband. The terminology, “data only SIMs”, refers chiefly to dongles. The classification, thus, done is as per IDA requirements. Excluding these “data only SIMs”, Singtel’s post-paid ARPU is higher, as dongles come in at lower ARPU (an estimated SG$22/month).

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SingTel – ADD

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Figure 18: NBN will keep revenue growth in corporate data suppressed

1,147 1,172 1,1951,225

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3.5%Revenue (LHS, SG$ m) Growth (RHS)

Source: Company, IIFL Research Moreover, we would expect SingTel to stick to its core geographies, i.e. the Asia Pacific region. Further, we would expect the company to tackle various verticals such as education and healthcare through its software-as-a-service approach.

Data and Internet – expect revenue growth to moderate to 5% SingTel offers ADSL and fibre-based retail broadband services; it commands a 45% share of all the retail broadband in Singapore (including cable, which is Starhub’s main offering). As with other products, penetration upside is limited, in our view, as it is already in excess of 109% in Singapore. The company derives ~85% of data and internet revenue from retail broadband (4QFY11).

Figure 19: Revenue growth has been modest, but stable FY10 FY11

Data and Internet 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Subscribers ('000) 508 510 512 515 517 520 523 529 Revenue (SG$ m) 109 108 107 106 109 109 111 112 YoY growth ‐1.8% 0.1% 0.6% 3.5% 4.8%

Source: Company, IIFL Research; Fixed retail broadband contributes ~85% to Internet revenue.

Figure 20: Starhub has done better than SingTel on subscriber additions… FY09 FY10 FY11

Broadband Subscribers 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

SingTel ('000) 505 508 510 512 515 517 520 523 529

Starhub ('000) 383 389 392 400 408 408 412 422 425


Figure 21: …but SingTel’s revenue has generally risen faster, as its retail subscribers have migrated to higher‐end plans

Broadband Revenue Growth comparison

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Starhub Singtel


SingTel also includes corporate DSL customers in its revenue, so we do not calculate a pure retail calculate ARPU. However, if the

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SingTel – ADD

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corporate revenues were stripped out, we would expect SingTel’s ARPU to be in mid-30s, compared with Starhub’s S$45.

The differential is explained by the fact that Starhub used to offer 8-10 Mbps plans, compared with SingTel’s 1-3 Mbps. Both companies have diversified their ARPU range, with the result that Starhub’s ARPU has come off sharply (from almost S$55 levels two years ago to S$45), whereas SingTel’s (blended with corporate) has been mostly constant.

However, SingTel’s revenue has grown faster than that of Starhub, and we model in ~5% growth over the next three years.

Figure 22: Broadband should grow at 5% CAGR over 3 years

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Other businesses – steady growth in IT, sharp rise in Pay TV In August 2008, SingTel acquired SCS (Singapore Computer Systems) and integrated it with its own IT division, NCS. Since then, the company has built upon this inorganic growth at ~5% p.a. (including during the bounce-back from the global credit crisis).

Figure 23: Fibre rollout revenue to taper off in FY12 and end in FY13

FY09 FY10 FY11 IT and Engg. Revenue (SG$ m) 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Core IT Engg services 333 257 289 308 382 273 302 312 378

Source: Company, IIFL Research; * we expect this revenue stream to wind down by FY13

Figure 24: Core IT – we model in 4.8% revenue growth over FY11‐14. This represents a slight acceleration vs. FY11, and we believe that cloud computing will play in important role , though rear ended. But inclusive of the winding down of the fibre rollout, the aggregate revenues will be flat.

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Pay TV: key to revenue growth Pay TV (a market dominated by Starhub) is a small portion of SingTel’s portfolio, but we expect strong growth in this segment in the coming years. SingTel has admittedly been late in tapping this growth avenue, but it has done this quite vigorously.

One must remember that Singapore is a heavily-regulated market. When SingTel attempted to accelerate its progress in Pay TV by bidding aggressively (and successfully) for exclusive English Premier

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SingTel – ADD

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League (EPL) two years ago, a widespread worry was that content costs would rise across the industry. The main loser was Starhub, which saw its ARPU erode by >10% after losing EPL, as EPL fans switched over SingTel.

Subsequently, cross-carriage of content was made mandatory in 2010 by MDA (Media Development Authority). It also imposes an obligation on pay-TV operators to make available channels/content, which they have acquired exclusively, for carriage on other specific pay-TV licensees in Singapore. This arrangement will apply for exclusive content agreements entered into on or after 12 March 2010. It will reduce/eliminate the incentive for pay-TV licensees to bid aggressively to bag exclusive deals.

Figure 25: EPL aided revenue acceleration FY10 FY11

Pay TV business 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Subscribers ('000) 101 126 155 191 220 245 264 292ARPU (SG$, estimated) 11 11 10 11 22 31 28 27Revenue (SG$ m 2.6 3.6 4.2 5.7 13.5 21.5 21.2 22.8


Our Pay TV revenue projections for SingTel are based on its subscriber base and ARPU reaching almost 550k and SG$40/month respectively. This would take SingTel to ~60% of Starhub’s revenue, as per our FY14ii projections. We do not expect content costs to come down in FY12, but in the longer term, telcos may enable content developers to fight the piracy issue better and hence, pricing may improve.

Figure 26: Almost one‐third of SingTel’s FY12 revenue growth to come from Pay TV

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500550600

PAY TV Revenue (S$ m) (LHS) Subscribers


Figure 27: Aggregate revenue projections for SingTel – wireless and Pay TV major drivers Revenue Break‐up (SG$ m) FY10A FY11A FY12ii FY13ii FY14ii Mobile revenue (ex‐ est Intl) 1,610 1,788 1,967 2,110 2,253 National telephone 393 375 363 353 343 Corporate data revenue 1,147 1,172 1,195 1,225 1,262 Retail broadband revenue 430 440 462 487 513 International telephony 519 511 517 543 574 Core IT and Engg revenue 1,417 1,534 1,488 1,449 1,455 Sale of equipment 268 311 312 315 322 Pay TV revenue 16 79 151 218 257 Miscellaneous (5) 194 191 193 195 196 Total 5,995 6,401 6,648 6,895 7,176 Growth % 8.1% 6.8% 3.9% 3.7% 4.1%


gvgiri@iif lcap.com

SingTel – ADD

13


Figure 28: Favourable cost impact of low‐margin fibre installation revenue coming off to be neutralised by content cost increases in FY12 Cost projections % Service Revenue FY10A FY11A FY12ii FY13ii FY14iiSelling and administrative 17.7% 20.5% 22.2% 23.2% 23.2%Traffic expenses 14.4% 13.9% 13.9% 13.8% 13.8%Staff costs 15.0% 14.8% 14.9% 14.9% 14.9%Cost of sales 17.9% 19.3% 17.9% 16.6% 15.9%Others 1.5% 1.6% 1.6% 1.6% 1.6%Total 66.6% 70.1% 70.4% 70.2% 69.4%


Figure 29: EBITDA margins should improve as % of service revenue from here on, as substantial investments in developing an installed base of smartphones peak out

EBITDA margin projections

33.3%

38.1%

35.0% 34.5% 34.6%35.3%

33.0%33.7%

32.9%

36.4%

30%

32%

34%

36%

38%

40%

FY10A FY11A FY12ii FY13ii FY14ii

% of total revenue % of service revenue


Figure 30: Our capex assumption for FY12 is in line with the SG$900m guidance, which is sharply higher YoY due to a major government IT project

433.0

737.0652.0

726.0

902.7 867.5 830.9

9.3%

14.0%

11.4%11.9%

14.2%

13.2%

12.1%

100

350

600

850

1,100

FY08A FY09A FY10A FY11A FY12ii FY13ii FY14ii7.0%

9.0%

11.0%

13.0%

15.0%Capex (SG$ m, LHS) Capex % of service revenue (RHS)


gvgiri@iif lcap.com

SingTel – ADD

14


Optus – Near-term pressure on wireless, long-term upside on NBN Optus is a diversified telecom service provider in Australia, and occupies the #2 position, after Telstra. SingTel purchased Optus in 2001 from Cable and Wireless.

Optus is the #2 wireless player in Australia behind Telstra, marginally ahead of in terms of revenue and significantly ahead of in terms of EBITDA relative to VHA (Vodafone Hutch Alliance, the #3 player). Optus has 9m wireless subscribers (with post-paid marginally higher in weightage than pre-paid), including ~1.3m of wireless broadband subscribers. Wireless accounts for 64% of reported revenue.

Optus’ business and wholesale fixed division is the next biggest, accounting for 21.5% of revenue. It includes wholesale satellite bandwidth sales to competing Pay TV providers.

Optus’ consumer and SMB (small and medium-sized businesses) division accounts for 14% of revenue and it provides fixed-line services to consumers and businesses. Optus has ~1m subscribers in fixed line, evenly split between own lines on HFC (Hybrid Fibre Coaxial) and ULL (Unconditioned Local Loop, which involves paying Telstra, who owns these lines, a fixed charge and taking over the entire subscriber relationship, along with revenue and operating costs). Most of these subscribers are with Optus on voice and broadband.

Figure 31: Wireless is the major contributor to Optus’ revenue

Revenues (AU$ m, FY11)

SMB2%

Handsets11%

Business14%

Wholesale7%

Mobile Services53%

Consumer13%


Figure 32: Wireless is the main revenue growth driver for Optus

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Mobile Services Handsets Business Wholesale Consumer SMB


gvgiri@iif lcap.com

SingTel – ADD

15


Wireless – bracing for a tough competitive environment Australia’s wireless market is characterised by:

1) market leader, Telstra facing threats from a steadily-improving Optus and hence, stepping up aggression in defending market share;

2) a low population density, with a very uneven spread, given the massive land area of Australia and its mere 22m population;

3) significant capex-intensity problems in connecting different parts of the country and hence, the importance of common national networks, which is now being addressed through the NBN (National Broadband Network); and

4) focus on formation and operation of NBN and divestiture of assets by Telstra, the dominant incumbent, as well as other regulatory undulations, notably around interconnect charges.

Figure 33: Optus is the second‐biggest player in the wireless space, with 9m subscribers as of 4QFY11

Australia Wireless Subscribers ('000), market share

Vodafone Hutch Alliance7,57027%

Telstra11,48141%

Optus8,96432%


Optus has been outperforming Telstra: Optus has been consistently outpacing Telstra in revenue growth, as it has been able to hold on to its ARPU and increase its share in the post-paid market.

The key planks of Optus’s strategy are as follows: 1) It intends to constantly improve its network coverage and capacity –

it has now reached 98% of population coverage and narrowed the historical gap between itself and Telstra in terms of network coverage and quality, as measured by IDC.

2) It has also been early to anticipate a data traffic surge, a global phenomenon, but very much seen in Australia as well; Optus has added capacity in metros, where the bulk of revenue is generated from. This capacity addition has come in the form of: a. Doubling 3G spectrum holdings (2100MHz) by purchasing

Qualcomm’s spare spectrum; b. Concentrated build-out of metro sites; c. Raising the proportion of fibre-connected sites in metros to 80%

in the past three years.

Optus seems to be more nimble on the network side than the #3 VHA and on the subscriber-facing side, ahead of the leader, Telstra.

Figure 34: Gaining on Telstra…

H‐o‐H revenue growth rates

8.4%

‐0.6%‐3.5%

7.6%

‐1.3%

16.7%

1.7%

9.1%

5.3%1.2%

3.7%8.5%

3.4%8.7%

‐1.0%

5.8%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jun‐07 Dec‐07 Jun‐08 Dec‐08 Jun‐09 Dec‐09 Jun‐10 Dec‐10

Optus Telstra


gvgiri@iif lcap.com

SingTel – ADD

16


We believe that Optus’ 1.3m wireless broadband subscribers (dongles) give it a significant subscriber market share (~50%); this is a recent phenomenon, illustrating the company’s growing presence.

Optus declares an overall wireless post-paid ARPU (currently ~AU$71), which includes wireless broadband subscribers at monthly spends of AU$30-AU$50. This brings the overall ARPU, and ARPU expansion, down relative to what it would have been otherwise.

Optus’s fairly large market share in the dongles space means that the ARPU dilution effect is not so large for Telstra; hence, if one were to strip out dongles from ARPU of both companies, Optus’s ARPU would be even higher than Telstra’s.

Figure 35: Optus has increased the gap between itself and Telstra on ARPU Post Paid ARPU (AU$) Dec‐08 Jun‐09 Dec‐09 Jun‐10 Dec‐10Optus (simple average of successive quarters) 69 68 70 69 70Telstra 64 61 62 63 62


Expect EBITDA margin to be under pressure in FY12 Figure 36: Post paid subscriber growth will continue to be strong Subscriber Projections (‘000) FY09A FY10A FY11A FY12ii FY13ii FY14iiPre‐paid 4,195 4,307 4,295 4,215 4,175 4,135Post‐paid 3,595 4,191 4,773 5,297 5,768 6,192Total 7,790 8,498 9,068 9,512 9,943 10,327


Despite revenue growth of ~7% in 4Q and FY11, Optus guided to low single-digit revenue and EBITDA growth for FY12. This is principally because increased aggression from Telstra is foreseen, and it will impact ARPU and subscriber adds, in our view.

Looking at 2H2010, Telstra outpaced Optus marginally, after a sustained period of lagging behind on revenue growth. This plus Optus’s strong growth in 4QFY11 (JFM quarter) suggests that VHA

may be losing revenue share to both companies, a hypothesis that is currently difficult to confirm as VHA does not report financials.

We project 4%-5% ARPU erosion in FY12: We build in a 3% drop in pre-paid ARPU and a 5% drop in post-paid ARPU (inclusive of dongles) in FY12, YoY. This compares with almost no change in post-paid ARPU and a 7% erosion in pre-paid ARPU in FY11.

Figure 37: FY12 will be a rough year for all wireless players…Optus will not be an exception ‐ 900bps EBITDA margin drop in FY12 projected

4,9375,573

5,9776,189 6,588

7,13128.1%

26.1% 26.1%25.2% 25.2%

26.2%

800

1,800

2,800

3,800

4,800

5,800

6,800

7,800

FY09A FY10A FY11A FY12ii FY13ii FY14ii20.0%21.0%

22.0%23.0%

24.0%25.0%

26.0%27.0%

28.0%29.0%

Wireless Revenue (AU$ m, LHS) EBITDA Margins


Optus’s deployment of 3G capacity may enable it to raise its share of high-speed wireless traffic, and this could throw up a margin upside. However, we stay within the management’s guidance, by projecting only 2.7% EBITDA growth. Our margin recovery projection is decidedly rear-ended, but we have no doubt that eventually, margins will rise slightly.

Wireline businesses: long-term prospects improve, thanks to NBN Business and wholesale fixed - Stable, but outlook not exciting: Optus derives 21.5% of revenue from the business and

gvgiri@iif lcap.com

SingTel – ADD

17


wholesale fixed segment, which is a portfolio of several enterprise and wholesale revenue streams.

The company has done fairly well, with an EBITDA CAGR of 7.8% in the past three years, but we model in a slightly more conservative number for the next three years, principally because:

1) We do not foresee the same opportunities for margin improvement as those that existed in the past three years.

2) In both business and wholesale, revenue growth was very modest (1.9%) in FY11; the outlook is not materially brighter in the medium term, though the businesses are stable.

Figure 38: Business and wholesale fixed ‐ projections Business and wholesale fixed (AU$ m)

FY11 FY13 % total FY13

revenue3y CAGR to

FY113y CAGR to

FY14Voice revenue 412 446 4.5% ‐1.8% 3.7%Data and IP revenue 478 497 5.0% 1.8% 2.0%ICT & Managed Services 392 408 4.1% 3.3% 2.0%Total Business revenue ‐ A 1,282 1,352 13.5% 1.0% 2.6% Voice revenue 145 142 1.4% ‐1.3% ‐1.0%Data and IP revenue 258 268 2.7% 4.3% 1.9%Satellite revenue 281 297 3.0% 4.0% 2.7%Other Total Wholesale revenue ‐ B 685 707 7.1% 2.9% 1.6% Total B&W fixed revenue (A + B) 1,968 2,059 20.6% 1.7% 2.2%

Source: Company, IIFL Research; three‐year EBITDA CAGR until FY11 includes adjustment for a one‐off contribution in 4QFY11; based on reported numbers, EBITDA CAGR would have been 9.2%.

Optus has 1m subscribers for fixed-line voice telephony; 95% of them also are on broadband. These subscribers are on its own network, either built by it (HFC) or hired by it (ULL arrangement with Telstra for copper lines). Subscribers are split almost evenly between these two arrangements.

Optus also has a very low-margin reseller revenue stream, which it has been winding down; thus, EBITDA growth has been quite strong, at 12%, over the past three years, revenue growth lower than it would have been, and hence the pronounced margin improvement.

We build in marginal deceleration on this, at 8.6% for EBITDA growth over the next three years, because of limited incremental EBITDA upside from reduction in the very-low margin reseller revenue; its proportion in overall consumer revenue is now only ~5% (from ~40% three years ago), thanks to Optus’s efforts in this direction.

Figure 39: Consumer businesses – 4.6% EBITDA CAGR over the next three years Consumer Businesses FY09A FY10A FY11A FY12ii FY13ii FY14ii

Telephony Subscribers ('000) 961 1,004 1,016 1,024 1,032 1,040 Broadband Subscribers ('000) 818 889 927 958 978 998 Aggregate Revenue (AU$m) 1,422 1,384 1,348 1,346 1,357 1,372 EBITDA % 14.4% 15.1% 17.1% 19.0% 21.0% 21.5%


Signing of the NBN improves long-term prospects for Optus. A neutral company, NBN Co, will be running the (largely) fibre-based network, instead of the bulk of the assets being with Telstra, as is the case now.

The upside for Optus would principally come from fixed-line businesses, in our view. Migration of subscribers to the NBN network will begin in 2014, and it will happen over a four-year period.

At present, details of cash flows are not clear, and we know that the agreed compensation for Optus is AU$800m on an NPV basis and principally for service disruption (as subscribers are migrated from the current to the NBN network) and asset shutdown (HFC network).

gvgiri@iif lcap.com

SingTel – ADD

18


Further, the specifics of separation of Telstra’s wholesale and retail business, in the format the agreements stipulate, are not totally taken on board by all stakeholders. It is not clear that telcos will have to purchase no wholesale services from Telstra.

Finally, several media reports have highlighted the apparent disparity between the payment on a per subscriber basis made to Optus and Telstra, with the import being that the former is significantly higher. Regardless of whether this is correct or no, it does add to the pressure the (Julia) Gillard government may face and hence, it raises the overall uncertainty surrounding the specifics of the deal.

Expect a modest FY12, but 10% three-year EBIT CAGR: In our final analysis, we build in a 10% EBIT CAGR over FY11-14, chiefly powered by wireless. In SGD, this translates into a 11.2% EBIT CAGR. Beyond FY14, NBN brightens Optus’s prospects.

We emphasise EBIT CAGR because post-NBN, capex intensity will begin receding, but so will EBITDA margins, making EBIT growth a better metric.

Figure 40: Aggregate Optus projections: Post NBN (FY15), capex intensity will reduce Aggregate Optus Projections FY09A FY10A FY11A FY12ii FY13ii FY14ii Revenue (AU$m) 8,333 8,959 9,292 9,548 10,004 10,605 EBITDA % 24.8% 24.1% 25.1% 25.1% 25.6% 26.4% Capex to sales 21.3% 11.7% 10.9% 12.0% 11.5% 11.0% EBIT% 11.3% 11.6% 13.0% 13.4% 14.0% 15.3%


NBN in Australia: This month, the Australian government signed the NBN agreement with Telstra and Optus. This paves the way for: 1) structural split-up of Telstra into (wireline) assets and operations; and 2) roll-out of NBN.

Major agreements:

1) Telstra/NBN Co agreement covers: (a) definition of the conditions precedent for the deal; (b) disconnection of copper network and broadband (but not Pay TV) services on its HFC network wherever NBN fibre is to be rolled out; (c) access provided by Telstra to NBN Co for dark fibre, ducts and exchanges (along with an undertaking that Telstra will need to delive these assets in usable condition); and (d) pricing of NBN’s wholesale capacity supply as well as basic services

2) Telstra Commonwealth agreement covers inter alia, a guarantee by the commonwealth of payments and performance obligations to be made by NBN Co.

Telstra will get ~AU$11bn, of which AU$4bn relates to the compensation for disconnection of services and AU$5bn relates to the infrastructure to be given by Telstra to NBN. The major milestones from hereon are: (a) ACCC (Australian Competition and Consumer Commission) approval of the deal as well as the operation of Telstra’s copper network during the transition period; and (b) Telstra’s shareholder approval.

Optus’s agreement involves a post-tax NPV compensation to Optus of AU$800m for similar reasons. Unlike Telstra, Optus will have to give up Pay TV on its HFC / ULL lines. Migration to NBN will start in 2014, and will be done over a four-year period. Companies must use only NBN to deliver fixed-line services.

The deal opens up fixed line to competition, whereas until now, Telstra was very dominant. There will be service disruptions to Optus’s 1m customers, as they are evenly split between HFC, Optus’s own network, and ULL (Optus serving subscribers on copper lines rented from Telstra). Most of them (~90%) are also broadband customers. Optus also has a small Pay TV operation on these lines. The AU$800m compensation principally consists of compensation for this service disruption, in our opinion.

gvgiri@iif lcap.com

SingTel – ADD

19


Telkomsel: Recovery after a brutal price war; but sell-out in the offing? SingTel owns 35% of Telkomsel, with Telkom (Indonesia) owning the rest. Telkom is a full-service (wireless and fixed) telco, owned 52.5% by the Indonesian government. The government has been vocal in the media regarding its desire to buy back 35% of Telkomsel that SingTel owns, principally to spin Telkomsel’s mobile towers into a separate company, which SingTel appears not to be enthusiastic about. However, given Telkom’s government ownership, we would expect this to happen eventually.

Recovery after a price war: In 2009, Indonesia saw a brutal price war, triggered when XL Axiata cut rates heavily, taking advantage of its spare network capacity.

Telkomsel matched these initial price cuts, which then turned into a full-blown tariff war, bringing margins crashing down for Telkomsel. Despite this, thanks to its 46% market share, Telkomsel survived the onslaught and it still has a healthy EBIT margin of 35% as of 1Q2011 (~1200bps down from the peak).

Figure 41: QoQ revenue growth: After having been outpaced for some time, Telkomsel recorded an improvement in performance

‐15.0%‐10.0%‐5.0%0.0%5.0%

10.0%15.0%20.0%

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

‐15.0%‐10.0%‐5.0%0.0%5.0%10.0%15.0%20.0%

Telkomsel (LHS) XL Axiata (LHS) Indosat (RHS)

Source: Company, IIFL Research; financial year coincides with calendar year

Figure 42: Comparison of QoQ revenue (LHS) and traffic growth (RHS) – Telkomsel saw a huge surge in traffic after it matched sharp price cuts by XL, but this was not matched by revenue growth

2.0%

-6.8%

5.1%4.1%8.8%

16.4%

24.5%

11.8%

-4.1% 4.9%

52.9%16.3%

-12.0%-16.0%-6.1%22.5%

207.0%

59.9%

-10%-5%0%5%

10%15%20%25%30%

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

-50%

0%

50%

100%

150%

200%

250%

Revenue grow th (LHS) Out going traff ic grow th (RHS)

Source: Company, IIFL Research Figure 43: This saw EBIT margins come off from the high‐40s to mid‐30s 2009 2010 2011

Key P&L Items 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Revenue (IDR bn) 9,206 10,123 10,887 11,366 10,012 10,541 11,102 10,588 10,519 Revenue growth % YoY

‐4.1% 11.8% 24.5% 16.4% 8.8% 4.1% 2.0% ‐6.8% 5.1%

EBITDA Margin % 63.6% 67.9% 67.0% 64.3% 62.7% 61.4% 60.6% 62.4% 58.2% EBITDA Growth Y‐o‐Y

‐13.8%

20.9% 39.6% 15.7% 7.2% ‐5.9% ‐7.8% ‐9.7% ‐2.5%

EBIT% 42.3% 47.5% 47.8% 43.0% 39.3% 39.4% 39.0% 39.9% 35.4%


gvgiri@iif lcap.com

SingTel – ADD

20


Figure 44: Pre‐paid ARPU stabilised after a steep fall. 3G should help raise it 2009 2010 2011

KPIs 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Pre‐paid subs (m) 70.2 74.0 77.7 79.6 79.9 86.2 91.0 91.9 97.2Post‐paid subs (m) 2.0 2.0 2.1 2.0 2.0 2.1 2.1 2.1 2.2Total subs (m) 72.1 76.0 79.8 81.6 82.0 88.3 93.1 94.0 99.4 Pre‐paid ARPU (IDR '000) 42.5 42.0 44.0 43.7 39.0 39.0 39.0 36.0 37.0Post paid ARPU (IDR '000) 200.0 218.7 214.5 221.0 208.0 211.0 212.0 206.0 196.0

Source: Company, IIFL Research; However, control on capex is remarkable: Cash flow generation (EBITDA – capex) improved steadily during the last two years. This is quite commendable, as Telkomsel used to report >90% capacity utilisation historically (measured by subscriber count, which might not strictly be objective). In our assessment, Telkomsel had a very scalable network, which came to its rescue, when it needed to add capacity in response to the traffic surge (200% + in 2Q2009). Figure 45: Capex intensity has come off in the past two years, aiding cash flows

EBITDA ‐ Capex (% sales)

39.2%45.6%

45.8%

29.6%32.9%

39.5%

31.8%35.9%

38.8%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11


In the past five years, Telkomsel paid out IDR45trn in dividends, supported by IDR38trn of FCF. We believe that sharply-reduced capex to sales % will rectify this ratio, and enable 100% dividend payout ratio.

3G, spurred by cheap handsets, a key revenue growth driver: We believe revenue growth would come from a fairly-widespread emerging markets phenomenon – conversion of subscriber base from 2G to 3G. In the case of Indonesia, recovery from a price war in 2G will coincide with proliferation of 3G, through data on regular phones as well as greater choice in devices.

Telkomsel has also been quite vigorous in pushing the supply chain to deliver cheaper handsets. Movements in this direction elsewhere, notably in China and India, will bring prices of 3G phones before long below the US$35 mark. For Indonesia and Telkomsel, this should be good news from a revenue-growth perspective.

Figure 46: Telkomsel projections – 7.3% three‐year revenue CAGR, modest margin improvement, and improved FCF generation and dividends Telkomsel projections FY08A FY09A FY10A FY11ii FY12ii FY13ii Revenue growth % 1.3% 11.9% 1.6% 7.1% 8.5% 6.4% EBITDA% 64.6% 65.7% 61.7% 61.3% 62.1% 62.1% EBIT% 45.1% 45.2% 39.4% 39.5% 40.1% 40.1% PAT growth % ‐16.2% 15.2% ‐5.2% 12.9% 7.9% 5.2% Capex to sales 33.2% 32.1% 21.8% 15.1% 14.1% 14.0% FCF (IDR bn) 6,325 9,431 8,697 17,464 19,577 20,695 Dividend payout ratio 77.7% 70.0% 78.6% 89.1% 108.5% 110.0%


gvgiri@iif lcap.com

SingTel – ADD

21


AIS: Struggling against regulation A move to a more favourable license regime crucial: AIS is one of the three private telcos in Thailand (a market with 101% tele-density), the other two being DTAC and True Move. The three private telcos operate on the basis of concessions taken at a rev share of 25%-30% from the two state-owned telcos, TOT and CAT. These concessions begin running out from 2013 onwards, and the private telcos have been arguing for a lower rev share.

The lower rev share would have applied on the 3G spectrum and would have been payable to the government, rather than the state-owned telcos, had the auctions been held. However, the state-owned telcos have successfully lobbied against the auction of 3G spectrum, because of denial of rev share to them, and thus Thailand continues to be a 2G market for now.

AIS has 17.5MHz of 900MHz spectrum, for which the concession expires in 2015, plus 12.5MHz of 1800 MHz spectrum.

The various possibilities are:

1) the concession is simply extended,

2) new license is given, with the same 25%-30% revenue share, or

3) revenue share is reduced, which AIS hopes, will be 6% as agreed upon.

AIS has stated that it will not agree to unchanged license fees.

The first company whose license expires is True Move (in 2013).

While AIS‘s management and operational expertise will be valuable (as the new owners of AIS’s network will be unable to run it as efficiently if AIS were to walk away), the current decision making paradigm in Thailand makes it unrealistic to expect clarity in the near future.

Figure 47: Strong free cash flow generation – if license fees come down, there is further scope for improvement AIS Projections (THB m) FY08A FY09A FY10A FY11ii FY12ii FY13ii Teledensity 91.1% 97.0% 103.7% 110.2% 115.6% 120.3% Postpaid subscribers (m) 2.6 2.9 3.1 3.2 3.3 3.4 Prepaid subscribers (m) 24.7 25.9 28.1 30.3 32.1 33.8 Total subscribers (m) 27.3 28.8 31.2 33.5 35.4 37.2 ARPU 270 242 244 246 246 247 Revenue 110,791 102,452 111,280 125,383 134,105 142,400 EBITDA 46,406 45,899 52,063 57,710 61,724 65,542 PAT 19,660 21,172 24,018 26,737 27,523 29,131 Capex 12,333 13,364 10,118 11,637 12,620 13,539 FCF 17,354 27,280 38,529 41,853 40,182 42,428


Data drives growth, but on 2G: Data usage is driving revenue growth in Thailand. AIS offers unlimited plans for 2G data, principally as the speeds will naturally limit consumption. For 3G, however, a per-KB pricing is offered to consumers. Around 10% of the users use 3G handsets. While AIS has grown revenue faster than the market in the past 3-4 quarters, until 3G comes, revenue growth will not accelerate. Steady-state growth will be ~5%, as per our estimate.

ARPU for post-paid users is 610b/month; 700b/m for smartphones and >1000b/m for Blackberry. In the high-ARPU Blackberry market, which is currently 250,000 strong (per our estimates), AIS has a 60% market share.

Figure 48: AIS will pay out at least 100% dividend AIS ratios FY08A FY09A FY10A FY11ii FY12ii FY13ii Revenue Growth 2.2% ‐7.5% 8.6% 12.7% 7.0% 6.2% EBITDA % 41.9% 44.8% 46.8% 46.0% 46.0% 46.0% Capex to sales% 11.1% 13.0% 9.1% 9.3% 9.4% 9.5% Dividend Payout Ratio % 96.0% 94.5% 242.0% 137.0% 147.3% 153.4% Debt/EBITDA (x) 0.4 0.3 0.5 0.2 0.2 0.2


Strong cost reduction measures, but little EBITDA improvement incrementally: 3G auctions not happening resulted

gvgiri@iif lcap.com

SingTel – ADD

22


in capex to sales falling temporarily, but we expect it to go up as the accumulated capacity augmentation needs become urgent. The company has implemented several cost reduction measures, which allow it to have a 45% EBITDA margin, despite a 25% revenue share cost for spectrum. The measures have been quantified based on international benchmarking by AT Kearney, and AIS appears to be one of the most cost-competitive telcos in the world. Nevertheless, we foresee little EBITDA improvement incrementally, as much depends on the license rev-share fee.

gvgiri@iif lcap.com

SingTel – ADD

23


Bharti Airtel – Stable pricing and regulation, strong growth Bharti (owned 32% by SingTel) is India’s largest telco by subscriber base, revenue and profitability. It has a collective subscriber base of almost 162m across wireless, fixed-line and DTH. Bharti has ~230m subscribers (including its presence in Sri Lanka, Bangladesh and 16 countries in Africa). In India, the company owns 3G spectrum across ~68% of its revenue footprint and it recently launched 3G services. Its Africa operations have begun showing improvement in EBITDA margins, after a period of distress under the previous management, Zain.

Figure 49: Financial Summary Y/e 31 Mar 1QFY11 2QFY11 3QFY11 4QFY11 FY10A FY11AIndia Wireless traffic (min m) 190,396 190,767 199,146 211,822 610,430 792,132 % growth (qoq, annual for full year) 10.2% 0.2% 4.4% 6.4% 27.5 29.8India & South Asia Revenues 112,725 113,312 117,030 120,839 396,090 463,906 % growth (qoq, annual for full year) 0.5% 3.3% 3.3% 7.2 17.1%Consolidated Revenues (Rs m) 122,308 152,150 157,560 162,654 396,090 594,672% change 23.0 54.5 61.2 61.8 7.2 50.1EBITDA (Rs m) 44,140 51,212 49,816 54,496 160,208 200,265EBITDA Margins (%) 36.1 33.7 31.6 33.5 40.4 33.7Interest expense (Rs m) 6,708 6,258 7,856 6,999 ‐3,679 ‐21,887Effective tax rate (%) 20.3 29.4 22.3 27.5 13.1 18.6Reported PAT (Rs m) 16,816 16,612 13,033 14,007 90,897 60,994PAT (Pre‐Exceptional) (Rs m) 16,816 16,612 15,838 14,071 90,897 60,994% change ‐18.2 ‐1.2 ‐4.7 ‐11.2 7.3 ‐32.9

Source: Company, IIFL Research Background Bharti Airtel, founded by entrepreneur Sunil Mittal in 1995, grew into a national operator through a combination of organic and inorganic initiatives. It is now present in all 22 circles of India, 15 countries in Africa (acquisition of Zain’s Africa operations), Sri Lanka, and Bangladesh (70% stake in Warid Telecom). In India, the company has a

30.1% share of revenue, and in Africa, it is the market leader in many of the 16 countries. Its major competitors are Vodafone, RCOM, Tata DoCoMo, Idea Cellular and BSNL in India, and MTN in Africa. Bharti owns 89% of Bharti Infratel, which owns 42% in Indus Towers. Indus Towers is a three-way JV between Bharti, Idea and Vodafone, into which the three companies have pooled their tower assets to improve cost efficiencies. In DTH, Bharti’s major competitors are Dish TV and BIG TV. Figure 50: Bharti dominates the India market with a 30% revenue market share

India Wireless Revenue Share breakup (4QFY11)

Aircel4.6%

TTL8.6%

Others3.4%

BSNL MTNL8.5%

Vodafone21.4%

Bharti30.1%

RCOM9.8%Idea

13.6%


Most businesses in India and South Asia are cash flow positive Except for Bharti’s DTH business, which is housed under the “others” segment, all other segments are cash flow positive.

This includes the mobile division, which has been in an investment mode in Sri Lanka and Bangladesh since FY11. Currently, almost all revenue comes from India, where Bharti is not only the biggest, but also the most profitable. Bharti also owns BWA (Broadband Wireless Access) spectrum in the 2300 MHz band (in four key circles out of

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22), which it will use to launch very high-speed wireless data service in 2011. In all likelihood, the company will use this to target enterprise and home broadband markets.

Among Bharti’s competitors, BSNL/MTNL (the state-owned telcos), Reliance Communications (RCOM) and Tata Teleservices (which sells wireless services under the Tata DoCoMo and Tata Indicom brands) are the diversified telcos. Idea Cellular and Vodafone Essar are pure wireless players, though Vodafone is beginning to make its fixed line enterprise presence felt.

Bharti’s telemedia division consists of an 84-city spread in India and ~3.4m subscribers, of whom ~43% are on broadband, all fixed line.

Finally, in a short span of less than three years, Bharti, with 5.6m subscribers, is one of the premier Pay TV service providers in India, and it uses the DTH platform.

Figure 51: India and South Asia – Break‐down by segment

India & South Asia (INR m) FY11

Revenue EBITDA

%EBIT

%EBIT YoY

%Capex /

Sales

Mobile 362,689 33.7% 22.6% 21.8% 16.2%Telemedia 36,324 45.2% 23.2% 16.1% 22.1%Total enterprise 41,292 23.3% 12.7% ‐84.5% 10.0%Passive Infrastructure Services 85,555 35.9% 12.5% 356.9% 26.4%Others 10,317 ‐96.9% ‐139.4% 11.3% 127.3%Total Gross 536,177 Eliminations 72,271 Total Net 463,906 36.3% 19.9% ‐7.4% 23.0%

Source: Company, IIFL Research; In the mobile division, capex does not include the cost of 3G spectrum acquisition, and it includes only spending on equipment.

Mobile – regulatory and tariff struggles over; time for 3G-led growth Brutal competition took its toll on margins: The last two years (FY10-11) have been a troublesome period for Bharti. Before this,

for six years, the Indian market was characterised by very rapid subscriber growth plus revenue growth. Thereafter, while subscriber growth continued, revenue growth collapsed from almost 40% in FY09 to single digits.

The key reason was that the government decided to permit new telcos to compete, and it released licenses and spectrum at controlled prices. Consequently, the number of competitors went up from 6 in most service areas to 12.

Once the network roll-out was done, these telcos, notably RCOM and Tata DoCoMo, had little option, but to create visibility for themselves through sharp tariff cuts. This brought tariffs down by 30% in a few months, to levels of 1 paise (rupee cent)/second.

With this, all telcos, especially the start-ups, suffered financially, but fierce competition raged on throughout 2009-10.

Figure 52: Sharp tariff cuts by desperate competitors brought revenue growth and profitability crashing down in FY10… Mobile business FY06 FY07 FY08 FY09 FY10 FY11 Revenue 82,392 141,443 217,860 303,601 324,872 362,689 Growth (YoY) 52.5% 71.7% 54.0% 39.4% 7.0% 11.6% EBITDA% 36.1% 37.6% 39.2% 31.0% 31.1% 34.7% EBIT% 23.3% 25.2% 27.4% 22.6% 21.4% 23.6% Capex to sales 50.5% 51.0% 54.5% 21.4% 19.3% 16.2%

Source: Company, IIFL Research; Beginning 4QFY08, EBITDA of towers was transferred to the passive infrastructure division, which pulled down reported EBITDA sharply. In FY11, along withchange to IFRS (US GAAP before then), high EBITDA margin long‐distance services were clubbed with the mobile division.

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Figure 53: …but subscriber growth continued to be strong, and so also was traffic growth (voice) Key performance indicators FY06 FY07 FY08 FY09 FY10 FY11Subscribers (‘000) 19,579 37,141 61,985 93,923 127,619 162,203Traffic (min, m) 70,425 152,582 284,399 475,346 610,430 792,132Rate / Min (RPM) 1.2 0.9 0.8 0.6 0.5 0.4MOU / Sub 377.2 448.3 478.2 508.1 459.2 455.5ARPU (Rs) 441.3 415.6 366.3 324.6 243.8 200.9

Source: Company, IIFL Research But 3G auctions and a change in the telecom ministry signalled a turnaround: In 2010, the government conducted 3G auctions, and an industry, which generates less than US$30bn in annual revenue was made to spend US$20bn. Bharti paid up US$3.5bn for its 3G and BWA spectrum, and other competitors ended up with significantly higher levels of debt.

With profitability already severely dented, new telcos including Etisalat and Telenor (operating in India as Uninor, a 67%-owned subsidiary), re-evaluated their investments. In the meantime, there was a change of leadership in the telecom ministry, and the circumstances under which licenses were issued in 2008 were investigated in detail. This enquiry is still in progress, and it has created uncertainty for all telcos who secured spectrum in recent years. The new minister indicated that there would be a step up in transparency and progressive regulation and has begun taking steps in this direction.

The impact of all this was a return of mass subscriber faith to old telcos, including Bharti, and a halt in tariff cuts. This is evident in strong traffic growth and stable rate/minute (RPM).

Figure 54: RPM declines were vicious, but now, it has returned to normal levels and will stabilise within 2‐3 quarters

‐30.0%

‐25.0%

‐20.0%

‐15.0%

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‐5.0%

0.0%

5.0%

2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11 4Q FY11

Bharti Idea RCOM

Source: Company, IIFL Research Figure 55: Tariff cuts spurred usage in the last two years, as seen from very strong mobile traffic growth

FY10 FY11 Wireless Traffic Growth (YoY) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Bharti 33.7% 24.0% 24.0% 32.2% 35.3% 32.8% 30.0% 22.6% Vodafone 37.1% 34.2% 35.0% 43.6% 43.8% 37.8% 33.0% 27.3% Idea 47.3% 38.6% 43.7% 54.4% 68.8% 68.5% 61.7% 49.3%

Source: Company, IIFL Research Now upside is more likely to emerge: Key upside factors include: 1) revenue growth from rural areas; 2) growth from data services (3G); and 3) clarity on regulation, especially license fees to be paid upon renewals (Bharti’s licenses come up for renewals from 2014). We examine each of these briefly:

Strong rural presence, poised to deliver growth: Bharti, with its 116,000 BTSs, covers 86% of the population, among the highest in India. The population coverage in urban areas, which has ~25% of the population, is already 100%, and teledensity exceeds 140%. In rural

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India, tele-density is barely above 30%. Most incremental subscriber additions are happening from rural India, which contributes 40% to Bharti’s subscriber base. Urban ARPUs are ~1.5x of rural ARPUs for most telcos.

Figure 56: Bharti has a strong rural presence, and penetration in that economy is still relatively low, providing growth opportunities for 2‐3 years

Wireless Teledensity in India

63.2%36.6% 40.3% 44.7%49.6% 53.8% 58.0%

140.5%

87.2% 95.0% 103.2%112.0% 120.6%

129.8%

30.1%

25.3% 27.3%23.1%20.0%17.2%15.4%

0.0%

20.0%40.0%

60.0%80.0%

100.0%

120.0%140.0%

160.0%

June‐09 Sept‐09 Dec‐09 Mar‐10 June‐10 Sept‐10 Dec‐10

Total Urban Rural

Source: Company, IIFL Research Figure 57: Bharti leads in the rural market, after a brief climb by Tata in 2009. New competitors have chipped away in the last 3 quarters… Rural subscriber share

Mar‐09 June‐09 Sept‐09 Dec‐09 Mar‐10 June‐10 Sept‐10 Dec‐10

Bharti 26.9% 26.8% 27.1% 26.3% 25.2% 25.2% 24.8% 24.3%Reliance 13.8% 13.0% 12.4% 11.7% 11.1% 11.1% 11.0% 10.8%Vodafone 18.6% 19.7% 19.3% 18.5% 19.3% 18.9% 19.0% 19.0%BSNL 17.4% 15.4% 14.8% 13.6% 13.2% 12.5% 12.5% 12.3%Idea 15.7% 15.7% 15.6% 15.8% 15.6% 16.1% 15.9% 16.2%Tata 2.4% 2.3% 3.1% 6.6% 7.0% 7.3% 7.4% 7.1%Aircel 5.1% 7.0% 7.6% 7.1% 7.3% 7.4% 7.3% 7.1%Others 0.0% 0.1% 0.5% 1.2% 1.5% 2.2% 3.2%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Rural presence calls for a fairly strong investment, as infrastructure and opex costs are very high, compared with the urban markets, due to low population density. Once this market is seeded, usage upsides from 2G, and eventually 3G, can be tapped. The market is also less competitive than the urban markets, as the higher investment required in rural areas keeps away financially-weaker competitors.

In Bharti’s case, most of this investment is already done, and hence exploitation of rural upside can be done with relative ease.

Figure 58: In India, most operators are seeing subscriber additions from rural areas Rural proportion in subscriber base

Mar‐09 June‐09 Sept‐09 Dec‐09 Mar‐10 June‐10 Sept‐10 Dec‐10

Bharti 31.4% 33.0% 34.8% 36.4% 37.7% 38.6% 39.2% 39.9% Reliance 20.8% 20.5% 20.3% 20.5% 20.7% 21.1% 21.3% 21.6% Vodafone 29.7% 32.5% 32.9% 33.2% 36.5% 36.4% 37.3% 38.4% BSNL 36.6% 35.6% 35.6% 35.7% 36.4% 36.1% 36.2% 35.5% Idea 40.1% 42.0% 43.1% 45.3% 46.7% 48.9% 48.5% 49.7% Tata 7.6% 7.9% 9.5% 18.8% 20.4% 21.1% 21.1% 21.3% Aircel 30.5% 40.5% 41.7% 37.7% 38.0% 37.0% 35.7% 35.3% Others 0.1% 1.9% 6.4% 12.8% 13.6% 15.1% 17.3% Total 28.0% 29.5% 30.0% 31.3% 32.7% 33.0% 33.0% 33.4%


3G should boost revenue growth: Bharti won 3G spectrum in 13 of the 22 circles in India, which cover more than 68% of its revenue. We expect 3G to propel strong revenue growth and Bharti would participate in it for the following reasons:

1) India is a unique country, because two independent movements have happily coincided:

a) There has been a worldwide spurt in the last 15 months in devices, particularly tablets and smartphones, which has enabled genuine high speed data access at affordable prices; and

b) In India, telcos finally got their hands on 3G spectrum, with a ready 3G technology as well as a hungry subscriber base.

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2) Bharti has the highest ARPU among telcos, illustrating its dominant share of the high-ARPU segment, the most-likely consumers of 3G.

3) Bharti’s Airtel brand is one of the strongest in the country, and it is ideally positioned to take advantage of the increase in spending by subscribers on data.

Figure 59: Bharti enjoys the highest ARPU among all telcos

Bharti has the highest ARPU in the industry

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1QFY10

2Q FY10

3Q FY10

4Q FY10

1Q FY11

2Q FY11

3Q FY11

4Q FY11

Bharti Vodafone Idea RCOM


Tower sharing to help control both opex and capex: Bharti’s passive infrastructure consists of towers owed by subsidiary, Bharti Infratel and JV Indus Tower (with Vodafone Essar and idea Cellular). Bharti pioneered tower sharing in India. This model principally features pooling of towers by several operators into a single neutral company, and loading multiple sets of electronics on each tower, to better defray fixed site costs (capex and opex).

We estimate that there will be minimal need for Bharti from here on to invest in towers, as between Infratel and Indus Towers, Bharti has a sufficient spread of towers to access locations from.

Towers can constitute up to 60% of total capex in a site, and especially so in rural areas, where to cover large distances, taller towers are needed. Sharing enables capex and opex savings, and hence, we believe that at a time when 3G capacity has to be added,

Bharti’s extensive tower portfolio will be a competitive advantage, holding costs down.

Figure 60: Snapshot of tower companies in India Current estimated of BTSs and Towers Tower Count Tenancy Tenants Bharti Infratel 32,792 1.7 56,710 Indus Towers 108,586 1.8 198,557 Vodafone Essar 15,000 1.5 22,500 Idea Cellular 9,077 1.5 13,616 BSNL 45,000 1.1 49,500 RCOM 54,000 1.7 91,800 GTL Infrastructure 32,493 1.2 38,900 Viom Networks 41,000 1.9 77,900 MTNL and Others 20,000 1.1 22,000 Total 357,948 1.6 571,482

Source: Company, IIFL Research Figure 61: In both Bharti Infratel and Indus towers, tower additions have slowed down and instead tenancy has increased. These factors will continue generating cost savings. FY10 FY11

Tower Portfolio 3Q 4Q 1Q 2Q 3Q 4Q Indus Tower Count 102,696 102,938 104,901 106,438 107,789 108,586 Tenancy 1.66 1.71 1.75 1.78 1.80 1.83 Bharti Infratel Tower Count 29,806 30,568 31,196 31,831 32,424 32,792 Tenancy 1.57 1.62 1.65 1.65 1.68 1.73


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Figure 62: We expect tenancy in both tower companies to rise significantly from current levels within 3‐4 years Tower Portfolio Current Steady StateIndus Tower Count 108,586 140,000Tenancy 1.83 2.50 Bharti Infratel Tower Count 32,792 40,000Tenancy 1.73 2.25

Source: Company, IIFL Research Figure 63: Wireless business: Expect an EBITDA CAGR of almost 15% over FY11‐13 Wireless Projections FY09 FY10 FY11 FY12ii FY13ii FY14iiSubscribers (m) 93.9 127.6 162.2 191.0 210.2 219.8ARPU (Rs) 324.6 243.8 200.9 186.2 185.9 197.6Revenue (Rs m) 303,601 324,872 362,689 411,873 469,493 536,566EBITDA% 31.0% 31.1% 34.7% 35.1% 35.4% 35.7%Capex / Sales 21.4% 19.3% 16.2% 19.0% 17.0% 15.0%


Other businesses – Strong growth in DTH expected: Figure 64: Wireless to continue to be the major driving force for revenue growth Aggregate India Projections (Rs m) FY09A FY10A FY11A FY12ii FY13ii FY14iiMobile 303,601 324,872 362,689 411,873 469,493 536,566Telemedia 33,517 34,154 36,324 38,236 40,350 42,694Enterprise (Inc LD) 84,882 83,597 41,292 43,616 46,232 49,006Passive Infrastructure 42,489 35,425 85,555 96,287 108,257 121,298Others 3,611 5,825 10,317 17,913 24,538 28,761Total Gross Revenue 468,100 483,873 536,177 607,924 688,871 778,326Eliminations 98,485 87,723 72,271 80,145 86,559 93,166Aggregate Net Revenue 369,615 396,150 463,906 527,778 602,312 685,160 EBITDA % 41.0% 40.5% 36.4% 37.2% 38.5% 38.7%Capex to Sales 38.3% 27.9% 23.0% 24.0% 21.4% 18.9%


Africa – challenging, but a sustainable, long-term growth opportunity When Bharti entered, Africa operations were wobbly: Bharti acquired Zain’s Africa operations in 15 countries in 2010, at which time, the following problems existed:

1) Zain Africa was losing market share and profitability was receding sharply.

2) The previous management, Zain, based in Kuwait, was not sufficiently hands on.

3) Network capacity and quality were not at competitive levels.

4) Tariffs were misaligned, and often much higher than competition.

Tariffs in Africa, at ~7.5 US$ cents/min, were high, and usage was only 20%-40% of that in other low-cost economies such as India.

Figure 65: Under Bharti, Africa continued to slide, but in the past two quarters, visible improvements have started

799.6 843.6

910.6923.9

27.5% 24.0%

20.8%

26.3%

700

750

800

850

900

950

1Q FY11 2Q FY11 3Q FY11 4Q FY1110%

15%

20%

25%

30%Revenue (Rs m, LHS) EBITDA % (RHS)


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Bharti strengthened its management team, aligned tariffs, and cut costs:

1) The company appointed ex-CEO of India operations as CEO of the African one.

2) It transferred more than 30 senior experienced people from India to Africa, to strengthen the involvement of management.

3) It focussed on network capacity augmentation, by stepping up capex and attempting to replicate its India cost structure.

4) It attempted to extend its success in India, in outsourcing IT to IBM, to the Africa operations.

5) According to media reports, it lobbied in several countries to bring down interconnect charges.

6) In markets where: (a) interconnect charges were brought down; (b) Bharti Africa’s tariffs were too high vs. competition, or (c) there was substantial under-utilisation of capacity (as in Kenya), Bharti cut tariffs sharply.

These measures have resulted in revenue growth resumption and margin improvement in the past two quarters.

Figure 66: After an initial round of tariff cuts, Bharti has been less aggressive Performance Indicators in Africa 1Q FY11 2Q FY11 3Q FY11 4Q FY11Subscribers ('000) 36,362 40,082 42,124 44,206Traffic (min m) 3,695* 12,782 14,904 14,915ARPU (US$) 7.43 7.38 7.34 7.16MOU (min) 103 112 120 115ARPM (US$c) 7.2 6.6 6.1 6.2Non Voice 7.9% 7.1% 7.9% 7.8%

Source: Company, IIFL Research,*Only for 23 days

Following are some major challenges for profitability:

1) To spread penetration despite Africa’s low average population density, significant network expansion needs to be undertaken.

2) In large markets such as Nigeria (35%-40% of Bharti’s revenue), power is expensive and it is provided by diesel gensets. There appears to be no near-term solution to attacking this important element of cost, as the various African country governments are not in any hurry to implement power reforms.

3) Local competitors have been lobbying with governments to prevent Bharti from cutting tariffs and becoming competitive; in a few cases (like DRC), the governments have moved on this, to Bharti’s disadvantage.

4) Other network capex and opex, principally consisting of non-energy site costs, depend on passive infrastructure costs, i.e. towers. Bharti has so far, in 12 months of involvement with Africa, been unable to string together tower-sharing arrangements. It is difficult to say if this will happen, but the economics certainly support this, because there are several struggling sub-scale operators in much of Bharti’s Africa footprint, who would benefit from sharing their surplus passive capacity with a tower-hungry operator such as Bharti.

Based on the above, our estimates are well below the Africa CEO’s target of US$5bn in revenue and a 40% EBITDA margin in FY13; although it must be admitted that in the months after margin recovery began (two quarters back), the management has certainly been more vocal about the achievability of the target.

Figure 67: We are lower, at present, than the Africa CEO’s target of US$5bn in revenue and a 40% EBITDA margin Africa Projections FY11A FY12ii FY13ii FY14ii Revenue (US$ m) 2,882.5 4,226.1 4,649.0 5,114.9 EBITDA % 24.0% 30.7% 34.0% 38.0% EBIT % 3.7% 4.5% 7.8% 9.9% Capex / sales% 30.0% 29.0% 26.0% 23.0% Source: Company, IIFL Research

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Figure 68: Expect sustained traffic growth with stable pricing in Africa Africa Projections FY11A FY12ii FY13ii FY14iiSubscribers ('000) 44,205.7 54,205.7 63,205.7 70,605.7Traffic (min m) 46,296.3 69,001.6 83,638.9 99,710.5ARPU (US$) 7.33 7.16 7.22 7.56ARPM (US$c) 6.53 6.13 6.09 6.09


Bharti Consolidated Financials: Figure 69: Margin improvement should happen in both India and Africa Income statement (Rs m) FY10A FY11A FY12ii FY13ii FY14iiRevenue 396,150 594,672 718,089 831,340 958,200EBITDA 160,267 199,664 256,060 316,537 370,055EBITDA % 40.5% 33.6% 35.7% 38.1% 38.6%EBITDA Growth Y‐o‐Y 5.7% 24.6% 28.2% 23.6% 16.9%EBIT 99,810 97,598 120,679 159,466 191,986EBIT % 25.2% 16.4% 16.8% 19.2% 20.0%Interest income 1,386 1,363 1,336 1,336 1,336Interest expense 5,783 ‐27,821 ‐27,323 ‐23,507 ‐16,008Others 5,643 Profit before tax 106,978 76,783 94,692 137,295 177,314Taxes ‐13,958 ‐17,790 ‐19,946 ‐34,176 ‐48,310Tax Rate 13.0% 23.2% 21.1% 24.9% 27.2%Minorities and other ‐1,994 1,475 ‐2,683 ‐5,503 ‐7,954Net profit 91,026 60,468 72,063 97,616 121,049


Figure 70: Will Bharti raise dividend payout? We believe that they will look for more inorganic growth in Africa Cashflow summary (Rs m) FY10A FY11A FY12ii FY13ii FY14ii Profit Before Tax 106,979 76,782 94,692 137,295 177,314 Depr. & amortization 60,457 102,066 135,380 157,071 178,069 Tax Paid ‐22,145 ‐24,388 ‐19,946 ‐34,176 ‐48,310 Working capital ∆ ‐28,923 8,293 33,321 36,217 39,627 Other operating items 19,813 2,008 175 335 386 Operating cashflow 136,181 164,761 243,622 296,741 347,085 Capital expenditure ‐81,875 ‐276,865 ‐138,601 ‐149,501 ‐162,387 Free cash flow 54,306 ‐112,104 105,021 147,240 184,698 Equity Raised 27,568 ‐402 2,283 1,490 1,848 Investments ‐347,681 Debt financing/disposal ‐54,183 429,586 ‐39,544 ‐39,820 ‐39,820 Dividends paid ‐4,428 ‐3,068 ‐6,687 ‐12,473 Other items 272 ‐25,462 ‐37,122 ‐30,809 ‐25,384 Net change in cash 27,964 ‐60,491 27,570 71,414 108,869


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Figure 71: BY FY13ii, debt/EBITDA will be well below 2x Balance sheet summary (Rs m) FY10A FY11A FY12ii FY13ii FY14iiCash & equivalents 77,034 16,543 44,113 115,527 224,396Sundry debtors 24,335 54,929 64,873 75,675 87,492Inventories ‐ trade 484 2,139 2,632 3,147 3,707Other current assets 37,494 38,466 44,320 50,889 58,105Fixed assets 443,808 651,426 676,986 693,481 701,863Intangible assets 52,675 637,317 614,977 590,913 566,849Other term assets 10,578 64,244 224,843 237,922 235,198Total assets 646,408 1,465,064 1,672,744 1,767,554 1,877,610Short‐term debt 17,166 84,370 84,873 85,053 85,233Sundry creditors 63,109 239,684 282,949 329,967 381,411Other current liabs 67,836 45,791 52,312 59,731 67,894Long‐term debt/CBs 47,452 532,338 492,794 452,974 413,154Other long‐term liabs 8,656 46,650 179,772 184,753 190,179Minorities/other equity 28,489 28,563 30,846 32,336 34,184Net worth 413,699 487,668 549,197 622,739 705,555Total liabs & equity 646,408 1,465,064 1,672,744 1,767,554 1,877,610


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Globe – Strong traction in broadband Globe is the second-largest telco in the Philippines, behind PLDT, and ahead of Digitel and Bayantel. It is 47%-owned by SingTel and 30% by Ayala Corp, a conglomerate. Globe offers wireless, fixed-line and broadband services.

Very high data proportion in wireless revenue: In wireless, the Philippines market is unique with a very high proportion of data. 53% of wireless revenue (27m subscribers, 30% market share in a 90% penetrated market) for Globe comes from mobile data, consisting of SMSs, Blackberry and mobile surfing. Globe also has 631k fixed-line subscribers, 1m wireless broadband and 265k wired broadband subscribers. Broadband, 11% of revenue, also has a substantial wireless component, with 1m broadband subscribers. The main source of revenue here is surfing from dongles, gaming etc.

PLDT (backed by DoCoMo) has between 50% and 60% of the wireless and fixed-line markets, though in recent quarters, Globe has led in broadband net subscriber additions.

Broadband leads growth: The bulk of revenue growth is coming from broadband (29% YoY in 1Q2011, compared with 4.2% for wireless services, which accounts for 76% of service revenue), which accordingly, accounts for a greater proportion of Globe’s investment than mobile. 28% of Globe’s revenue is linked to the US$, and a strong Peso has played a role in keeping revenue growth suppressed.

Wireless to grow at modest pace: Our projections are based on:

1) Strong traction in broadband with stable pricing (ARPU bottoming out) and market share gains in subscriber adds;

2) Modest growth in the mobile market and Globe’s preservation of the current 32% subscriber market share (since unique ownership incidence has been flat over three years and SIM penetration is already more than 90% and this is unlikely to change in the foreseeable future).

Globe’s main issue has been that PLDT is set to merge with Digitel; despite PLDT’s stated aim of keeping Digitel’s operations separate, it is concerned that there would be an undue concentration of spectrum in the hands of a single dominant operator, PLDT.

Figure 72: Modest growth foreseen in the mobile market Globe KPI Projections – wireless FY08A FY09A FY10A FY11ii FY12ii FY13ii Teledensity 73.0% 80.0% 93.0% 95.0% 99.3% 101.3% Total subscribers (m) 24.7 23.2 26.5 29.4 31.3 32.6 ARPU 206 185 168 150 136 126


Figure 73: Broadband revenue should grow from the current 19% to 31% of total revenues within three years Globe Projections (PHP m) FY08A FY09A FY10A FY11ii FY12ii FY13ii Revenues Wireless Services 55,562 53,321 49,977 50,379 49,612 48,422 Wireless non‐Services 1,647 916 2,374 3,149 3,359 2,921 Wireline 7,609 9,624 12,671 16,130 19,889 23,731 Total 64,818 63,861 65,022 69,657 72,860 75,074

EBITDA 37,398 36,462 33,013 35,999 36,811 38,681 PAT 11,276 12,569 9,744 11,145 11,551 12,645 Capex 18,785 20,989 17,552 17,876 16,758 17,267 FCF 5,115 11,297 6,201 15,831 15,284 16,336


Figure 74: Smartphone subsidies will suppress EBITDA growth for the next 2‐3 years Globe ratios FY08A FY09A FY10A FY11ii FY12ii FY13ii Revenue Growth ‐1.1% ‐1.5% 1.8% 7.1% 4.6% 3.0% EBITDA % 57.7% 57.1% 50.8% 51.7% 50.5% 51.5% Capex to sales% 29.0% 32.9% 27.0% 25.7% 23.0% 23.0% Dividend Payout Ratio % 124.7% 132.7% 83.2% 92.7% 100.0% 100.0% Debt/EBITDA (x) 0.9 1.1 1.3 1.0 0.9 0.7


gvgiri@iif lcap.com

SingTel – ADD

33


Figure 75: Globe will spend more on broadband capex than mobile

Globe's Capex 2011 outlook

Mobile32%

Corporate Data7%

Back Office6%

Submarine18% Broadband

37%


gvgiri@iif lcap.com

SingTel – ADD

34


Aggregate Projections for SingTel (Consolidated) Figure 76: Optus to deliver the bulk of the revenue growth Aggerage Projections (SG$ m) FY10A FY11A FY12ii FY13ii FY14iiOp Revenue SingTel 5,995.0 6,400.6 6,647.6 6,895.3 7,175.7Y‐o‐Y growth 8.1% 6.8% 3.9% 3.7% 4.1%

Optus 10,875.9 11,670.0 12,327.8 13,046.4 13,968.9Y‐o‐Y growth 15.9% 7.3% 5.6% 5.8% 7.1%

Total 16,870.9 18,070.6 18,975.4 19,941.7 21,144.6Y‐o‐Y growth 13.0% 7.1% 5.0% 5.1% 6.0%


Figure 77: EBITDA expansion post FY12 Operating EBITDA FY10A FY11A FY12ii FY13ii FY14iiSingTel 2,179.9 2,129.5 2,184.9 2,278.6 2,417.7EBITDA % 36.4% 33.3% 32.9% 33.0% 33.7%Y‐o‐Y growth 5.4% ‐2.3% 2.6% 4.3% 6.1%

Optus 2,572.0 2,859.6 3,003.9 3,243.3 3,589.0EBITDA % 23.6% 24.5% 24.4% 24.9% 25.7%Y‐o‐Y growth 13.3% 11.2% 5.0% 8.0% 10.7%

Total 4,751.9 4,989.1 5,188.9 5,521.9 6,006.8EBITDA % 28.2% 27.6% 27.3% 27.7% 28.4%Y‐o‐Y growth 9.5% 5.0% 4.0% 6.4% 8.8%


Figure 78: EBIT growth will be powered by Optus EBIT FY10A FY11A FY12ii FY13ii FY14iiSingTel 1,705.3 1,632.0 1,628.1 1,666.7 1,743.3EBIT % 28.4% 25.5% 24.5% 24.2% 24.3%

Optus 1,263.3 1,518.6 1,651.1 1,832.3 2,143.6EBIT % 11.6% 13.0% 13.4% 14.0% 15.3%

Total 2,968.6 3,150.6 3,279.2 3,499.0 3,886.9EBIT % 17.6% 17.4% 17.3% 17.5% 18.4%


Figure 79: Bharti’s PBT recovery should raise associates’ PBT

PBT Breakdown (SG$ m)

0

1,000

2,000

3,000

4,000

FY10A FY11A FY12ii FY13ii FY14ii

Singtel, Optus Associate PBT

Source: Company, IIFL Research Figure 80: Bharti likely to be the largest contributor to Associate earnings growth Associate PBT (SG$ m) FY11 FY12 FY13 FY14

Telkomsel 868.6 1,008.2 1,050.1 1,112.6 AIS 292.4 294.4 311.6 326.3 Bharti 708.0 853.1 1,223.0 1,564.0 Globe 193.2 212.3 215.9 221.7 Others 161.1 135.3 138.0 140.8 Total 2,223.3 2,503.3 2,938.7 3,365.3

Source: Company, IIFL Research Figure 81: Expect regular dividends to rise above 85% Taxes FY10A FY11A FY12ii FY13ii FY14ii

PAT 3,907 3,835 4,195 4,595 5,133 Dividends 2,084 2,357 4,246 3,261 4,031 Payout Ratio 60.4% 60.3% 110.7% 77.7% 87.7%


gvgiri@iif lcap.com

SingTel – ADD

35


Valuation – ADD (13% total return) Figure 82: We estimate that SingTel carries a 13% 12‐month upside; we recommend ADD

Valuation (All Amounts in SG$ m) Approach WACC

Exit EV/ EBITDA

Fwd Multip

le M‐Cap HoldingHC

Discount

Price / Share (SG$)

SingTel (Singapore) DCF 8.0% 6.0 100.0% Optus

(Australia) DCF 10.0% 6.0 100.0% Core DCF 23,553 100.0% 1.48 Telkomsel DCF 12.0% 6.4 31,464 35.0% 10.0% 0.62AIS PER 12.1 13,529 21.4% 10.0% 0.16Globe DCF 11.0% 5.0 4,527 47.3% 10.0% 0.12 Bharti India &

SA PER 14.0 34,754 Bharti Africa EV/EBITDA 8.7 11,608

Bharti Total 46,362 32.3% 10.0% 0.84 Others DCF 0.06Total/share 3.29Dividend/share 0.27CMP 3.16Total Return 12.6%


We rate SingTel ADD, with a 12.6% total return (note that SingTel declared higher than average payouts reflecting a capital management move), reflecting our belief in the robust business spread SingTel has.

Optus accounts for 55% of the core SingTel + Optus EV. The core constitutes 45% of the Target price. With Optus facing heightened competitive pressure, with the massive market share in Singapore operations likely to face heightened competition in parts due to

NGNBN, with relatively low weightages for Globe and AIS, it boils down to whether the upsides from Telkomsel and Bharti are sufficient to raise our optimism.

Bharti is the single biggest component of the per share target price, and upside surprise could come from 1) higher tariffs – we feel it is premature to build these upsides as competitive pressure in India has by no means disappeared 2) high usage from 3G – here our estimates could be beaten as smartphone prices fall rapidly 3) regulatory stability – with a new leader in the telecom ministry, the stage seems to be set for stable and progressive regulation, but we feel that these upsides are already factored in, and incremental earnings upsides are unlikely and 4) Africa turnaround – challenges abound here, but as we have discussed, the management seems game.

Figure 83: Comparison of SingTel, Starhub and M1 – SingTel trades at an attractive P/FCF multiple Item SingTel Starhub M1

P/E (FY12 / CY11) 12.0 14.8 13.3 P/E (FY13 / CY12) 11.0 14.4 11.7 P/FCF (FY12 / CY11) 15.2 16.7 13.8 P/FCF (FY13 / CY12) 12.9 15.3 11.6 EBITDA / Int (FY12 / CY11) 17.3 31.4 66.4 EBITDA / Int (FY13 / CY12) 18.1 31.0 75.3 Revenue CAGR (FY11/CY10 + 3) 5.4% 3.9% 6.8% EBITDA CAGR (FY11/CY10 + 3) 6.0% 8.4% 6.3% EPS CAGR (FY11/CY10 + 3) 10.2% 9.6% 8.2% FCF CAGR (FY11/CY10 + 3) 10.6% ‐5.3% 46.3% TGT P/E (FY12 / CY11) 12.5 15.3 13.9 TGT P/E (FY13 / CY12) 11.4 14.8 12.2 TGT P/FCF (FY12 / CY11) 15.8 17.2 14.4 TGT P/FCF (FY13 / CY12) 13.4 15.8 12.0


gvgiri@iif lcap.com

SingTel – ADD

36


Financial summary Income statement summary (S$ m) Y/e 31 Mar FY10A FY11A FY12ii FY13ii FY14iiRevenue 16,871 18,071 18,975 19,942 21,145EBITDA 4,847 5,119 5,321 5,617 6,101EBIT 2,969 3,151 3,279 3,499 3,887Interest expense ‐334 ‐324 ‐308 ‐310 ‐312Exceptional items Others 2,407 2,176 2,503 2,939 3,365Profit before tax 5,041 5,002 5,474 6,128 6,941Taxes ‐1,136 ‐1,170 ‐1,279 ‐1,532 ‐1,808Minorities and other 1 3 0 0 0Net profit 3,907 3,835 4,195 4,595 5,133

Cash flow summary (S$ m) Y/e 31 Mar FY10A FY11A FY12ii FY13ii FY14iiProfit Before Tax 5,041 5,002 5,474 6,128 6,941Depr. & amortization 1,878 1,969 2,042 2,118 2,214Tax Paid ‐592 ‐621 ‐681 ‐768 ‐880Working capital ∆ ‐136 111 ‐16 ‐20 ‐25Other operating & Non‐Cash items ‐912 ‐401 ‐1,456 ‐1,535 ‐1,843Operating cashflow 5,280 6,060 5,364 5,923 6,407Capital expenditure ‐2,213 ‐2,803 ‐2,048 ‐2,017 ‐1,997Free cash flow 3,067 3,257 3,316 3,905 4,410Equity Raised 709 7 0 0 0Investments 0 0 0 0 0Debt financing/disposal ‐902 844 40 40 40Dividends paid ‐2,084 ‐2,357 ‐4,246 ‐3,261 ‐4,031Other items ‐252 ‐627 0 0 0Net change in cash 538 1,124 ‐890 685 419 Source: Company data, IIFL Research

Balance sheet summary (S$ m)Y/e 31 Mar FY10A FY11A FY12ii FY13ii FY14ii Cash & equivalents 1,614 2,738 1,848 2,533 1,614 Sundry debtors 3,172 3,449 3,422 3,388 3,172 Inventories ‐ trade 346 299 297 294 346 Other current assets 13 69 68 67 13 Fixed assets 10,750 11,113 11,118 11,017 10,750 Intangible assets 10,200 10,218 10,218 10,218 10,200 Other term assets 11,857 11,396 12,254 13,025 11,857 Total assets 37,951 39,282 39,226 40,543 37,951 Sundry creditors 4,650 4,550 4,515 4,470 4,650 Other current liabs 657 1,291 1,281 1,268 657 Short‐term debt 1,528 2,699 2,719 2,739 1,528 Long‐term debt/CBs 5,351 4,587 4,607 4,627 5,351 Other long‐term liabs 2,250 1,805 1,805 1,805 2,250 Minorities/other equity 23 22 22 22 23 Net worth 23,493 24,328 24,278 25,612 23,493 Total liabs & equity 37,952 39,282 39,226 40,543 37,952 Ratio analysis Y/e 31 Mar FY10A FY11A FY12ii FY13ii FY14ii Revenue growth (%) 13.0 7.1 5.0 5.1 6.0 Op Ebitda growth (%) 9.4 5.6 3.9 5.6 8.6 Op Ebit growth (%) 10.0 6.1 4.1 6.7 11.1 Op Ebitda margin (%) 28.7 28.3 28.0 28.2 28.9 Op Ebit margin (%) 17.6 17.4 17.3 17.5 18.4 Net profit margin (%) 23.2 21.2 22.1 23.0 24.3 Dividend payout (%) 60.4 60.3 110.7 77.7 87.7 Tax rate (%) 22.5 23.4 23.4 25.0 26.0 Net debt/equity (%) 22.4 18.7 22.6 18.9 16.7 Net debt/op Ebitda (x) 1.1 0.9 1.0 0.9 0.7 Return on equity (%) 17.8 16.0 17.3 18.4 19.6 ROCE (%) 8.7 9.1 9.3 9.4 10.2 Return on assets (%) 25.5 25.4 29.3 31.4 35.6 Source: Company data, IIFL Research

gvgiri@iif lcap.com

SingTel – ADD

37


Key to our recommendation structure BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon. SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon. In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at 10%, this being the risk-free rate of return + equity risk premium. Add - Stock expected to give a return of 0-10% over the hurdle rate, ie a positive return of 10%+. Reduce - Stock expected to return less than the hurdle rate, ie return of less than 10%. Published in 2011. © IIFL Securities Pte Ltd, Singapore (IIFL) 2011. MICA (P) 125/10/2010 This report is not intended for distribution to or use by any person or entity who/which is a citizen or resident of or located in any locality, state or other jurisdiction where such distribution, publication or use would be contrary to law or regulation. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information of IIFL’s clients, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. Opinions expressed in this document are our current opinions as of the date appearing in the material and may be subject to change from time to time, without notice. The views expressed in this report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. IIFL prohibits the analyst(s) who prepared this research from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for or view of a particular company. However, the analyst(s) may receive compensation that is based on their coverage of company(ies) in the performance of their duties or the performance of their recommendations, and the research personnel involved in the preparation of this report may also participate in the solicitation of business as described below. IIFL, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or may have positions in securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, IIFL or its affiliated companies may deal in the securities mentioned herein as a broker or for any other transaction as a market maker, investment advisor, etc to the issuer company or its connected persons or seek to perform significant investment banking or underwriting services for or relating to such company(ies) or any entity mentioned in this report. IIFL generally prohibits its analysts from having financial interest in the securities of any of the companies that the analysts cover. In addition, the company prohibits its employees from conducting F&O transactions or holding any shares for a period of less than 30 days. As on the date of this report, the analyst(s) who prepared this report do not own and do not have an interest in the securities in the company(ies) covered or recommended in this report. IIFL or any persons connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. IIFL or any of its connected persons—including its directors or affiliated companies or associates or employees—shall be in no way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, or views and opinions expressed in this publication.

2011 jul 08 - iifl - singtel

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