SingTel - DBS Research 2019-11-22: Mobile Tariffs In India To Rise Sharply; Upgrade to BUY

SINGTEL (SGX:Z74)

SingTel - Mobile Tariffs In India To Rise Sharply

Earlier-than-expected tariff hikes in India from December 2019 onwards turn us positive on SingTel (SGX:Z74).
Tariffs could be raised 10-20% in India over the next 12 months; we have modelled a 10% tariff hike benefitting SingTel’s earnings by ~3%.
Upgrade to BUY with a revised Target Price of S$3.60 as raise our fair value for Bharti and AIS.

Singtel’s share price has declined ~8% since our downgrade on 8 July 2019. On the back of proposed tariff hikes in India from Dec 2019 onwards, we are confident of a sharp rise in regional associates’ profit contribution in FY21F which has been the most critical factor in Singtel’s share price performance historically.
Despite weakness in Singapore and Australia, we raise SingTel’s FY21F underlying profit by 2% due to a healthier Bharti.
SingTel offers annual earnings growth of 8% over FY20F- 22F, coupled with over 5% yield. See SingTel Dividend History.
Upgrade to BUY with a revised Target Price of S$3.60. See SingTel Share Price; SingTel Target Price.

Tariffs have been declining in India since September 2016 when Reliance Jio entered the market, leading to sector consolidation. Jio became the No.1 player with ~32% revenue market share (RMS) in June 2019, followed by Bharti at ~30% and Vodafone-Idea Limited at ~28%. Jio raised tariffs effectively from 10 October when it started charging users INR0.06 per minute for outgoing calls to other networks. This translates into 10-14% effective price hikes across its various price plans.
On 18 November 2019, Vodafone-Idea and Bharti announced plans to raise tariffs from December 2019 onwards to sustain their businesses after a huge regulatory levy of almost US$6bn each on Vodafone-Idea and Bharti. Reliance Jio followed up by announcing plans to increase tariffs in the next few weeks without specifying the timeline. None of the players have dropped any hints on the magnitude of tariff hike.

The street has modelled a 8% revenue growth for Bharti in FY21F. India Mobile contributes ~ 50% of Bharti’s total revenue with expected revenue growth rate of ~20% mainly from 15-16% subscriber growth (those churning out from Vodafone) and ~5% ARPU rise. However, if tariffs were to be raised 10%, we estimate that mobile revenue could rise by another 5%, keeping in mind elasticity of demand. Assuming 80% of additional revenue flow to EBITDA, Bharti’s EBITDA could rise by INR16.3bn or 4% while net profit could increase by INR12.2bn. Assuming 35% of additional net profit accrues to SingTel, it may contribute an additional S$82m or 3% to SingTel’s earnings. We think a 10-20% tariff hike is quite possible in India, given ~30% discount ot Indonesia’s ARPU despite much higher data-usage in India. Our Indian partner Emkay Global expects ~21% revision in mobile tariffs over the next 12-15 months.
We have
1. raised fair value of Bharti to Rs500 (based on the revised fair value of Bharti by our Indian partner Emkay Global) from Rs340 earlier,
2. increased AIS’ value by 20% as we updated our fair value to Bt266 from Bt222 earlier,
3. reduced holding company discount to 10% from 15% to reflect upside potential of regional associates.

Bharti and Telkomsel comprise 26% and 22% of our SOTP valuation of SingTel.
Overall, regional associates comprise 68% of our SOTP valuation with the core business in Singapore and Australia comprising just 32% now. See attached PDF report for details of sum-of-the-parts valuation and complete analysis for SingTel.

Post 2QFY20 results, the street has cut FY20F/21F earnings by 7% each, in line with our projections now. The cuts are largely on the back of weakness in Australia and Singapore, which we had flagged in our report on 17 October 2019.
We do not see further earnings cuts as average revenue per user (ARPU) in India has ample room to rise after having declined 30% in total over the last three years.

Rise in associate contributions and monetisation of digital business. Potential rise in associate profit contributions and divestment of loss-making digital businesses over the next 12-month are key catalysts. See SingTel Announcements; SingTel Latest News.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2019-11-22

SGX Stock Analyst Report BUY UPGRADE HOLD 3.60 UP 3.120