The Indian government has extended the period after the state-run telecommunications companies need to compulsorily provide nearly 30% of their orders to ITI Ltd. by two more years, ensuring constant revenue for the ailing telecom equipment maker.
ITI, once India’s sole telecom equipment maker, has been sustaining mainly on contracts from Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. as companies such as China’s Huawei Technologies Co. and France’s Alcatel-Lucent captured the market with latest technology and low-cost products.
As per the reservation rule, BSNL and MTNL have to give 30% of their orders to state-run ITI. These account for 70% of ITI’s revenue.
As per the Government’s statement, ITI had sought a three-year extension of the quota policy, which expired on Sept. 20. The reservation period has been extended starting Sept. 21 because in today’s highly competitive environment, it is very difficult for ITI to survive on its own without the benefit of the quota.
ITI’s weak financial health has provoked the government to take several measures for reviving it in the past. The company has also asked for an additional money support from the government to upgrade infrastructure at its manufacturing plants.
According to the statement, the reservation rules also require BSNL and MTNL to give 70% advance payment against the orders placed with ITI, so that ITI does not face the problem of working capital for the execution of the orders.
BSNL offers telecom services in 20 of the country’s 22 service areas and is in the process of expanding its 2G and 3G mobile services, while MTNL operates in the other two service areas of Delhi and Mumbai.
The statement also revealed that the extension of the quota policy would be applicable for products manufactured by ITI and on turnkey projects, including network rollout.
“Bharti Airtel (Formerly Bharti Televentures) is
‘s largest private sector provider of integrated telecom services, especially wireless. The wireless business accounts for nearly two-thirds of the company’s total revenue. The company is a market leader in wireless services and its wireless operations extend across all 23 domestic circles.”
Potential for margin expansion despite tariff pressures
“Bharti believes that wireless EBITDA margins could expand to ~39-40% over the long term, despite likely continued pressure on revenue per minute, rpm. In 1Q FY07A, Bharti’s wireless margin stood at 36.4%; we forecast margins at ~37% for FY07E and expect that margins will expand further to ~39% in longer term, as scale economies should overcome rpm pressures. Despite the growing cloud of mobile minutes, Bharti expects rpm to remain under pressure due to high competitive intensity in the market and also, some pass through of scale benefits by operators.”
New operator rollouts seem unlikely before end-2007
“Recent newsflow of more wireless operators seeking a pan-India footprint is a dampener from the standpoint of industry structure, but we think any threat to Bharti’s customer and profit leadership is distant. Also, we think any on-the-ground network rollout by new operators is unlikely to commence before end-CY07.”
Reiterate Buy, Bharti remains our top pick
“We forecast Bharti’s earnings to grow at a CAGR of ~48% over FY06A-08E driven primarily by ~61% growth in its wireless subscriber base. At a PE of ~16x Mar ’08 & EV/EBITDA of 9x FY08E, the stock is currently trading near the lower end of its one-year forward PE-band of 18-24x and EV/EBITDA band of ~10-13x. Bharti remains our top pick in the Indian telecom sector. Buy.”