TSP Telecomunicacoes de Sao Paulo S.A. - Telesp

We are downgrading our recommendation to Underperform from Outperform on Telesp S.A. (VIV). Although the Vivo merger boosted Telesp's existing operations, competition in fixed-line and mobile businesses weigh on its results. We are skeptical about the company's ability to regain lost profitability of the fixed-line business.

Tariff cuts or changes in government regulations would also create added pressure. All these factors might restrict potential synergies derived from the merger and restrain top and bottom-line growth. Hence, we expect the company to underperform the market.

Telesp is expected to suffer intense inflationary pressure, competition and excessive government intervention. We give an Underperform rating to the stock, with a price target of $27, based on 10.7x our 2011 EPADS estimate.
 
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