>Bharti Airtel (MERRILL LYNCH)

Cutting margins; growth still strong

Earnings & PO cut by 4-10%; still offers strong growth - Buy
We have cut Bharti’s FY10E & onwards earnings by 4% & lowered our DCF-led PO to Rs715/sh (-10% vs earlier). Despite the PO and earnings cut, we believe Bharti remains one of the strongest growth stories in AsiaPac & offers ~20% YoY EPS growth potential at a PE of ~11x FY10E. This compares with local market PE valuation at ~11x FY10E for no YoY grwth expected & avg. AsiaPac-wireless PE of ~10x CY09E for ~3% YoY earnings fall. We expect Bharti to sustain ~15-20% LT earnings growth despite new competition.

Margin hit: USO deferral, lower termination, pot’l SMS cut
We have cut wireless FY10E-11E EBITDA margin by ~70bps vs earlier, to 30.1%. This reflects 1) reported deferral of USO concession by the government (assumed to be ~100bps for Bharti), 2) lower termination charges (10p cut) announced earlier (~40bps margin hit) and, 3) potential cut in roaming SMS tariffs (~30bps margin hit). These factors coupled with competitive pressures will likely offset the margin cushion (~100bps) from stable spectrum charges.

Government defers USO concession
As per media reports, today, the government has decided to defer the USO concession that was scheduled to apply from April 2009 onwards. Earlier, in Oct ’08, the government had announced 200bps concession in USO levy (part of licence fee) on achieving >95% coverage of a service area. We had assumed that Bharti would qualify for the concession in ~50-60% of its coverage area.

Revised estimates safe unless usage collapses
We think our FY10E earnings forecasts are safe as they imply virtually no usage elasticity (flat MoU/sub YoY) despite f’cast 12% decline in tariffs (rpm). Our industry feedback so far, post RCom’s GSM launch, suggests that tariffs are not seeing major pressure (-1-2% QoQ) & usage (MoU/sub) maybe down ~2-3% QoQ

To see full report: BHARTI AIRTEL