>Bharti Airtel (HSBC)

Retain OW (V); Focussing on the last mile

■ Bharti may be considering outsourcing the last-mile connectivity as per news reports

■ We would view such a move positively, as it should allow Bharti to leverage its investment in fibre assets

■ We retain our Overweight (V) rating and INR786 target price; we expect Q4 (March) results to be lacklustre

News reports suggest that Bharti may consider outsourcing its last-mile connectivity of its broadband operations and enterprise operations. The reports, by the Business Standard, among others, suggest that this will help the company focus on its core competencies, beyond reducing costs of operations. Outsourcing has been a key part of Bharti’s overall strategy; its mobile network has been outsourced to Nokia Siemens and Ericsson and its IT operations to IBM.

Frost & Sullivan, a business research and consulting firm, estimates the Indian enterprise data services market at INR51bn and expects a CAGR of 25.1% for this segment to INR154bn by FY13e. Large enterprise contributes c70% of the total market, and growth of the data market is driven by MPLS/VPN, which is expected to have a market share of nearly 50% in FY12-13.

While there is no official confirmation of the news item, we believe that an outsourcing deal would allow Bharti to boost its capabilities in network integration. In our view, network integrators have assumed significance recently on the back of complications involving sourcing equipment from multiple vendors and equipment interoperability.

We expect Q4 FY09e (March) results will be lacklustre for Bharti as a result of pricing pressures following the RCOM GSM rollout. We estimate Q4 revenues will decline 2% q-o-q. We estimate the EBITDA margin at 40%, compared to 41% in Q3 FY09. Similarly, we expect net income for Q4 to decline 2% sequentially. We retain our Overweight (V) rating on Bharti shares and our INR786 target price.

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