>Bharti Airtel (PRABHUDAS LILLADHER)

Focus is to sustain realizations

■ “Just a matter of time when new rollouts withdraw their promo/launch schemes” - Bharti not reacting with any tariff reductions : Bharti highlighted the pullout of freebies by Rcom in the first 90 days of their launch & sighted reasons that such freebies is not a sustainable model to lure subscribers over the long term. Engagement of such freebies over the longer term would impact the profitability of operator employing such schemes more than the incumbents.

■ Interconnection usage charge (IUC) cut may impact profitability marginally: The recent IUC cut from Rs 0.3 to Rs 0.2 effective 1st April 2009, would have a marginal impact in FY10 (~Rs 500m) which can be easily absorbed. However, the effect of such pass through’s by new rollouts in their aggressive schemes is yet to be seen.

■ Network operating costs (NOC) to stabilize with traction built up in Indus & Bharti Infratel: NOC has risen from 11.6 % of revenues in Q1FY08 to 16.3% in Q3FY09. This rise is attributed to higher energy costs and incremental rural rollouts. Management believes the NOC would start stabilizing or marginally come down in the next couple of quarters with increase in sharing of Indus & Bharti Infratel.

■ 3G auctions would be on top radar of new Govt., expects rollout in 3-6 months post spectrum allotment: Bharti expects the 3G auction by July 2009 with the new Govt. taking over. We believe that sooner the 3G spectrum auction concludes, better it would be for incumbents like Bharti (whose VAS revenues are close to mere 10% of ARPU).

■ Valuations: Bharti is expected to report revenue & EBIDTA CAGR of ~15% over FY09-FY11 period. Superior subscriber profile, healthy balance sheet, higher visibility of cash flows and absence of Mobile Number Portability (MNP) regime places Bharti as our top pick in the sector. Moreover, with ~91m wirelesssubscribers, Bharti would continue to demonstrate leadership in plans innovation and leverage the scale benefits.

To see full report: BHARTI AIRTEL