>BHARTI AIRTEL LIMITED (INDIABULLS)

Rating downgrade due to competitive headwinds
In Q4’09, Bharti Airtel Limited (Bharti) posted a revenue growth of 25.6% yoy and 2% qoq, gaining from better-than-market ARPU of Rs. 305 while facing more-than-anticipated drop in share of net adds. Bharti’s share in net adds fell to 17.5% in Mar’09 (our estimates of 20%), as RCOM and other new entrants notched up subscribers with under-cutting in tariffs while rolling out their services in new circles. Moreover, Bharti’s overall market share plunged to 24% in Q4’09 from 24.7% in Q3’09. While we believe that Bharti can easily sustain its EBITDA margins in the near term at ~39%, retention of high-end Metro subscribers is a key challenge for the Company. Besides, the recent surge in the stock price has pushed it above our fair value estimate. Hence, we downgrade our rating to a Hold.

Customer retention is a key challenge
Bharti derives around 40% of its revenues from 11% subscribers, who are present in Metro circles. As newer mobile players are aggressively targeting these subscribers through value added services and attractive tariffs, subscriber retention has become a key challenge for Bharti in order to maintain its market leadership and profitability in the near term.

Scaled up operations and cost rationalization to help maintain margins
Bharti maintains a significant cost advantage over its competitors supported by its scaled up pan-India network and established brand equity. Besides, the Company is constantly keeping a check on its SG&A and payroll costs which is likely to help offset the increasing network operating costs due to rise in rural penetration. Thus, we expect Bharti to maintain its EBITDA margin to around 39% for FY10-11E.

Maintain our estimates and target price
We forecast revenue and EPS CAGR of 18% and 15% for FY09-11E, respectively (excluding associate contribution from Indus towers). Based on DCF valuation, we arrive at a target price at Rs. 817 implying a P/E multiple of 14.6x FY11E EPS.

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