>BHARTI AIRTEL (KOTAK SECURITIES)

Relief rally without any signs of relief—an opportunity to cut exposure. We reiterate our current negative outlook on Bharti and recommend using the recent stock outperformance to pare exposure. Better-than-expected December 2009 quarter earnings are likely spurred by higher STV bookings and higher minutes elasticity. However, sector fundamentals remain weak, pricing may yet to bottom out and the full impact of pricing competition will reflect only in the March 2010 quarter. REDUCE.

A rally without legs—use it to reduce exposure
We believe that the recent rally in Bharti’s stock price may have been driven by (1) relief on pricing post Uninor’s ‘rational’ launch pricing, (2) expectations of reasonable and significantly better-than feared December quarter earnings, and (3) other potential technical factors. However, we continue to believe that it is too early to take a call on the duration of irrational price competition or the extent of damage it causes to the industry structure. We discuss our views on each of the above ‘positive’ developments below.

Uninor’s rational launch pricing may turn out to be a lull before another storm
We would be wary of viewing Uninor’s relatively rational launch pricing as early signs of pricing
stability in the market; notions of pricing having bottomed out may be even riskier. Incumbents
and new entrants both continue tactical price cuts spanning local & NLD calls, roaming charges,
and SMS services. More importantly, there are initial signs of price competition in the post-paid
market, especially in the metros. In addition, new network launches are still not over; Tata
Docomo is yet to launch in a few circles, Uninor has launched only in seven circles, Etisalat-DB
Telecom is close to its initial network launch. We would not rule out another big bang price cut
from one of the incumbents, cross-over licensees, or new licensees over the coming months;
lower-than-expected network traffic will likely trigger the pricing action.

December quarter earnings may not reflect full impact of recent price cuts
Higher-than-expected minutes elasticity and positive impact of revenue booking of large volumes of STV (special tariff vouchers to avail of discounted tariffs) sales may mean a better-than-initially feared December quarter earnings. But we highlight three reasons why Dec 2009 quarter earnings will be a poor indicator of underlying earnings, in our view—(1) a part of the minutes elasticity will be purely seasonal, on account of the festive season, (2) higher STV sales bookings (extent of positive impact would depend on the timeframe of amortization) are non-recurring in nature and (3) tariff discounting has happened in steps, and at various times in the middle of the quarter; thus, the full quarter impact of discounted tariffs will not reflect in Dec 2009 earnings.

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