>BHARTI AIRTEL LIMITED: Some positives, more unknowns

We assume coverage of Bharti Airtel with a Neutral rating and a Mar-11 price target of Rs357 (13% upside). We prefer Bharti over RCOM and Idea as we believe it is better placed to benefit from Phase 1 (minute growth, moderated price competition). However Phase 2 in the Indian telco sector (competition resurgence) could throw up some challenges and we also expect Bharti to face operational issues in Africa in the near term. We see regulation as a continued overhang and don’t expect consolidation in the market anytime soon. Improving performance in Africa, benign regulations, and evidence of high-end churn not increasing at Bharti would make us more positive.

• Phase 1 opportunity: Bharti, helped by its leadership position and strong operational performance, will fully benefit from the moderating price competition coupled with minute growth at the GSM majors, in our view.

• Phase 2 challenges: We expect to see increased competition in the postpaid wireless segment as a result of 3G rollouts and implementation of MNP. With 3G we expect to see higher capacity in the market, a need to defend 2G revenue base (70% coverage), and also an opportunity for
revenue consolidation. We estimate that a 0.5% increase in Bharti’s postpaid churn negatively impacts its margins by 1.5%.

• Africa a near-term concern: Africa offers Bharti longer-term growth potential, in our view, especially if management is able to deliver on cost management. However, we expect Bharti to face operational and execution challenges. On our estimates, Africa is 8%/4% dilutive on EPS in
FY11/FY12 but 4% accretive in FY13.

• Our Rs357 price target is based on our SOTP valuation. At current levels we don’t believe Bharti is inexpensive – it is trading at over 14x one-year forward P/E (up from 10-11x in May) back to the levels last seen in early 2008. Key risks to our rating and price target are rational competition post MNP and a better performance in Africa on the upside, while downside risks include higher-post paid churn at Bharti on account of competition, a less benign regulatory environment than is being priced-in currently.

To read the full report: BHARTI AIRTEL