Saturday, September 8, 2012

>Bharti Remains a Buy on 3 Key Reasons

I. Business trends should improve longer-term
We remain confident on the outlook for the Indian telecom sector longer-term with the heavy spectrum outgo for 2G likely to temper competitive intensity. While the staggering of spectrum payments will help blunt the blow, the outgo will still be substantial, translating into much more rational behavior by most operators. 

The operating leverage from the resultant uptick in rev/min (either through reduced discounting or absolute hike) will benefit everyone. Bharti, being the largest operator with the strongest balance sheet, is most leveraged to this trend. A 1p increase in rev/min results in ~6% wireless EBITDA and 3% consolidated EBITDA upgrade. It also results in a 6% increase (Rs20/sh) in Bharti’s fair value.

II. Material earnings downside unlikely but priced in
The required run rate to meet street expectations on financials now appears in line with recent operating trends. However the stock price seems to imply a further deterioration. We believe this reduces the probability of any major disappointment on earnings hereon.

We believe the current intensity in competition (largely led by incumbents) will continue for some time and put pressure on rev/min in the near-term. However, we also believe that: i) the declining trend is unlikely to be a prolonged one and will (eventually) reverse in the long run; and ii) a large part of this near-term pain appears largely factored in the estimates though we would stop short of calling this a bottom – in case the current phase is prolonged beyond our expectations (low probability, in our view).

III. Multi-year low valuations and declining ownership provide downside support
Moderate expectations combined with the sharp underperformance (43% YTD), multi-year low valuations (1.7 std dev below mean on EV/EBITDA) and falling ownership levels (institutional ownership is down 400bps from Dec-08 till Jun-12) provide downside support. That said, we do believe that near-term stock performance will remain subdued until evidence of underlying business (and profitability) stabilization.

To read report in detail: BHARTI AIRTEL