Wednesday, July 8, 2009



Positive subscriber growth outlook; competitive intensity manageable
The pace of net additions is expected to remain strong, though the management acknowledged that multiple SIMs may be prevalent. Free minute schemes being offered by competition are not sustainable and BHARTI has not attempted to match such offers. Tariffs are already competitive and lowering them is no longer a differentiator to attract customers. However, BHARTI continues to closely monitor new innovative tariff schemes and may evaluate the same based on customer uptake.

Rural expansion not margin dilutive so far; profitability sustainable
Rural expansion has not been margin dilutive so far. While network costs are higher in rural areas, rural channels (marketing & distribution costs, dealer commissions) are not expensive. This has helped in keeping costs low and maintaining margins. Management is confident of maintaining operating margins through continued focus on managing costs.

3G: Entry price is key
Management does not expect the incremental capex for 3G to be substantial, given that it will be an overlay on the existing 2G infrastructure. We understand, the auction price will, therefore, be the key to determining returns. 3G rollout is expected to be phased; metro/tier 1 locations are likely to be the initial potential markets for 3G.

MNP impact: expected to be neutral to marginally positive
Introduction of MNP is expected to be neutral to marginally positive; management is confident of maintaining/improving market share post-MNP. Post-paid customer retention will be key (~6% of subscriber base generating ~20% of revenues). Impact of MNP may not be as significant for the prepaid segment given the existing low switching costs and already high churn rate in this segment.

Outlook and valuations: Healthy earnings growth; maintain ‘BUY’
BHARTI remains our top pick in the Indian telecom space. The company’s healthy earnings growth (at ~14% CAGR in FY10-11E), strong return ratios and robust balance sheet support our positive outlook on the stock. Regulatory changes on spectrum allocation/charges remain a key concern. At INR 818, the stock is trading at an EV/EBITDA of 9.5x FY10E and 8.2x FY11E, and P/E of 15.6x FY10E and 14.1x FY11E. We maintain our ‘BUY’ recommendation on the stock.

To see full report: BHARTI AIRTEL