Bharti Airtel draws investor interest

Africa business recovery would add to stable India operations, boosting the financials

After bottoming out at the start of September, the Bharti Airtel scrip made smart gains over the past month, gaining 15 per cent as compared to the seven per cent uptick for the Sensex over the period.

Investors are bullish on the stock, as the valuations are at a multi-year low, there is a stable pricing environment in the domestic wireless telephony segment and a recovery in Africa volumes. Some of the largest mutual funds had raised their exposure to the stock in August, on the back of attractive valuations.  While the pricing environment, biggest overhang for the stock, has been favourable for a couple of quarters and continues to be stable, analysts say regulatory risk is factored in the valuations. At the current level of Rs 328, the stock is trading at 22 times the FY14 earnings estimate and 6.9 times its FY14 ratio of enterprise value (EV) to Ebitda (operating earnings).

Morgan Stanley analysts Vinay Jaising and Vanessa A D'Souza say despite the slowdown in its Africa operations and a lower rupee, at close to an all-time low valuation of seven times the EV to Ebitda ratio for FY14, a large part of this is already priced in the stock. Further, with the September quarter being seasonally weak, most analysts believe any fall in prices should be looked at as an opportunity to take further exposure to the stock. Its target price is in the range of Rs 375-400.

Africa biz
The Africa business accounts for 31 per cent of consolidated revenue. It has been performing below expectations, due to regulatory and political uncertainty issues and competitive pressures in key markets. However, things are likely to improve.

Goldman Sachs, in a recent report, highlighted the management view that traffic in the Africa business had recovered in recent months, after a cut in interconnect costs in certain places. While Indian wireless revenues are likely to fall in the September quarter, historically weak as compared to the other three, Africa revenues are expected to show a 13.5 per cent sequential improvement in rupee terms, believes the research firm. Ebitda for the region is expected to grow about 18 per cent, driven by rupee depreciation.

Operationally, the gains in Africa are likely to come largely from higher volumes. This is expected to move up five per cent over the June quarter, aided by subscriber additions which will push the overall base by 4.3 per cent sequentially, to 67 million. Ebitda margins, in the 25-26.5 per cent range for the Africa business in the past three quarters, are expected to inch up to 27.1 per cent in the September one. Any further improvement should help overall consolidated margins to improve from the current 32 per cent.

Further, recent changes such as a new management (Christian de Faria to head Africa operations), with a focus on local leadership, regulatory changes and pick-up in data and value-added services, bode well for profitability, say analysts at Ambit Capital.

Muted quarter but gains ahead
The September quarter, as noted earlier, is seasonally a weak one. Most analysts believe voice volumes for Bharti will fall about three per cent sequentially, with average voice revenue per minute (RPM) expected to be flat. Voice average RPM was 36.3 paise in the June quarter, up four per cent over the March quarter. Overall revenue per minute will be marginally positive, as data ARPMs are expected to move up three per cent sequentially. Data as a percentage of India wireless revenue is currently 7.3 per cent, up from 4.3 per cent in the same quarter a year before.

While the September quarter is likely to be muted, Goldman Sachs analysts, led by Sachin Salgaonkar, say longer-term business momentum should remain steady for Indian telecom companies. They give three reasons — steady rates due to stable competition, no reduction in volume despite significant rate increases and higher data usage. The next trigger for the stock could be the merger and consolidation guidelines, to be announced in the next couple of weeks. Any consolidation in the Indian wireless sector should be positive for Bharti, the country’s largest entity in the mobile services business.