Bharti Airtel: Concerns already priced in

Analysts feel pessimism on account of spectrum, RJio and African operations is overdone

The Bharti Airtel stock has been a under performer in 2014, with a seven per cent return, compared with the Sensex’s 30 per cent. The stock lost 13 per cent over the past three months. Worries on account of telecom spectrum auctions, entry of Reliance Jio and the African business weigh on the stock. However, analysts believe the risks are adequately priced in. Valuations, too, are undemanding.

Analysts at IL&FS Institutional Equities, who have been negative on the sector since the start of 2014 due to higher spectrum outgo, have turned positive, given the steep underperformance recently.

Further valuations for the sector at 6.2 times one-year forward enterprise value to operating profits (Ebitda) are close to a six-year low. The bottom, reached during the FY09-14 period, was 5.6 times. Bharti is trading at 5.9 times, while Idea Cellular and Reliance Communications trading at 6.4 times and 6.5 times, respectively.

The entry of Reliance Jio and outgo on account of spectrum renewals will impact companies across the sector. However, the risk on account of Africa (currency depreciation on the back of crude oil correction) is specific to Bharti. Analysts at Kotak Institutional Equities highlight the dollar-denominated local African debt is low at $500 million (Rs 3,000 crore). With the rupee also depreciating a bit, there might not be a significant translation loss. Part of the loss due to currency will be offset by a fall in diesel prices, which on an annual basis for Africa is in the region of $200 to $250 million (Rs 1,200 to Rs 1,500 crore). Further, Bharti's gross debt currency exposure includes the euro and swiss francs.

On spectrum auctions, analysts believe Idea is at a bigger risk than Bharti Airtel, given the importance of the key 900 MHz to the former's operations. Bharti, according to IIFL analysts, has mitigated a large part of the renewal-related risk, through aggressive bidding in the February 2014 auctions. Another trigger for the stock is data volume growth, grown at a compounded quarterly run rate of 20 per cent in the past four quarters.

Further, the company continues to achieve strong subscriber additions. In November, it added its highest number of net subscribers year-to-date, with two million subscribers logging on to the Airtel network.

Most analysts have a ‘Buy’ on the stock, with the Bloomberg consensus target price pegged at Rs 442, an upside of 25 per cent from current levels.