Analysts positive on long-term prospects of Bharti

The telecom major has been permitted to continue providing these services to existing customers in 'these' circles

The Street took a negative view of the Supreme Court (SC) ruling which directed Sunil Bharti-owned Bharti Airtel not to extend intra-circle roaming (ICR) facility to new customers in the seven circles where it does not have a 3G licence. On a day when the markets closed in the green with the S&P BSE Sensex and the NSE’s Nifty gaining 0.7 per cent and 0.6 per cent, respectively, Bharti Airtel closed 2.3 per cent lower at Rs 275.

What comes as a relief, however, is that it can continue to offer 3G services to existing customers in Kolkata, Madhya Pradesh, Haryana, Gujarat, Maharashtra, Uttar Pradesh East and Kerala. The apex court has also directed the government not to take coercive steps on the issue of penalty against Bharti Airtel.

While the Street will now await the outcome of the next hearing scheduled a month away, the immediate trigger for the stock and the sector will be the March quarter numbers.

Given the small base (Bharti’s 3G customer base is less than three per cent of its overall base), analysts do not feel the impact will be material and are neutral on today’s ruling.  

“We didn’t have any expectations from what the SC would give out. Our view is that Bharti Airtel getting to keep its existing subscribers till the final order comes in is incrementally positive. On the other hand, they not being allowed to add more customers is incrementally negative. We do not see a significant material impact on Bharti Airtel as of now,” said Hitesh Shah, director – equity research, IDFC.

On the other hand, A K Prabhakar, senior vice president – equity research, Anand Rathi, believes the regulatory overhang could put off investors.

“I have a negative view on Bharti Airtel, given the headwinds this sector is facing. The margins are very low in this business and the earnings for Bharti Airtel are not improving. The diversification into Africa was not to the taste of the markets. There have been multiple negative news flows for the sector and this development adds to its woes,” he says.

<B>Stock strategy</B><BR>
Despite the near-term headwinds, analysts remain positive on the stock from a long-term perspective and are keeping an eye out on the fourth quarter results for FY13 (Q4FY13).

“In case the final order is on similar lines, it would not only impact Bharti but all three players. While Bharti may lose some subscribers where it does not have 3G spectrum, it will gain where Idea and Vodafone subscribers are roaming on Airtel’s network,” Shah of IDFC points out.

“The current weakness in the stock is a buying opportunity. We hold a positive view on the sector and our top pick is Idea Cellular (price target Rs 135) followed by Bharti Airtel (price target Rs 390),” he adds.

Analysts at Barclays suggest that with reducing competition and increasing instances of sporadic reduction in discounts, Bharti should be able to arrest the long-term trend of declining RPMs (revenue per minute).

“Total minutes should have also seen a healthy uptick on the back of reasonable sub additions in Q4FY13. Overall, we expect revenue to have grown 3.1 per cent quarter-on-quarter (q-o-q) with margins witnessing a slight uptick (20 bps q-o-q). We expect Africa growth to have remained muted in March 2013," writes Bhuvnesh Singh, head of India research, Barclays, in a report dated April 4.

“We find the recent sharp correction in Bharti Airtel to be excessive and continue to view the company positively, as we believe its mid- to long-term prospects remain intact. We maintain our ‘Overweight’ rating on the stock,” it adds.