Bharti: No more dropped calls

Operating environment in India, the biggest overhang for the stock, is improving

The Bharti Airtel scrip fell 20 per cent since the middle of August due to the fears of a negative impact of rupee depreciation, given that two-thirds of the company's total debt (Rs 60,000 crore) is dollar-denominated.

Although a large part of this is serviced by African operations and some of it is long-term debt that would limit the extent of the impact, risks still remain, especially if the dollar rises significantly against Indian and African currencies. IIFL analysts in an August 27 report said while they had held firm against the dollar for some time, depreciation of African currencies was a risk. But some analysts believe a lot of it is factored in.

Vinay Jaising and Vanessa A D'Souza of Morgan Stanley said in a report last month that much of the foreign exchange risk and Africa slowdown were priced in the stock, which was trading at an all-time low valuation of 6.9 times FY14 enterprise value/ Ebitda. The analysts have raised their earnings estimates for the company the first time in five years.

Going ahead, there are multiple positive triggers for the stock. The first is the revenue market share gains in the June quarter. It added 95 basis points on a sequential basis to take its tally to 30.9 per cent. Secondly, what will aid the largest player in the mobile telephony space is the reduction in spectrum fee in the coming auctions. Finally, improving voice realisation as reflected in the recent quarter results suggest the hyper-competitive phase and discounting are behind the sector and revenue per minute is likely to inch up. For Bharti, currently, the India market accounts for most of its profits and these developments suggest its financial performance will continue to improve in the medium term.

UBS analysts Suresh Mahadevan and Varun Ahuja say the emergence of rationality (both in competition and regulation) in coming quarters will lead to a further re-rating. According to them, Bharti's share price currently does not reflect a pricing improvement scenario. At the current price of Rs 296, the stock is trading at 20.5 times its FY15 earnings estimates with target price of Rs 385-400.

Getting back share
The sector's revenue growth of 11 per cent year-on-year in the June 2013 quarter was the highest in over a year. The gains, according to analysts, were driven by a rise in voice realisations and the increasing revenue contribution from 3G/data revenues. After being stagnant in FY13 at 35 paise per minute, Bharti's voice realisations saw a four per cent increase in the June quarter to 36.39, compared with the March 2013 quarter. A one paise increase in ARPM (average revenue per minute) leads to a seven per cent increase in net profit for Bharti, say analysts at Morgan Stanley.

Higher revenue per minute will benefit larger players more. Bharti's wireless time is nearly twice that of Reliance Communications and 1.7 times Idea's. On an incremental basis, aided by market share gains in circles where it is not the leader, Bharti made the highest gains among incumbents - 42 per cent.

CIMB Research analysts say the highlight was the eight per cent year-on-year revenue growth in its portfolio of 1800MHz circles (led by Maharashtra, Gujarat and Madhya Pradesh), reversing the trend seen over the past four years.

Regulatory concerns ease
A key overhang for the sector, especially for incumbent players, was the spectrum pricing issue. According to Motilal Oswal analysts Shobit Khare and Anil Shenoy, for every Rs 1,000 crore decline in spectrum price, the target price for Bharti increases by Rs 4.4. For a price of Rs 9,000 crore for 5 Mhz spectrum, (Rs 3,000 crore less than the current reserve price), the analysts estimate a target price of Rs 450 against Rs 437 if the current reserve price stands.