Short-term worries could cap upside

The Street is bullish about the company’s prospects due to its cash flow and growing customer base, but valuations appear rich

The Bharti Airtel stock touched an 18-month high of Rs 400 last week, after the company announced a new organisation structure for its India and South Asia operations. The country’s largest wireless telephony operator plans to create two verticals, catering to consumers and corporates to unlock business and functional synergies. The likely integration of sales force across business segments is expected to help it reduce employee and overhead costs, believe analysts.

The company may also list its telecom tower arm, Bharti Infratel. Analysts believe if the company offloads 10 per cent in its tower arm, it could fetch about $700 million (Rs 3,125 crore), given the enterprise value per tower of Rs 40 lakh.

While Airtel will gain from the latest move to create two customer business units, the upside from the current levels for the scrip, given the recent run-up, seems limited. The stock has has gained 24 per cent over six months and about nine per cent in the past three months.

PRICED IN
	FY11	FY12E	FY13E
Price/Earnings (x)	25.0	19.9	15.2
EV/Ebitda (x)	10.9	8.3	6.9
EV/Sales (x)	3.7	3.0	2.6
x: Multiple; E: Estimates; EV: Enterprise value  Source: Motilal Oswal Securities

The Street is bullish on the stock due to the Airtel’s high free cash flow (over $1 billion per year) and expectations that competitive intensity in the wireless space would reduce. At the current price of Rs 387, the stock is trading at 19.3 times its 2001-12 earnings estimates. On an EV/Ebitda metric, it trades at eight times 2011-12 estimates, which is at a premium to global peer valuation of five times.

LOSING SHARE
While the company continues to be the market leader, with a 31 per cent share of gross revenues in the March quarter, its revenue market share has been on the decline over the past two years. While Airtel has lost 360 bps over eight quarters, Idea and Vodafone have managed to increase their revenue market share during the same period, say Rohit Chordia and Shyam M of Kotak Institutional Equities in a recent report. While it has been losing share, its ability to scale up its 3G subscriber base will be critical if the company has to maintain or increase its share, feel analysts.

COMPETITION
Revenues per minute (RPM) have been under pressure due to increased competition. However, as companies start to increase rates to focus on profitability, the decline is likely to moderate. Analysts at Edelweiss Capital believe while headline rates have remained stable, circle level competition continues, which will keep RPM under pressure. Airtel’s RPM declined eight per cent quarter on quarter to 47p in the March quarter and is likely to be under pressure over the next two quarters before stabilising in the second half of the financial year.

REGULATORY RISKS
ICICI Securities estimates Bharti would be adversely impacted if the Telecom Regulatory Authority of India’s recommendations on spectrum and licence fee are adopted. The research firm estimates the telecom major will take a Rs 27 a share hit, about seven per cent of its current market price of Rs 387.

A large part of the per-share impact is due to licence fee renewal (Rs 19) and increase in spectrum usage charges (Rs 11). However,the increase in spectrum charges are likely to be mitigated by reduction in licence fee to the tune of Rs 13.