Sharekhan has recommended `Hold` on Bharti Airtel with a price target of Rs 383 as against the market price (CMP) of Rs 373 in its report dated Sept. 27, 2010. The brokerage house gave the following investment rationale:
Recently, there has been a strong run-up in the stock price of Bharti Airtel (Bharti; +42% in the past three month, +18% in the past one month). The strong performance was on account of a series of factors including improving domestic environment, positive industry news flow (consolidation talks and dilution of Telecom Regulatory Authority of India [TRAI]`s draconian 2G recommendation) and fund houses shoring up the under owned status of the stock in their portfolios on the back of higher liquidity flows.
We reckon the positive news flow and factor in the same by assigning a higher multiple to the stock (from the earlier 15x FY2012 earnings to 16.5x FY2012 earnings). Our revised price target for the company stands at Rs 383. Post the recent upsurge, the stock offers limited upside from the current levels, and hence we maintain our Hold recommendation. Going forward, improving profitability and actual execution of the stated targets of the African business would be the key monitorable for the stock. Any slippages on the same would lead to underperformance.
Domestic environment improving
In the last three quarters, there has been a considerable improvement in the domestic telecom environment which has witnessed reduced competitive intensity as is visible in the form of lower tariff reduction and strong volume growth. On the tariff side, the revenue per minute for Q1FY2011 showed a modest decline of 5.4% as against the sharp sequential decline of 7-8% witnessed in FY2010. Along with stabilising tariffs, there has been a strong upsurge in the volume growth witnessed by Bharti in the last three quarters. For Q1FY2011, the overall minutes of usage for the quarter stood at a phenomenal 190 billion minutes (a 10% quarter-on quarter [Q-o-Q] growth ie 2.1 billion minutes per day), which is the highest ever growth in the minutes reported by an operator.
Robust African business guidance and increasing scope for improvement
The management remains upbeat on the acquired African business and has time and again reiterated its stance that it would focus on Revenue Market Share (RMS) and improvement in the cost structure as the key profitability drivers for the business. It has set a target to achieve USD 5 billion in revenues and USD 2 billion in earnings before interest, tax, depreciation and amortisation (EBITDA) by FY2013 from the African operations, implying a 11% compounded annual growth rate (CAGR) in revenues and 25% CAGR growth in EBITDA, with EBITDA margins targeted to rise from the current 28% to approximately 40% by FY2013.
Valuation gap bridged, further upside limited
Though we reckon the positive news flow and factor in the same by assigning a higher multiple to the stock (from the earlier 15x FY2012 earnings to 16.5x FY2012 earnings),
our revised price target for the company stands at Rs383. Post the recent upsurge, the stock offers limited upside from the current levels, and hence we maintain our Hold recommendation on the stock. Going forward, improving profitability and actual achievement of the stated targets of the African business would be the key monitorables for the stock, and any slippages on the same would lead to underperformance.
