Bharti Airtel - At inflection point: Everything falling in place - Edelweiss

Our thesis of receding competitive intensity & regulatory hurdles, realisation spurt, higher operational cash flows and data growth for Bharti Airtel (Bharti) is playing out (Telecom - Tide turning). Though a falling INR may dent near-term profits, immediate cash flow impact will be limited as only a small portion of the company's total debt is due in the near term. We believe the current scenario provides an opportunity to 'BUY' as regulators' accommodative stance and possibility of margin improvement led by higher revenue per minute (RPM) and data growth augur well for the sector as well as Bharti. Maintain 'BUY'.

Receding competition, RPM spurt, regulatory clarity: Key positives

Extremely muted participation in spectrum auctions (November 2012, March 2013) coupled with large scale discontinuation of services by new operators (Uninor) in several circles has not only led to healthy subscriber addition, but also catapulted realisations of incumbent players. This, along with stringent subscriber verification norms has resulted in lower churn and sales & marketing (S&M) costs. Also, over the past few months, regulators have clarified their stance on a few issues plaguing the sector—abolition of roaming charges, interference in tariff hikes—and adopted a pragmatic approach towards spectrum pricing, which bolsters optimism on Bharti.

African safari: Data volume surge, network cost dip to spur EBITDA

Bharti failed to achieve its guided 40% EBIDTA margin in Africa, despite USD5bn revenue run rate, primarily due to lower market share in several countries and subdued sector growth in the region. Despite this, its EBIDTA margin has improved 230bps over the past nine quarters and there is scope for further, at least 250bps, rise over FY13-15E on back of surge in data volumes and dip in network costs.

Outlook and valuations: Margin story to unfold; maintain 'BUY'

On both DCF and SOTP methodologies, Bharti's fair price comes to INR388, after assigning negative value of INR33/INR66 for Africa business/ regulatory cost. Improving cash flows, data growth and receding competition along with lower regulatory costs provide a low risk opportunity to investors. We reiterate 'BUY/SO' with TP of INR388.

Source : Equity Bulls

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