Bharti Airtel Cluster: Apple Green Recommendation: Hold Price target: Rs350 Current market price: Rs293
Increase in spectrum charges to impact margin
Key points
After being delayed host of times, the formal document for 3G auction?the notice inviting applicants (NIA)?has been sent to telecom operators with a revised 3G schedule, which is to begin from April 09, 2010. The key difference between the present information memorandum and the previous document published in October 2009 is that there has been even distribution of slots across circles. There has been no change in the reserve price for slots and the government?s revenue target from 3G auction remains intact at Rs35 billion.
The successful 3G bidder with existing 2G operations would have to pay 3-8% of the consolidated adjusted gross revenue (AGR) depending on the amount of 2G spectrum owned by the operator as against the present charge of 2-6% paid by the operator.
The spectrum slots in two of the five key circles where Bharti Airtel operates have been increased (in Delhi the 3G slots has been increased to 3 from 2, while in Rajasthan it has upped to 4 from 0). This allays fear of overbidding in these lucrative circles?which is positive for Bharti Airtel. On the flip side, the increase in spectrum charges by 100-200 basis points depending on the spectrum concentration by the operator would increase the cost for all the operators. We expect Bharti Airtel?s blended spectrum charges to AGR increasing by 100 basis point to 5.5% from 4.5% with a corresponding negative impact on its earnings before interest, tax, depreciation and amortisation (EBITDA) margin. We maintain our revenue as well as profit estimates for the company in the wake of impending Zain acquisition and uncertainty surrounding the 3G auction process. Post clarity on these issues we would revise our estimates.
The domestic telecom sector has been negatively impacted by irrational pricing, forcing telecom operators with strong balance sheet (like Bharti Airtel) to look for acquisitions in other emerging markets. Given the recent correction in the stock price, we advice investors with patience and fairly long-term investment horizon to gradually accumulate the stock. We maintain our Hold recommendation on the stock mainly due to competition-led pricing pressure in the domestic market, impending deal with Zain Africa and uncertainty surrounding the 3G auction process that would remain an overhang on the stock in the short term. We maintain our price target of Rs350. At the current price, the stock is trading at a price to earnings (P/E) of 12.8x and enterprise value (EV)/EBITDA of 7.4x its FY2011 estimates.
VIEWPOINT
Ashok Leyland
Strong volume growth in February
Ashok Leyland has reported a stupendous 142.5% year-on-year (y-o-y) growth in its sales volume in February 2010. The robust volume growth for the month was mainly on account of a strong pick-up in the domestic industrial and infrastructure activity and a low base of the last year.
On account of a resurgent macroeconomic recovery, the commercial vehicle business is likely to see a strong growth. Moreover, Ashok Leyland is well poised to maximise the benefits of higher government spending on infrastructure development coupled with higher industrial production, lower interest rates and a low base of the previous year. At the current market price, the stock is trading at 21x its FY2010E and 15.7x its FY2011E Bloomberg consensus earnings.
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