| Summary of Contents STOCK UPDATE Bharti Airtel
Cluster: Apple Green
Recommendation: Hold
Price target: Rs350
Current market price: Rs326
Earlier 3G auctions and MNP delay provide some respite -
As per the initial 3G schedule, notice inviting applications (NIA)?a legally binding document containing the details on the slot?was scheduled to be issued on December 08, 2009. However, due to non-clarity on the spectrum availability, the NIA document (yet not sent to telecom operators) is now expected to be sent by January 07, 2010. -
Despite these delays, we believe that the government would try to hold 3G auction before the end of FY2010, as there is possibility that the auction proceeds could be lower than the initial estimate of Rs35,000 crore in the scenario of weak balance sheets of telecom operators except Bharti Airtel (Bharti), ongoing intense price war and low interest level of new entrants. -
We believe that the potential benefits to Bharti from earlier 3G auction and delay in MNP rollout may provide only some respite in the current environment of intense competition in 2G space. Hence, we maintain our Hold recommendation and price target of Rs350 on the stock with cautious outlook on the sector. At the current market price, the stock trades at 13.1x its FY2011 estimated earnings and 6.9x enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA).
SHAREKHAN SPECIAL Q3FY2010 FMCG earnings preview -
We expect Q3FY2010 to be another quarter where almost all FMCG companies will see their bottom line growth far outpacing their top line growth. This will be on the back of subdued raw material cost (except for Tata Tea) on a year-on-year (y-o-y) basis. The top line of Sharekhan?s FMCG universe is likely to grow by 14.2% yoy in Q3FY2010, substantially driven by volume growth, as y-o-y pricing impact will be very minimal. Almost all the companies in our FMCG universe are likely to deliver handsome bottom line growth, which will be a combination of good growth in the sales volume and higher y-o-y margins. Thus we expect our FMCG universe to deliver ~18.2% y-o-y growth in the bottom line. -
While GCPL remains our top pick in the mid cap FMCG space, we like ITC among the large caps. Q3FY2010 Auto earnings preview -
Automobile sales volume in the first two months of Q3FY2010 continued to be robust on account of festive season in October and continual healthy demand environment due to easing liquidity conditions. We expect the high growth to continue in the remaining months of FY2010 on account of the low base of the last year and on incremental volume of new launches. -
We expect the Sharekhan auto universe to report a top line growth of 60.8% yoy on account of a handsome 56.2% y-o-y growth in volumes. Backed by lower yoy raw material cost and higher sales volumes, operating margins are likely to expand by a sharp 584 basis pointsto 14.6%. Consequently, we expect Sharekhan universe of auto companies to post a strong 190.6% y-o-y growth in their net profit. -
Our top pick in the large-cap space is Bajaj Auto while Apollo Tyres and Greaves Cotton are our preferred picks among the mid-caps. Q3FY2010 Cement earnings preview -
In terms of top line growth, the cement companies under Sharekhan?s coverage are likely to register a 14.2% growth in the revenue on a cumulative basis. Shree Cement and India Cements are expected to post an impressive sales growth of 33.6% and 20.8% respectively due to capacity addition carried out by these companies and delay in capacity addition by their competitors. -
In terms of average realisation, baring south-based companies, all the other companies are likely to post improvement in their average realisation on a year-on-year (y-o-y) basis. However, on a sequential basis, cement prices have declined across the country on increased supply from new capacities. Region wise, companies operating in the south have been affected more than those in other regions. North-based companies have been less effected by pricing pressure due to strong regional consumption. However, in the western and southern regions cement prices have moved up by Rs5-7 on account of logistic problem. We believe this will marginally mitigate the impact of price decline for the companies operating in western and southern regions. -
The adjusted profit after tax of the companies under Sharekhan coverage is expected to increase by 58.9% in the quarter on the back of strong volume growth and improved operating profit margin (OPM). Save Orient Paper & Industries, companies under Sharekhan coverage are expected to post sharp increase in their OPM. Grasim Industries, Madras Cement and Shree Cement are expected to see sharp improvement in their OPM, while Orient Paper & Industries is expected to register a decline in its OPM. However the bottom line growth of these companies will be restricted by a surge in the interest and depreciation charges during the quarter.
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