| Summary of Contents | | | | STOCK UPDATE Bharti Airtel
Cluster: Apple Green
Recommendation: Hold
Price target: Rs350
Current market price: Rs260
Maintain Hold Key points -
Selective bidding limits outgo: After 34 days and 183 rounds of bidding, 3G auction finally ended with Bharti Airtel (Bharti) managing to bag licenses in 13 out of the 22 circles committing Rs12,295 crore. Though the overall bidding process turned out to be quite aggressive, the overall 3G license spend of Rs12,295 crore by Bharti is well within the market expectations due to its strategy of selective participation. It has lapped up Mumbai and Delhi? the two most lucrative circles by revenue and subscriber penetration; further in circle A and B it has played selective. -
Robust Q4 and strong balance sheet provide comfort: In spite of intense competition, Bharti?s mobile revenues grew by 3% quarter on quarter (qoq) on the back of a strong bounce-back in minutes of usage, wherein the overall traffic grew by a strong 12.8% qoq to reach 173 billion minutes. Moreover, after incorporating 3G spectrum fee and debt for Zain Telecom?s acquisition, Bharti?s FY2012E net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) at 2.6x compares favourably to that of Reliance Communications at 3.5x and Idea Cellular?s 3x. Apart from this, we expect the shrill competition in the telecom industry to ease a bit as most telecom operators will have their balance sheets stretched after 3G auction and an equally aggressive bidding for the forthcoming broadband wireless access (BWA). -
EPS dilution of 14% but largely priced in: After incorporating 3G capital expenditure (licensing plus rollout) into our FY2012 estimates we expect a 14% dilution in our earnings per share (EPS) estimate to Rs19.9. However, the stock has underperformed BSE Sensex by 16% year to date and 51% in the last 12 months. Given the strong correction, its current valuation of 6.8x its FY2012 EV/EBITDA is close to its historical bottom and compares at par or at discount to Asia Pacific players like Taiwan Mobile and Singapore Telecom. -
Maintain Hold rating: We maintain our cautious stance on the telecom sector and maintain Hold call on Bharti with a price target of Rs350. In spite of a significant upside to our price target, we maintain a Hold rating on the stock on the fact that the key risks?the lack of clarity on 2G spectrum allocation and pricing, and the likelihood of the introduction of mobile number portability (MNP) services?continue to remain an overhang on the company. Further the stock also remain beset with uncertain outcome of the soon-to-start BWA auctions.
SECTOR UPDATE Telecommunication
3G auction ends; straining balance sheets Key points -
Final bid price 4.8x the base price, no pan-India player: The final pan-India price of Rs16,751 crore for 3G auction is 4.8 times the base price of Rs3,500 crore, while the government?s revenue collection of Rs67,719 crore from 3G auction alone is whopping 1.93 times the envisaged estimate of Rs35,000 crore (from both 3G and BWA auction). Where around two-fold rise in auction prices is a positive development for the government, the aggressive bidding is negative for telecom operators. Bharti Airtel (Bharti) would be shelling out Rs12,295 crore for 13 circles, Vodafone?s out go stands at Rs11,618 crore (for 9 circles), Reliance Communications? is at Rs8,585 crore (13 circles), Aircel?s Rs6,499 crore (13 circles) and that of Idea Cellular at Rs5,769 crore (11 circles). It is seen that players have been selective in their bids and have tried to get allocation in the circles that contributes maximum to their revenue kitty and wherein they have a strong market share. -
MTNL to be under pressure: As per the agreement, Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telecom Nigam Ltd (MTNL) will have to match the auction bids, resulting in an outflow of Rs10,187 crore and Rs6,564 crore for them respectively. This will not only wipe out the entire cash on books of MTNL but in fact the company will have to take debt to pay for the same. As a result, MTNL?s stock will come under pressure. -
Significant strain on balance sheets: The 3G license outflow and the ensuing rollout capital expenditure (capex) would strain the balance sheets of telecom operators, as the funding is expected to be financed through bank borrowings. We expect the strain to be highest on Reliance Communications followed by Idea Cellular. Bharti Airtel will be least affected with its net debt/EBITDA expected to increase to 2.6x from 0.2x. -
Fragmented spectrum allocation may necessitate sharing: Looking at different circles acquired by the incumbents, it seems that some of the players adopted a strategy of gaining spectrum across a geographical corridor. Notably, Aircel won most of the southern and eastern circles, while Tata Docomo covered the western and northern parts. We believe that complementary distributions may be useful in deriving synergies when consolidation starts in earnest. -
PSU banks likely to benefit: 3G auction is expected to have some positive fallout on banks, as most of the spectrum fee outgo would be funded by bank borrowings. This will result in a strong growth in the advances of some large public sector (PSU) banks; we expect Rs18,000-20,000 crore worth of advances growth for the State Bank of India. Moreover, these are long-term borrowing and would have a positive impact on the benefiting bank?s margins. -
Maintain cautious view on the sector: Given the aggressive bidding for 3G auctions, we expect BWA auction to attract equal attention from operators, which will further strain their balance sheet. Coupled with this, the impending risk of one-time 2G spectrum fee, the reframing of spectrum and the introduction of mobile number portability (MNP), the sector remains beset with significant uncertainties. Thus we continue to maintain our cautious stance on the sector.
Oil & gas
APM gas price hiked
The government has positively surprised the street with a sudden hike in the APM gas price as the issue has been pending for long. This development is the government?s first move towards a market-linked gas price mechanism in India. This also increases the hope for de-regulation of auto fuel (petrol and diesel) and cooking fuels (domestic LPG and PDS kerosene) in the country, which is a positive sign for state-owned upstream companies and oil marketing companies (OMCs: Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation). And we expect ONGC and OIL to outperform in the near term.
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