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bullishmumbai
Buy Bharti Airtel, target Rs 1050: Citigroup
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Citigroup is bullish on Bharti Airtel and has recommended buy rating on the stock with a 12-month target price of Rs 1050.Citigroup research report on Bharti AirtelUnderperformance though understandable, is now overdoneTRAI released recommendations on Aug 28, potentially allowing easier spectrum access for new entrants. Not surprisingly, fear of higher competition has resulted in Bharti underperforming the Sensex by 11% and peers by 9% since. This appears overdone as our estimates factor in the ensuing competitive risks to a large extent, i.e., lower market share and sustained decline in rev/min.Estimates factor in higher competition anywayOur estimates factor in a 300- 400bps yoy decline in Bharti’s share of FY09 net adds. On an absolute level, FY09 net add estimate of 1.8m/month has little downside risk especially as Bharti/incumbents try and accelerate their rollout even further to beat the now more visible competition from new entrants (possibly in 2HFY09). This will be visible in continued acceleration in Bharti’s net adds over the next 6-9 months.Revenue/min may surpriseRecent interaction with the industry (Asia Telco Tour) indicate potential for rev/min to relatively stabilize vis-à-vis an estimated 16%pa decline in FY07-10E, which amply factors in increasing competition. Also, impact on capex from new recos (even if accepted fully) will be marginal.Spectrum delay and towerco to provide upsideNotification of TRAI's recos could get delayed as stakeholders debate and pursue legal options even as spectrum release by Defence continues to get delayed. Meanwhile, possibility of strategic/financial investment in Bharti's towerco in 3QFY08 will provide valuation benchmark (our est. at Rs160/share). Bharti remains our top pick.Investment strategyWe rate Bharti Buy/Low Risk (1L). We believe continued robust wireless market expansion and Bharti's ability to capture this growth profitably will be a recurring theme. We estimate FY07-10 earnings CAGR of 32.7%, more than double the broader market. We believe that competitive pressures, though intense, will remain rational as low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.Additionally, most regulatory concerns are behind us and 3G recommendations, though discomforting, cannot derail the growth path, in our view. Combined with strong brand presence and good corporate governance standards, Bharti appears a strong investment. The company has yet to realize the benefits of economies of scale, and we expect a slight strengthening of margins over next 2-3 years. We also expect the towerco hive-off (Bharti Infratel) to be a value accretive looking beyond the immediate impact on margins, given Bharti's stated intentions to be a minority stake owner in the towerco.ValuationOur 12-month forward target price of Rs1,050 is based on core DCF of Rs890 and a towerco option value of Rs157. The core DCF (as on March-08) is based on a WACC of 10.7%, a terminal growth rate of 4% and beta of 0.9. We prefer DCF as our primary valuation methodology because the wireless market will likely continue to see robust growth requiring upfront capex but should generate significant free cash beyond FY09-10E.Our target price (net of towerco value) represents a FY09E P/E of 20.4x, P/CEPS of 13.1x and EV/EBITDA of 11.5x. The imputed target P/E (net of towerco) of 26.3x FY08E is at 30% premium to the broad market P/E (20.0x FY08E at the higher end of our Sensex target of 16,000). This, we believe, is justified by above-average earnings growth, high return parameters, improved earnings visibility and relative insulation from macro risks.RisksOur quantitative risk-rating system, which tracks 260-day share price volatility, rates Bharti as Low Risk. We are comfortable attributing a Low Risk rating for the following reasons: 1) Bharti has a track record of profitability and execution; 2) the company's capex plans are fully funded; and 3) SingTel's strategic shareholding leaves us comfortable with execution issues and initiatives. Risks that could prevent the stock from reaching our target price include competition-led tariff pressures, un-remunerative capex, overall market downside, and slower-than-expected execution of the tower sharing initiative.
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Citigroup is bullish on Bharti Airtel and has recommended buy rating on the stock with a 12-month target price of Rs 1050.Citigroup research report on Bharti AirtelUnderperformance though understandable, is now overdoneTRAI released recommendations on Aug 28, potentially allowing easier spectrum access for new entrants. Not surprisingly, fear of higher competition has resulted in Bharti underperforming the Sensex by 11% and peers by 9% since. This appears overdone as our estimates factor in the ensuing competitive risks to a large extent, i.e., lower market share and sustained decline in rev/min.Estimates factor in higher competition anywayOur estimates factor in a 300- 400bps yoy decline in Bharti’s share of FY09 net adds. On an absolute level, FY09 net add estimate of 1.8m/month has little downside risk especially as Bharti/incumbents try and accelerate their rollout even further to beat the now more visible competition from new entrants (possibly in 2HFY09). This will be visible in continued acceleration in Bharti’s net adds over the next 6-9 months.Revenue/min may surpriseRecent interaction with the industry (Asia Telco Tour) indicate potential for rev/min to relatively stabilize vis-à-vis an estimated 16%pa decline in FY07-10E, which amply factors in increasing competition. Also, impact on capex from new recos (even if accepted fully) will be marginal.Spectrum delay and towerco to provide upsideNotification of TRAI's recos could get delayed as stakeholders debate and pursue legal options even as spectrum release by Defence continues to get delayed. Meanwhile, possibility of strategic/financial investment in Bharti's towerco in 3QFY08 will provide valuation benchmark (our est. at Rs160/share). Bharti remains our top pick.Investment strategyWe rate Bharti Buy/Low Risk (1L). We believe continued robust wireless market expansion and Bharti's ability to capture this growth profitably will be a recurring theme. We estimate FY07-10 earnings CAGR of 32.7%, more than double the broader market. We believe that competitive pressures, though intense, will remain rational as low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.Additionally, most regulatory concerns are behind us and 3G recommendations, though discomforting, cannot derail the growth path, in our view. Combined with strong brand presence and good corporate governance standards, Bharti appears a strong investment. The company has yet to realize the benefits of economies of scale, and we expect a slight strengthening of margins over next 2-3 years. We also expect the towerco hive-off (Bharti Infratel) to be a value accretive looking beyond the immediate impact on margins, given Bharti's stated intentions to be a minority stake owner in the towerco.ValuationOur 12-month forward target price of Rs1,050 is based on core DCF of Rs890 and a towerco option value of Rs157. The core DCF (as on March-08) is based on a WACC of 10.7%, a terminal growth rate of 4% and beta of 0.9. We prefer DCF as our primary valuation methodology because the wireless market will likely continue to see robust growth requiring upfront capex but should generate significant free cash beyond FY09-10E.Our target price (net of towerco value) represents a FY09E P/E of 20.4x, P/CEPS of 13.1x and EV/EBITDA of 11.5x. The imputed target P/E (net of towerco) of 26.3x FY08E is at 30% premium to the broad market P/E (20.0x FY08E at the higher end of our Sensex target of 16,000). This, we believe, is justified by above-average earnings growth, high return parameters, improved earnings visibility and relative insulation from macro risks.RisksOur quantitative risk-rating system, which tracks 260-day share price volatility, rates Bharti as Low Risk. We are comfortable attributing a Low Risk rating for the following reasons: 1) Bharti has a track record of profitability and execution; 2) the company's capex plans are fully funded; and 3) SingTel's strategic shareholding leaves us comfortable with execution issues and initiatives. Risks that could prevent the stock from reaching our target price include competition-led tariff pressures, un-remunerative capex, overall market downside, and slower-than-expected execution of the tower sharing initiative.
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