Bharti Airtel’s stock has underperformed other telecom stocks in the last three months (down seven per cent against a four per cent rise for Idea and two per cent dip for RCom). It currently trades at a relative discount, at a PE ratio valuation of about 15 times one-year consensus forward EPS estimates. The underperformance takes into account a relatively neutral near-term outlook and concerns related to impending costs arising from proposed spectrum auctions and excess spectrum holdings of telcos, in the backdrop of Bharti’s higher leverage levels, with net-debt to-equity of 1.2 times.
This is heightened by lack of clarity regarding the direction of regulatory policy for the sector at large. However, ICICI Securities believes this relatively lower valuation factors in most regulatory risks and has a ‘Buy’ call on the stock.
Modest performance
The quarterly results outlook for the March quarter is moderate for Bharti and is expected to reflect a bounce-back in traffic (minutes of usage) after a more subdued performance last quarter.
Analysts believe this will ride on strong growth in net subscriber additions this quarter (13 per cent in January and 18 per cent in February). This was also partly due to some elasticity from a tweaking of rates to stem the revenue market-share erosion seen last quarter after rises. This belies expectations of lower competitive intensity post-cancellation of licenses in February and will be a key factor to watch, going ahead. The direction of rates, 3G investment and usage, Africa operations growth outlook and most important, regulatory environment are key monitorables this quarter. Operating profit margins are also expected to rise sequentially in the absence of one-off expenses seen last quarter. Higher subscriber acquisition costs this quarter (more adds) as well as Airtel Money launch costs will offset this advantage to some extent in South Asia, according to the IIFL Research report.
A seasonally weak quarter will reflect on Africa revenues with Ebitda feeling the impact of higher diesel costs. Forex movement will have a bearing on consolidated profits. This will include the appreciation of the rupee versus dollar and depreciation of the Lankan rupee against the Indian one.
Bottomline outlook
Analysts believe the launch of Long Term Evolution (LTE), a 4G wireless broadband technology, is expected to face hurdles from limited availability of enabled devices, reducing visibility for a near-term boost to revenues.
The LTE launch in all four circles is expected to have a cost impact of Rs 100 crore per quarter on amortisation and interest costs which will impact FY13 EPS 3.5 per cent (2.7 per cent on FY14 EPS), says IIFL Research. This had led to lowering of consensus FY13 earnings estimates. But longer-term positives are expected to flow in from hopes of a relative easing of competitive intensity, with resultant improvement in rates and revenues, says Brics Securities. It is positive on rising contribution from 3G services and improving operating efficiencies in Africa. In this backdrop and fairly-priced valuations, most brokerages have a positive outlook on the stock.