HSBC reiterates `Overweight’ rating on Bharti Airtel

HSBC reiterates `Overweight’ rating on Bharti Airtel

RESEARCH: HSBC RATING: OVERWEIGHT CMP: RS 616

HSBC reiterates `Overweight’ rating on Bharti Airtel. The 15% fall in Bharti’s share price since the launch of RCOM’s GSM service in December is an overreaction. Instead, investors should focus on Bharti’s market leadership strengths and RCOM’s longer-term structural limitations of operations in 1,800 MHz which require additional base stations. HSBC believes the combination of low revenue yields and bloated cost structure will reduce the scope for disruptive pricing and competitive intensity will become more rational . HSBC estimates FY10E traffic growth of 32% against the historical average of about 70% and cuts FY10-11 E EPS by 7% and 4% respectively to factor in increasing competition and the slowing economy. The core business is valued at Rs 645 on 13.7x FY10E core earnings based on a 15% premium to HSBC’s Sensex target of 11.9x. The tower business is valued at Rs 141, which reflects a 36% discount to recent transaction multiples. Risks are early implementation of MNP (mobile number portability), rollout of flat rate plans, higher than estimated slowdown in usage, higher than estimated decline in margins on the back of rural penetration, lower termination charges and higher spectrum charges.