The government of India has recently fixed the reserve price for pan-India 3G spectrum at Rs3,500 crore (substantially higher than Rs2,020 crore proposed by TRAI earlier).
In the initial phase of the auction, only five players will be allowed to offer 3G services with one place reserved for BSNL/MTNL. Further, the government plans to complete the auction in the next 90 days.
The speedy completion of 3G auctions is encouraging for all telecom companies. However, the exorbitant level of 3G reserve price is seen as negative for all telecom companies, as it would increase the capex and thereby the debt level on the balance sheet. Hence, we do not expect aggressive bidding by many domestic players.
Assuming a winning bid of Rs6,000 crore for Bharti Airtel, the company’s net debt to equity ratio is expected to get stretched to 0.4x in FY2010 from our current estimate of 0.2x.
We believe this level of leverage is manageable by Bharti Airtel. In our projection for net debt to equity ratio, we have not considered any kind of incremental earnings from the launch of 3G services and the additional debt of $4.1 billion required to acquire 49% stake in MTN Group.
However, the impact on net debt to equity ratio may dilute with incremental earnings from 3G services.
Given the strength of having the largest subscriber base, we believe Bharti Airtel would emerge as the key beneficiary of the launch of 3G services in India.
We highlight that the additional funds of around $4 billion required to acquire 49% stake in MTN Group could further strain Bharti Airtel’s balance sheet and increase its interest outgo.
At the current market price, the stock trades at 14.1x its FY2011 estimated earnings and 7.8x enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA).
We maintain our BUY recommendation on the stock with price target of Rs453.