For April-June 2009 quarter, Bharti Airtel (Bharti) has been successful in strengthening its gross revenue (GR) market share to 33.8% and maintaining its subscriber market share at 24%, despite the tough competition due to entry of new players.
Further, the company continues to maintain its GR leadership in 13 out of 23 circles in India.
Despite strong fundamentals and revenue market share, its stock price has relatively under-performed the Sensex (the stock rose 32% since April 01, 2009 versus the 50% increase in the Sensex).
This is mainly due to four reasons: 1) Uncertainty looming around the proposed Bharti-MTN deal; 2) Deterioration in key operating metrics like average revenue per user (ARPU) due to intensifying price competition; 3) Expected shift in subscriber and revenue market share of telecom operators with the anticipated introduction of mobile number portability (MNP); and 4) Introduction of per second billing system by Tata DoCoMo and Shyam-Sistema would further intensify the price war.
We believe that MTN’s implied deal valuation of 5.7x enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBITDA; CY2009E) is not expensive and in fact substantially lower compared to the EV/EBITDA multiple of 8x FY2010E for the Indian telecom companies.
Further, as a long-term strategy, Bharti-MTN merger deal makes sense as it provides Bharti entry into 21 fastgrowing and under-penetrated countries of Africa and the Middle East. Moreover, the operating metrics (ARPU and EBITDA margins) of MTN is better as compared to Bharti.
Outlook and valuation
We maintain our positive stance on Bharti on the back of: 1) The company’s low cost business model that would help it sustain its EDITDA margin in the range of 40-42% despite the increase in competition, 2) Bharti’s superior execution capabilities; and 3) Bharti’s healthy return ratios (return on net worth of 30% and return on capital employed of 26% in FY2009).
At the current market price, the stock trades at 13.4x its FY2011 estimated earnings and 7.4x EV/ EBITDA. We maintain our BUY recommendation and price target of Rs453 for the stock.