Bharti deserves premium over other telcos: Raamdeo Agrawal

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Bharti deserves premium over other telcos: Raamdeo Agrawal

Raamdeo Agrawal of Motilal Oswal Securities has reacted very positively to Bharti results. He said that the Telecom Minister's comments on cutting tariff had an effect of dampening sentiments on Bharti.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Bharti Airtel BSE | NSE 25/05/12 Are Mutual Funds betting on Bharti Airtel?

Raamdeo Agrawal, MD, Motilal Oswal Securities has reacted very positively to Bharti Airtel's results. He said that the Telecom Minister's comments on cutting tariff is affecting sentiments on Bharti.

He thinks Bharti results are fabulous and have beaten all expectations. The margin expansion of 150 bps is quite sharp for Bharti. He expects Bharti to become the largest telecom player in the industry. He believes that Bharti deserves a premium over other telcos.

He sees some pressure on tariffs, which he believes, will lead to companies with thinner margins, having a tough time.

Excerpts from CNBC-TV18's exclusive interview with Raamdeo Agrawal:

Q: How does Bharti at new highs, look to you?

A: The stock has run up in the last 10-15 days quite sharply. The Communication Minister's statement, that they would like to force the tariff to 33 paisa in the next 2 years, may have also impacted the stock. It looks almost impossible as far as our understanding is concerned. But, the results are absolutely fabulous.

There is about 10% sequential growth in the revenue, but the margin expansion is quite sharp by about 150 basis points. More details are yet to come in terms of how the appreciation of rupee has worked in their favour. But all in all, Rs 1,353 is way beyond. My own best estimate was Rs 1,310-1,315, so I think it looks fine.

Q2: How do you look at valuations in these stocks with Bharti at about Rs 850 and Idea going to about 120 kinds of levels?

A: I still believe, that the largest player in this segment is going to be the most valuable. They have rolled out all the circles, so the initial cost is all behind them. If they get the subscriber value lower, the opex and capex will be lower. So the bigger ones will make more profits.

If you look at Bharti's profit margin in this quarter, net margin is at 24.5-25%, whereas, for Idea it's about 10-12%. For the next 2 years, the margin outlook for Bharti is higher. By chance, if there is some kind of pressure coming on from the tariffs side, then the companies with thinner margins can have a tough time.

One has to give premium valuations to the Number 1 player in the segment. Going by Rs 32-33 EPS in the next year for Bharti, we are looking at about 30 times PE multiple for a company, which in next 3 years can grow at about 40% compounded. It's reasonably priced and next 2-3 years investors can double their money.

Q: How have you read the rupee, and how would you approach the frontline IT space now? Is it a buying opportunity because of the currency?

A: I think the bigger story of outsourcing to India remains as intact as ever, and volume growth will be very strong. The issue is that, translation from Rs 43.5 to Rs 44 to Rs 41 is going to hurt the bottomline of the companies. My personal belief is that, this has much to do with the rupee liquidity right now.

Once this rupee liquidity is behind us, probably rupee-dollar parity will find a higher level of stabilization. Of course, it may not come back to Rs 43-43.5, but it will be more like Rs 42. So anything above Rs 42-42.5 should be a good level to look at. 

If there is any major sell-off or if there is any further sharp appreciation in the rupee against dollar, then that should be used as an opportunity to get into a stock like Infosys. I can't speak for many companies, but Infosys, TCS, Wipro are the quality companies where sell-off and unreasonable pessimism into the counter, must be taken as an opportunity.

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