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Aug 09, 2012, 12.14 PM IST
Sanju Verma, MD & CEO, Violet Arch Capital Advisors expects further EPS downgrades on Bharti Airtel post its disappointing first quarter performance.
Here is the edited transcript of the interview on CNBC-TV18.
Q: What do you do with Bhart Airtel now?
A: The government has literally killed a show piece sector, it was a show piece two and half to three years back. If I have to look at Bharti dispassionately, the negatives are pretty much well known, regulatory pressures, higher tax outgo, increased depreciation costs etc.
Looking at the flip side, I think the positive is that here is a company despite all the regulatory pressures have still managed to show an EBITDA margin of 30% plus. Obviously, that is a huge let down from the 40% plus that we are used to but, clearly those days are passing.
The telly media business has done well with ARPUs at Rs 962. The data business has done well; the DTH revenues are up 25% year on year (YoY). Clearly, operationally things are not as bad. Of course prima facie the fact that net profit is down 37% YoY and 24% sequentially is not flattering.
The point I am trying to make is yes, EPS downgrades are certainly in the offing. So consensus EPS which stood at Rs 17 for Bharti for FY13 and at about Rs 24-25 for FY14 clearly will see further downgrades. That said, the feeling I get is that maybe the stock has already been knocked out from Rs 450 levels, 18 months back. It is down to around Rs 265 and still struggling to stay there and that is a huge fall.
My sense is that the key things to watch out for in terms of how this stock will move will primarily depend on a) what can Bharti do to bring down its net debt to equity, which currently stands at more than 3 times to about 1-1.5 times? I think that is the clincher and that will again depend on whether they are able to raise close to USD 750-800 million, which is their stated target divesting part of Bharti Infratel, maybe 8-10% or thereabouts. The experience of Reliance Communication trying to list Flag Telecom is hardly flattering.
My point is, here is a company which has an overall debt of Rs 60,000 crore but, a lot depends on what the government decides to do with respect to the auctions that are now slated to held, not in August but in November. I think the winning price bid will determine how 2G players pan out with respect to their performance going forward.
One must remember that the reserve price here is not really material. What is material is how the auction process pans out? My personal sense is that new players like Videocon, Uninor, Loop, Telenor are already loosing anywhere between Rs 5-8 crores per day. Every day lost in the auction process means more losses mounting up for the new players.
I think the auction process is not meant for the new players though, initially that was the agenda because they squeezed to the hilt. It is clearly going to be for incumbents. What will matter to incumbent players like Bharti or Idea or Vodafone is what will be the winning price bid because the winning price bid will determine how much the incumbent pay over and above the 4.4-6.2 megahertz spectrum that they already have.
What will be the Spectrum usage charges? Will it be 3%, 5% or 8%? What is the outcome of the presidential directive with respect to a whole host of issues including whether the government decides to make internet telephony free?
If the government decides to make internet telephony free because there is lot of noise around that then clearly incumbents like Bharti, Vodafone and Idea are going to suffer big time. The biggest beneficiary will be Reliance which already has a Broadband Wireless Access (BWA) network in place.
I feel that it's not easy to take a call on Bharti because there are too many complexities that have to be taken care of. Bharti’s licenses come up for renewal in 2014. Now a lot depends on how Bharti plays this. It will have to surrender its 900 megahertz spectrum and take 1800 mh spectrum, which is less efficient, from the government.
At what price it finally manages to get its 2014 license renewed for another 10-15 years, I think will again be a clincher. But, as things stand today, with a base price of Rs 14,000 crore for 2G Spectrum of 5 megahertz, incumbents like Bharti, Idea and Vodafone will have to combine and shell out something like Rs 95,000 crore simply to be in business.
One must not forget that out of the Rs 2000 crore debt which the Indian telecom industry owes to the Indian banking space, Rs 100,000 crore plus of debt is owed just by the top three players. So a lot depends on how the regulatory things pan out going forward.
I think it's too soon to take a call and write this stock off or go the whole hog and buy it. But, given a choice at this point in time, I would stay out of telecom until there is clarity on the reserve price, on the outcome of the presidential directive so on and so forth. That means we will have to wait till November.
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