Bharti Airtel an outperformer; target of Rs 1025: Macquarie

Bharti Airtel BSE | NSE 28/05/12 Are Mutual Funds betting on Bharti Airtel?

Broking house, Macquarie Research  has recommended an outperofrmer rating on Bharti Airtel with a target of Rs 1025.

 

Macquarie Research  report on Bharti Airtel:

 

Event  

 

Target price (TP) raised to Rs 1,025, upside of 40.6%:

 

We significantly   upgrade our revenue, margin and EPS estimates for Bharti due to upward   revisions to our subscriber forecasts as well as higher margins. Our new TP   is 37% higher than our previous TP of Rs750. Our EPS forecasts are higher   than consensus by 6.3%, 18.6% and 25% for FY07E, FY08E and FY09E,   respectively.  

 

Impact  

 

Core India holding, great play on the consumption boom in India:

 

In spite   of stellar returns of 19%, 66% and 88% in the last three, six and 12 months,   we think Bharti is likely to outperform the BSE Sensex and its AsiaPac   telecom peers in the next year. Our strong conviction is due to the high   visibility of sustained subscriber and earnings growth and our forecast of   41% stock returns. Bharti is one of the best ways to play the secular India   consumption story and is our top pick in AsiaPac wireless. It is also a favourite   of our Indian strategist.  

 

Stock attractively valued relative to growth and ROE:

 

We feel Bharti is   undervalued, taking into account its revenue leadership in the Indian wireless   market, the quality/depth of management, superb forecast earnings growth   and return ratios. Bharti has the third-lowest PEG ratio of 0.66x among 15   blue-chip, high-growth Indian stocks. We forecast FY07-09E EBITDA CAGR   of 45%, EPS CAGR of 49% and expect ROE to climb up to 40.9% in FY08E.  

 

EBITDA margin is likely to expand on back of better opex management:  

 

Bharti has hived off its portfolio of ~34,000 towers and related infrastructure   into a 100%-owned subsidiary. It aims to enhance sharing of passive   infrastructure, leading to significant capex/opex moderation. We project   EBITDA margin to increase to 42.9% in FY09E as further economies of scale   are realised from India's largest wireless network. Other margin drivers may   be: 1) lower access/interconnect charges due to higher share of on-network   calls; and 2) greater contribution from high margin non-mobility businesses.  

 

Earnings revision  

 

Our EPS estimates have been revised upwards by 6.4% for FY07E, 18.5% for   FY08E and 20.8% for FY09E, to Rs22.3, Rs36.6 and Rs49.7, respectively.  

 

Price catalyst  

 

12-month price target: Rs1,025.00 based on a DCF methodology.  

 

Catalyst: 1) Increased population coverage on the back of network expansion; 

 

2) Ramp-up of fixed wireless, launch of DTH business;

 

3) Sequential EBITDA   margin improvement; and

 

4) Capex and opex savings from network sharing.  

 

 

Action and recommendation  

 

With a clear growth strategy, flawless execution and the biggest network,   Bharti stands to gain the most from the strong growth forecast for the Indian wireless sector.