May 02, 2013, 03.27 PM | Source: CNBC-TV18

Ambit Capital advises caution on Infosys; bets on Bharti

Even while telecom major, Bharti Airtel posted disappointing Q4 numbers, Ankur Rudra of Ambit Capital is not change his positive stance on the stock. The company today posted its Q4 net profit of Rs 508.6 crore, way below what analysts were expecting.

Even while telecom major, Bharti Airtel posted disappointing Q4 numbers , Ankur Rudra of Ambit Capital is not change his positive stance on the stock. The company today posted its Q4 net profit of Rs 508.6 crore, way below what analysts were expecting.

"We remain positive on Bharti. We see an upside based on recovering financial performance in India and in Africa. In India if the RPM (revenue per minute) story remains intact, we will still see some sort of a margin uptake," adds Rudra in an interview to CNBC-TV18.

In the meanwhile, Rudra continues his negative position on Infosys and says he is a seller of the stock. Justifying his 'sell' call, Rudra says the company failed to recover this quarter and did not show any operational improvements. "Both those reasons stay. So, we stay sellers on Infosys for now. Our target price is Rs 2,138 and we have five to six  percent downside on the stock," adds Rudra.

Below is the edited transcript of Rudra’s interview to CNBC-TV18.

Q: Your first thought in terms of the internals of the Bharti Airtel’s performance, not just the overall numbers but everything by way of minutes of usage and Average Revenue Per User (ARPU). What is your comment on Bharti?

A: Bharti’s operational performance is very much in-line with Idea . There has been continued expansion in minutes driven more by usage rather than a recovery in Revenue Per Minute (RPM), somewhat to the contrary of what we were expecting. We were expecting the reduction in promotions and discounting that began last quarter to show up in the numbers this time. Unfortunately for Bharti, and very similar to Idea, one has not seen that the growth has been driven a lot more by expansion and usage. As long as there is growth, it does not matter where it comes from.

There was a decline in subscriber acquisition cost and network operating cost. The second part of which surprises a bit more because we thought, to an extent, increase in energy prices will hurt the margins. The main negative surprise was we still have not seen a proof of prices stabilising and RPM turning northwards which will be important for margin recovery story for FY14 for the sector including Bharti and Idea.

Q: Would you say that at current prices the telecom stocks are discounting most of the goods news? What would be your call on a stock like Bharti at current price or maybe even Idea after the kind of rally that we have seen?

A: The rally we have seen in the last six to nine months factors in three things. Firtsly, spectrum costs on a throttled basis are lower. We have seen two auctions fail. That is the price and that is fair that it should be in the price. The second part is, expectations of reduction and discounting leading to an RPM increase. We have seen the first steps. We have seen reduction in discounting, but we have not seen an RPM increase yet. So, in case of Idea, it was a bit more of the mix change where some of their newer circles where RPMs are lower increase in proportion of the overall hole, which did not show the flow-through on RPM on a reported basis.

We are expecting a bit more clarity from Bharti to see what we make for FY14. There is also regulatory uncertainty for the sector. To an extent that is reduced, but to an extent the regulatory noise remains. Given the rally we have seen, particularly in Idea that has driven a lot of upgrades, we do not see substantial upside there.

On Bharti, however, we remain positive. We see an upside based on recovering financial performance in India and in Africa. In India if the RPM story remains intact, we will still see some sort of a margin uptake, but we will wait for commentary from management to take a final call on that.

Q: What did you make of the numbers that they reported out of Africa? You spoke about improving or strengthening of the P&L and the balance sheet. There is still a problem of high interest costs and depreciation, especially interest costs. How do you see that panning out? Will that bring in some benefits as we get into a period of perhaps rupee appreciation and lower interest rates at home?

A: Interest cost has been one of the big dampeners for Profit After Tax (PAT) performance for the last couple of years for Bharti. If the rupee should continue strengthening, they are leveraged to that substantially,  they should benefit from it. However, one really cannot take a call right now on how that will pan out for the rest of the year, but should it happen, they will clearly be one of the beneficiaries along with Idea.

Both companies will benefit. Bharti a bit more, given the exposure to Africa. Africa’s performance this quarter has been somewhat more muted than we thought it would be. Management has been attributing it to seasonal factors. So, we will wait and watch for Q1.

The subscriber growth number was positive. The RPM numbers are also pleasing, but the usage numbers are bit concerning, because we do not get quarterly breakup of results. It is difficult to actually break it out. From what we understand a certain section of the markets had a weaker quarter this time, so we will hope that recovers over the course of this year, because this is quite key for overall performance improvement for Bharti.

Q: Do you think it is now time to now cut some of the estimates on the Africa front? It has been sticky. The management has been saying every quarter that there has been an issue maybe this quarter, but at the end of the day quite clearly this is not going away. It looks a bit sticky. How much more would you wait for clarity on Africa numbers before actually cutting estimates or you will not be doing that?

A: Our estimates do not factor an extremely strong growth or a recovery in Africa. We do not expect margins to trend anywhere close to where they are in India at the moment. So, we have been a bit more cautious in our expectations from a margin recovery in Africa. Given the repeated disappointments a large part of the Street’s numbers build in relatively realistic estimates right now. So, I would not think this would drive substantial downgrades from this point on. What we may begin to think about is the goodwill on the balance sheet which Africa currently carries, should there be impairment test on that goodwill given it has not performed for a long time. But the consensus estimates are not aggressive anymore to the extent they were maybe a few years back.

Q: What are your price targets for both Bharti and Idea?

A: Our target for Bharti is Rs 350. We see approximately 10 upside from here. Our target for Idea is Rs 121, so it is like a few percentage points downside. The rally has taken away most of the upside.

Q: Is the worst over for Infosys? Is the stock discounting everything bad or you would still be negative on Infosys, because you were negative even before the numbers came?

A: We have been negative on Infosys on two counts going into the results season. One is we did not expect a recovery to come through in this quarter based on the data points we saw from industry advisors, from peer results etc. and that is something that has come to pass right now. That has gone away from the stock.

The second reason we were negative is, we did not see operational improvements resulting in improved market share gains for Infosys that the Q3 results were indicating to an extent. So, the first one is definitely proven so far this quarter. Secondly, one has not seen Infosys improve operationally to the extent one had hoped. Both those reasons stay. So, we stay sellers on Infosys for now. Our target price is Rs 2,138. We have five to six  percent downside.

If there is a recovery in discretionary spending over the course of FY14 which we currently do not expect, then Infosys should be among the beneficiaries. We will wait for one of the things that may turn our view on Infosys such as, if there is a change in our view of the market recovery.

READ MORE ON  Ambit Capital, Q4, Infosys, Bharti


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