Positive on Bharti Airtel, target of Rs 450: ICICI Direct

In an interview to CNBC-TV18, Karan Mittal, telecom analyst of ICICI Direct, speaks about the telecom sector and gives his outlook going forward.

He is positive on Bharti Airtel. "We do like it and our target price is Rs 450 for Bharti Airtel. The reason for that being fundamentally it is the strongest stock among the peers," he adds. Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: Could you take us through Reliance Communications? What you made of the news with regards to the IPO of Flag Telecom? A: The news is definitely positive for RComm because the overall debt, which is at about Rs 37,000 crore, will be reduced slightly with that. We will have to see if the IPO actually gets that kind of proceeds and how much RComm is willing to divest. Their net debt to EBITDA is at about 6.2 times. That is on the higher side, considering the peers in the telecom space. So that should be a positive. Q: What is our opinion on the stock at this juncture? What are you expecting from the Q4 numbers? Do you see it going up above the Rs 100 mark? A: The net debt level decreasing should get us a spike in the stock. But fundamentally we are not very bullish on the counter. The main reason for that being, if you look at the revenue, the top-line has not grown in the last seven-eight quarters. It has been stagnant whereas that for Bharti and Idea have increased only for the domestic mobility business. So, even if the company takes care of the debt portion to an extent, there might be a spike in the stock. But we are not putting a buy on this stock for the simple reason that the fundamentally the company is not performing well. Q: Another under performer vis-a-vis the general markets has been Bharti. Now, they have launched their 4G service. There is talk that they could expand a little more aggressively in 4G, although policy hurdles may have to be crossed. What is the view, is it good to catch it in the hope that these hurdles will be crossed? What is the view on Bharti and Q4 performance? A: We are positive on this counter. Infact we do like it and our target price is Rs 450 for Bharti Airtel. The reason for that being fundamentally it is the strongest stock among the peers. It has almost cleared off all the charges or regulatory hurdles that might be going on in the sector as of now. The other reason is net debt to EBITDA levels stays close to about 2%, although the overall debt is pretty high. The African business is improving considerably. Looking at 4G, we are not building much into it because currently there is only one circle that they have launched into and overall there are just four circles. 3G itself has not picked up in the last one and half years that it has been launched. So, it is too long that 4G will start kicking in the revenue and the EBITDA. Q: We heard from Loop Telecom that they are winding up operations in all circles except for Mumbai. We had Etisalat DB also do the same. What sort of windfall gains do you expect for other telecom operators because there are around 6,000 subscribers who are left in the dark now? A: That�s a very small number, if you talk of the subscribers. The windfall gain would come from the ability of spectrum which is a scarce resource as of now. So, if much spectrum is made available to the incumbents. I think the auction price or the bidding could not be as fierce as was seen for the 3G. Moreover, the operators have learnt from the experience in 3G because they are not generating a good return on investment from the 3G. So, the spectrum that would be made available is good for all the incumbents be it Airtel, Vodafone, Idea or even Reliance Communications. Q: Idea is the absolute outperformer vis-�-vis the sector vis-�-vis the Sensex, the Nifty. Would you see more gains or is it priced in everything? A: I think most of it is priced in. In Idea, we have a target price of Rs 99, which the stock is currently trading at. I think the stock looks expensive and may not go ahead from here because there is a speculation that Idea might face cancellation of licenses in seven circles. Though they do not contribute much to the revenue and contribute negatively to the EBITDA, but it will be more of a sentimental negative. The other thing is that the revenue growth, although will be there, but Idea might have to face a heavy burden in terms of one time spectrum cost or spectrum auction happens or even in case of spectrum reframing because it has large portion of spectrum in the 900 megahertz. So, as a percentage of its overall profitability, that could have a higher impact.