Lowering Bharti target price, bullish on Idea: Kotak

Anuj: What about Idea Cellular? A: We continue to be bullish on that one. Operationally, they remain best in the industry. There is a spectrum auction next month and that one is fairly tricky to call. We will see what happens there but operationally this company is doing what it needs to do. It is growing EBITDA at a fairly healthy rate and the balance sheet is still the best in the industry. So, I continue to like that stock.

Ekta: I just wanted to come back to Bharti Airtel because one of the things that kept the counter buzzing was talk of them hiving off their Africa assets to Orange; anything substantial that you have heard on that and if it does come through how would you read it? A: I haven’t heard anything more than the rumours on the street. There was the Bloomberg news report which said that Orange is in talks with Bharti. At some level it does make sense for Bharti to look at doing some corporate action in Africa whether it could be moving out of some countries, consolidating their presence in all their stronger markets. Telecom is a business of scale, you need to be the number one, number two or number three player in any market for you to have a business that delivers good return ratios, does well. So, to that extent it does make sense for Bharti to look at some of those things. Whether there is any truth to the Orange rumour or not, I don’t know. Ekta: Would you change your valuations if incase the deal does come through on the upside? A: Any deal has to be valued on the deal specifics. So, to that extent if they do get a good deal then there is upside to the stock. If you look at my Sum-of-the-parts (SOTP) on Bharti, Africa contributes a negative value. So, if they get a deal at a valuation which is higher than my estimates, numbers will go up.

Anuj: Coming back to Idea, it had a good 2013, the stock had doubled. However, the last one year it has been a rank underperformer in fact even underperformed Bharti. Last one year it is down about some 6-7 percent, what is dragging this right now and what do you think could be a catalyst for the stock to now breakout of this range that it has been in last one year? A: As I said the biggest hump for Idea is the upcoming auctions. They have some of their key circles, nine circles where they hold 900 MHz spectrum which is coming up for renewal. There have been worries about these auctions again getting into frenzied mode; Idea having to overpay to retain their spectrum. As Marten Pieters, the current CEO of Vodafone put it in a couple of days back in our conference, he said this is not a spectrum up for auction this is our business up for auction. So, to that extent it is a very important auction and market will take a call only post auctions is my sense. Anuj: What is the sense you are getting about this auction, do you think the bidding would be very competitive or it would be a bit of a big negative for companies, they would have to go all out in some circles? A: As far as 900 MHz renewal is concerned, companies will have to stretch a little bit if there is competitive bidding for that spectrum. That said the balance sheets in the industry in general are weak so to that extent rationality is a fair assumption as far as going into any auctions. However, you have to remember that this will be contextual rationality because the context has been set by the Department of Telecommunications (DoT) in terms of the reserve prices that they have set which I would say are on the higher side.

kotakinstl_rohitc_relcomm_11feb Ekta: Wanted your view on Reliance Communication. A: We do look at that stock. The company has challenges, they also have seven circles coming up for renewal. The GSM operations, 900 MHz spectrum which is coming up for renewal that contributes about 25-27 percent of their revenues which is at risk. In the marketplace their competitive positioning is only going down, CDMA business continues to struggle, even on the GSM or 3G side they have not been able to gain meaningful market share. In fact they and BSNL are the two largest market share losers in the market. Balance sheet continues to be stretched even post QIP. They are still looking at about 5.5-6 times EV/EBITDA. So, the company is struggling. We continue to have a negative recommendation on the stock. Ekta: Can you just tell us what your reading of Bharti Infratel’s numbers were and what is your call on the stock? A: It is a fantastic asset; there is no doubt about that. It is a steady cash flow story. Slightly overvalued in my view and hence right now I have a negative recommendation on the stock. Ekta: What is your target price on the stock and what would make you change your recommendation? A: I think the price coming down. As I said it is a steady cash flow growth story so I don’t expect meaningful earnings upgrade in the story. It is a very steady business, not too difficult to forecast so the chances of meaningful upsides or downsides on numbers is limited. It is a call on valuations.