Bharti looks attractive at current levels: Ambit Capital

The 2G trial court on Tuesday summoned Bharti's Sunil Mittal, Vodafone's Asim Ghosh and Essar's Ravi Ria over irregularities in the additional 2G spectrum allocated in 2002. Shares of Bharti Airtel, crashed nearly 8 percent after the announcment. Trial court will hear the case on April 11.

Ankur Rudra of Ambit Capital feels that this will not impact Bharti's business. "We can see from a business fundamental perspective all incumbents, Bharti, Idea Cellular, Vodafone are benefiting from reduction in discounting," he said in an interview to CNBC-TV18. He finds Bharti attractive at current valuations and recommends buying the stock with the target price of Rs 361. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Because of the summons issued by the trial court to the highest officer in Bharti Airtel would you worry more for the stock at all or is this just a sentimental downtick that the stock saw? Is it an opportunity to buy? A: One has to break this down into two aspects, how does this affect the business on an ongoing basis and how does it affect sentiment. On the business side clearly this will not have any impact. We can see from a business fundamental perspective all incumbents, Bharti, Idea Cellular, Vodafone are benefiting from reduction in discounting. Also, possibly an improvement in the regulatory prices of spectrum given by the failure of the auction so far. On the sentiment and how impacts share prices clearly the fact that chairman has been summoned by a court has negative connotations, but we do not have visibility on legal issues of this nature. So, I think there clearly will be stock price volatility till the hearing is held on April 11 and maybe a possible resolution after that. However, it is difficult to call exactly what happens. From a business perspective, we find Bharti extremely attractive. We are buyers on Bharti. Our target price is Rs 361 and we would use every opportunity to buy. Q: Previously the Supreme Court has gone on the offensive and even cancelled 122 licenses in February of last year. Do you see the Supreme Court taking a hard stand and as a worst case scenario perhaps even revoking that additional spectrum which is being questioned by the likes of Bharti Airtel over irregularities? A: We do not have a lot of visibility on the legal side of the story. I will not be able to comment exactly on that. As we understand this is not exactly the Supreme Court. There are two different parts to this. It is currently a Central Bureau of Investigation (CBI) court and whatever is heard here will possibly have a recourse to a higher court at a later date. Given even the uncertainties about what charges are being raised it is difficult to comment anything in that direction right now. It would be extremely disruptive. Much more than what it was for the licensees involved in the last round. I am sure any court will take that into mind before deciding. Q: Summoning Sunil Mittal does raise corporate governance uncertainties and issues. Do you see the possibility of inventors looking at this? A: It is too early to call it an issue in that sense right now. At the moment it is summons and to be fair the case was initially raised in December 2012. The sector has been hammered by several regulatory related issues and litigations. As one knows all these companies are involved in other litigations with the government as well either on spectrum refarming or renewals or one-time access fee or abolition of roaming or abolition of mobile termination charges. So litigation for the sector to an extent is not new and sector multiples and valuation for all stocks in telecom have to be taken with a sterner view on cost of capital assumptions to incorporate the regulatory risk involved. This is a manifestation or something part of a regulatory risk inherent of being in this sector. I would think most investors would be accustomed to that and would have factored an element of greater regulatory uncertainty and policy risk. This could manifest itself in several forms including this one. _PAGEBREAK_ Q: What is the financial pain, it is just about Rs 845 crore or thereabout of spectrum isn’t it, if it came to it and they had to pay up? A: The order or the media article so far suggests something to -- the number is what we have suggested around Rs 8.5 billion. One would think that the policy which was adhered to buy the operators was shared between the operators at that time. This would include Bharti Airtel now Vodafone India but at that time, two other operators and also the state-owned operators. To that extent, any levy should probably in all fairness be equally shared. Hence, any number of that should not hurt balance sheets of companies involved here with the exception of state-owned operators. Q: What is your price target for Bharti? A: Our price target is Rs 361. Q: So you recommend investors buying into Bharti Airtel after that 5.5 percent knock that we have seen over the last two days? A: We continue to recommend Bharti Airtel as a key buy idea in telecom in India. Clearly, we see things improving from an operational perspective. Discounting is genuinely going down in the market which will result in better realized tariffs. Over this quarter and over FY14 the possibility of tariff hikes is rising. The payout for spectrum which was extremely uncertain over the course of FY13 is seemingly less so now. So, the regulatory payouts are lower. With the benefit of possibly we reaching an inflection point in terms of 3G data penetration things look out for the sector. So, we are optimistic on the sector. Q: There is also a possibility of reframing taking a toll on the company as well as renewal charges. How much would you attribute in terms of per share price that this might cream off? A: In our target price we have already taken the impact of a possible reframing. So, at the moment we are not working with the assumption that does not happen. We are working with the assumption that it does happen and the main impact is on Bharti’s 900 MHz circles, particularly the Delhi circle. The fact that the auction price will now be lower than what was assumed, before March 2013 auctions makes it even lower now. On a per share basis we have impacted something in the region of around 5 percent per share. Rs 15-20 per share, which is already embedded into our valuation. I am sure it is embedded into consensus valuation as well. Q: In terms of time, how long it will take for this issue to blow up, what is your sense? A: For this issue to be resolved, it is difficult to say. Litigation in the sector goes on for a very long time. This is somewhat different from a typical implication. However, this is an example, the mobile termination abolition litigation began in May 2011. It still has not seen the end of the day yet. So, this could go on for a while.