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Last Updated : Feb 24, 2017 07:16 PM IST | Source: Moneycontrol.com

Brokerages cheer Bharti-Telenor's deal, but flag sector issues

Analysts feel that the deal could help Bharti stand up to intense competition that will unleash in the telecom space, but the sector overall could see pressure as well.

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Investors cheered Bharti’s decision to acquire Telenor India as the stock surged 10 percent intraday on Thursday. The stock contributed heavily to the index’s gain for a greater part of the trading session and pushed up the market on expiry day.

While the company did not disclose the deal value, said to be under finalisation, sources told CNBC-TV18 that the acquisition cost could be to the tune of Rs 6,000-7,000 crore.

Analysts pegged the deal to be valuable for Airtel on the back of multiple benefits. However, they have also flagged concerns on the sector’s outlook based on increased competition.

Numbers Speak

Motilal Oswal has a buy call on the stock with a target price of Rs 410. It estimates an investment of Rs 2,000 crore by Bharti to acquire outstanding spectrum payments and other operational contracts including tower lease. Based on this investment, “the deal appears attractive, with a possible EV/EBITDA of 5-6X on current EBITDA run rate.”

It estimates Telenor's EBITDA to improve to Rs 60-70 crore, assuming a margin of 25-27 percent compared to Bharti’s 38 percent India wireless margin. With Bharti’s investment likely to be at Rs 2,000 crore, the deal would be RoCE-accretive and would yield 20 percent RoCE, the brokerage said.

Fitch, on its part, expects Bharti's EBITDA for the financial year to March 2017 (FY17) to be around USD 5-5.3 billion (FY16: USD 5 billion) despite intense competition in the Indian mobile market during second half of this financial year.

On the debt front, Motilal Oswal said, “With an operating cash flow of Rs 32,000 crore, net debt of Rs 1,02,000 crore, the investment would add hardly 2 percent to net debt, which would be offset by the EBITDA contribution from the merger.” The firm also foresaw a better roll-out of 4G services on 1800 MHz which remains the most efficient due to its well-developed ecosystem.

Deutsche Bank maintains its buy call on the stock with a target price of Rs 400. It feels that Telenor’s spectrum liability would account for a large part of the acquisition cost. “Adjusting for the upfront payment, the license-fee set-off and the annual payments made to date, we estimate Telenor’s outstanding spectrum liability would be around Rs 1,600 crore (USD 230 million). This would transfer to Bharti in the event of the acquisition.” However, Fitch felt that Bharti’s credit profile would remain unaffected as benefits from additional spectrum assets will offset spectrum liabilities taken over.

Spectrum Needs & User Base

ICICI Securities maintains its buy call on the stock with a target price of Rs 410 based on better prospects as well as no extra spectrum needs. The brokerage feels that the telecom firm could further cement its position in the telecom space with a combined subscriber base of 31 crore. It remains a preferred choice owing to the superior operating metrics, analysts at the firm wrote.

Deutsche Bank said that Bharti could ascribe some value to Telenor’s subscriber base, especially in two key markets of Uttar Pradesh (East) and Uttar Pradesh (West). BNP too concurred with this view and said that Airtel would be strengthened in markets such as Gujarat, Maharashtra, UP East and UP West.

On spectrum requirements, ICICI Securities said, “Airtel possesses extensive spectrum coverage across circles with 942.9 MHZ of total spectrum (pre-deal), 24.1 percent of the total spectrum in the industry (ex- BSNL/MTNL, pre-deal) and would not have any spectrum requirement in the near term.”

Competitiveness & Challenges

Motilal Oswal feels that the added spectrum will help Airtel to stand up to Reliance Jio’s aggressive plans. “While the incremental spectrum may not be presently required, given the large-scale data traffic on RJio’s network, holding high quantum of spectrum would allow Bharti to compete with RJio in a fixed-cost-driven market. We believe Bharti’s strategy to remain ahead of the curve in data-rich spectrum investments should hold it in good stead,” the brokerage said.

Fitch, meanwhile, believed that the consolidation was taking places to take on Reliance Jio. “The agreement by Bharti Airtel to buy Telenor's Indian telecom operations is the latest sign that the entry of aggressive new operator Reliance Jio is spurring incumbents to consolidate to better meet the intense competition and weaker telecom companies to exit altogether.” Furthermore, it believes that the consolidation is not likely to return any pricing power to operators in the near term.

Edelweiss has a hold call on the stock with a target price of Rs 340. The brokerage sees competitive intensity to be high despite a cut in the number of players in the space. This, it says, would be based on operators’ aim to acquire higher market share and would look to cut prices. Others could also follow suit with this.

(Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 that publishes Moneycontrol.com.)
First Published on Feb 24, 2017 04:24 pm