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Friday, January 05, 2007

From Research Desk - Bharti Airtel Ltd.


Bharti Airtel Ltd.

BUY

CMP Rs630

The buyout of Hutch’s stake (51% direct holding, 67% total holding) in Hutch Essar has been in the media over the past few weeks. The 67% stake is up for grabs by several telecom majors like Vodafone, Reliance Communications, Verizon Communications and the Essar group. According to media reports, the floor price of the bid has been fixed at US$14bn. In the light of these developments, one company that is likely to seek higher valuations in the near term is Bharti Airtel.

We are considering three possible bid prices -US$15bn, US$16bn and US$17bn. We have used EV/Subscriber method to value Bharti Airtel. At US$16bn, Hutch EV/Subscriber works out to be US$717, which is at 11% premium to Bharti. We believe, Bharti should trade at least 10-12% premium to Hutch Essar considering Bharti’s

1. Pan India presence
2. Superior operating margins
3. Superior managerial skills

Consequently if the deal is valued at US$15bn, Bharti’s EV is likely to increase by 10-12% to US$30.5bn and the share price could rise to Rs700+ levels.

At CMP of Rs635, the stock is trading at 33.5x FY07E EPS of Rs18.8, 25.2x FY08E EPS of Rs25 and 18.7x FY09E EPS of Rs33.75.