Telecom: Attractive valuations

India Infoline News Service | Mumbai |

Albeit we cut our Idea target price to factor in large renewal related payouts but retain BUY; prefer Bharti at current juncture given a bigger balance sheet and quality spectrum holdings.

Telecom stocks have remained under pressure since the 1800/900MHz auctions ended in February 2014 as both Bharti and Idea have underperformed the Sensex by ~3%-6.5%. Underperformance stems from twin concerns of higher renewal prices for 900MHz in future auctions and impending entry of Reliance Jio in the voice market. Although some caution may be warranted on both the counts, we believe current valuation of 4.8x/6.3x FY16E EV/EBIDTA for Bharti/Idea adequately factor in above scenarios and offer favourable risk adjusted upsides. Albeit we cut our Idea target price to factor in large renewal related payouts but retain BUY; prefer Bharti at current juncture given a bigger balance sheet and quality spectrum holdings.


Bharti, Idea underperform since auctions ended

Bharti and Idea have underperformed Sensex since auctions ended in February 2014 on fears of higher future renewal prices especially in 900MHz where spectrum in metros has been valued at ~3x 1800MHz base prices. However current valuations offer enough headroom to expand and do provide an attractive entry point in our view.


Prefer Bharti on better risk reward profile

Based on our calculations, we estimate the payouts in future 900MHz/1800MHz at ~Rs106bn/165bn for Bharti (only 900MHz) and Idea which translates in to Rs9/Rs16 per share impact, assuming operators do not pass the increased costs of spectrum. Since Bharti has already secured prized 900MHz spectrum in the three metros it is relatively better placed as compared to Idea which has several large renewals coming up in 900MHz over next 2-3 years (though it has bought 1800MHz in these circles). We remain positive on Idea’s underlying strengths of robust execution record and rising revenue market share but would prefer Bharti given a bigger balance sheet and a healthy spectrum portfolio. Reduce Idea’s target price on revised estimates while keep Bharti forecasts unchanged.   


Financial summary
Bharti
Idea
Y/e 31 Mar (Rs m)
FY14E
FY15E
FY14E
FY15E
Revenues
866,536
951,270
263,303
288,845
yoy growth (%)
7.8
9.8
17.5
9.7
Operating profit
269,493
308,211
78,728
88,675
OPM (%)
31.1
32.4
29.9
30.7
Reported PAT
31,057
49,095
18,094
18,814
yoy growth (%)
36.5
58.1
79.0
4.0
EPS (Rs)
7.8
12.3
5.5
5.7
P/E (x)
39.8
25.2
25.5
24.5
Price/Book (x)
2.1
1.9
2.9
2.6
EV/EBITDA (x)
6.9
5.7
7.5
6.8
Debt/Equity (x)
1.1
0.8
0.8
1.0
ROE (%)
5.6
7.9
11.9
11.1
RoCE (%)
8.2
11.0
11.6
11.7
Source: Companies, India Infoline Research
 

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