Monday, 2 November 2009

Bharti at 52-week low: Time to buy?

The telecom industry continues to weather rough storms. In the throes of an intense pricing war in a bid to woo subscribers — especially by the newer entrants — apart from concerns relating to irregularities in the Department of Telecom’s (DoT) allocation of 2G spectrum and a harrowing delay in the 3G auction, the sector’s cup of woes seems to be running over.

Industry leader Bharti Airtel is especially facing a tough time. The bellwether, which a few months ago called off an attempt to strike a merger deal with South Africa’s telecom giant MTN, faces the threat of competition biting away at its subscriber base with lucrative pricing and the prospect of declining average revenues per user (ARPUs) — the industry benchmark used to measure a telco’s financial health.

In a recent interview with CNBC-TV18, industry veteran Rajeev Chandrasekar, former chairman of BPL Mobile and now a Rajya Sabha MP, said the telecom sector was on the verge of a fundamental shift in dynamics. “We are going from a model where there were two or three well capitalised strong players in this market — the Bhartis and the Vodafones — to a market where now we will have most likely six-seven players, all very well capitalised and strongly positioned to take high market shares in the incremental market,” he said, adding that newer players like Tate DoCoMo and Reliance Communication would do to Bharti and Vodafone what these leaders did to BSNL 10 years ago. “The best days for incumbents like Bharti, Vodafone, BSNL and Idea are behind them.”

Stock at 52-week low

Bharti Airtel, announced its second quarter FY10 results on Friday, which were quite disappointing. The company’s net profit declined 7.8% to Rs 2,321 crore as against Rs 2,517 crore on a quarter-on-quarter (QoQ) basis. Soon after, the Bharti Airtel stock hit a 52-week low at Rs 290 on the exchanges. The stock was, two months ago, quoting a price of Rs 450.

Is Bharti now so beaten-down that investors can buy at it current levels or is it wiser to stay away from it at even these levels, given the outlook of the telecom sector?

Stock close to bottom

“For Bharti, we are closer to the end now in terms of price damage,” says Sanjay Chawla of Anand Rathi Securities. “However, it is the time correction that is likely to be extended and that may well last for another three-six months.”

Chawla adds that market is eyeing two-three developments closely: the impact of tariff cuts on its margins and evidence of the pricing war bottoming out.

“Also, with the Unitech-Telenor launch, Docomo making rapid inroads and number probability to launch soon, the effect of that remains to be seen,” he says. “We don’t see that the time correction is going to end until Q1 results are out.”
He, however, added that stock was close to bottoming out and may stay at current levels for some to come.

“The earnings numbers that we saw are disappointing particularly the fact that the average revenue per user (ARPU) has declined 8% — even when the entire tariff cut was implemented much later,” says Hemang Jani, Senior Vice President, Sharekhan, adding that there was a feeling that the stock may under-perform for the next six months given the competition.

“However, the way I look at Bharti, it’s a company that makes a net profit of Rs 8,500 crore, available at about 11-12 PE and I don’t think we are going to see this kind of a scenario playing out for too long. From an investment perspective at 11 times forward PE, Bharti definitely looks attractive.”

Watch out for ARPUs ahead

Shubham Majumder of Macquarie Securities feels that even as the stock looked attractive for long-term investors at current levels, one needs to watch out for a few developments. “Brokerages’ estimate for Bharti’s earnings per share (EPS) could be scaled down further if its embraces per second billing and number portability, which could affect its post-paid user segment where profitability remains high,” he says.

“Also, we could see pressure on the text and data side of the business because as of now, all of this tariff action is limited to the prepaid, which essentially is the Rs 100-200 ARPU bracket,” Maajumder says. “When you see action move to the Rs 400-500-800 ARPU customer — that is when you really need to start to worry for players like Bharti and Vodafone because they cater to a majority of the high ARPU and a high value market.”

Source: Moneycontrol

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