Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs820
Current market price: Rs729
Vodafone deal to boost valuations
Key points
- The entry of the global telecom giant Vodafone into the Indian markets through the acquisition of a controlling stake in Hutchison Essar Ltd (HEL) would result in a tougher competitive scenario in the already crowded domestic telecom service space.
- The Vodafone deal values HEL at an enterprise value (EV) of $18.8 billion and is at a steep premium to the current valuations of Bharti Airtel Ltd (BAL) and Reliance Communications (Rcom) in terms EV/earnings before interest, tax, depreciation and amortisation (EBITDA). Consequently, it should have a positive impact on the sector's valuations over the long term and reflects the increasing confidence of global players in the Indian telecom service market.
- The Bharti group has been granted an option to acquire the 5.6% direct stake held by Vodafone in BAL while Vodafone would retain the 4.4% indirect stake (held in lieu of its interest in a holding company) as a financial investor. The direct stake of 5.6% has been offered to BAL at a consideration of $1.6 billion, which is at a 10-12% discount to the existing equity value of BAL. The Bharti group is likely to utilise the acquired stake to either enhance the free float (through placement to institutional investors) or bring in a strategic partner (some global telecom giant) that could support BAL to roll out 3G services. Thus, the deal is a positive development for BAL from a long-term perspective.
- On the other hand, the deal is likely to have a negative impact on Rcom. Especially since the acquisition of HEL could have given Rcom the required head start in the GSM-based wireless service space and also enabled it to emerge as the largest telecom service operator in the country.
- BAL continues to be our preferred pick in the sector. We maintain our Buy call on the stock with a price target of Rs820.
SECTOR UPDATE
Telecom
Ringing loud
The upswing in the Indian telecom industry continued as the industry added as many as 6.7 million users during January 2007 (a strong growth of 4.6% over December 2006), taking the total user base to 153.2 million users.
Both the GSM and the CDMA segments witnessed robust growth in their subscriber add-ons. The GSM segment added 5.0 million subscribers during the month, taking the total GSM mobile subscriber base to 110.4 million. The CDMA segment added 1.7 million subscribers, marking a growth of 4.2% over December 2006, and taking its user base to 42.7 million.
Cement
Cement majors report lacklustre dispatches
For the month of January, the cement majors cumulatively reported a meagre growth of 2.8% year on year (yoy) at 59.4 lakh tonne on account of operations at near capacity levels.
Amongst the cement majors, Gujarat Ambuja registered the highest growth of 6% yoy at 1.49 million tonne. ACC's volumes stood flat at 1.64 million tonne whereas the AV Birla group (Grasim + ltraTech) reported a meagre 3.09% year-on-year (y-o-y) growth.
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