Buy Bharti Airtel for Target of Rs 414 -Motilal Oswal

Motilal Oswal in its January 25, 2010 research report has maintained a  buy rating on the stock Bharti Airtel with a price target of Rs 414.

It further went on to say that, Bharti’s 3QFY10 earnings (Rs 22.1 Bn; up 2.3% YoY, down 4.8% QoQ) were ahead of our estimates driven by relatively lower margin decline in the mobility segment (down only 160bp QoQ despite sharp tariff cut) and Rs 1.5 Bn forex gain. While revenue (Rs 97.7 Bn; down 0.7% QoQ) was broadly in-line, EBITDA (Rs 39.1 Bn, down 5.6% QoQ) was above expectations. Mobile EBITDA declined 6.5% QoQ to Rs 24.2 Bn. Telemedia (EBITDA up 7.6% QoQ) and passive infrastructure (EBITDA up 6.2% QoQ) posted strong numbers  while enterprise business was soft with 9% QoQ EBITDA decline.

Wireless metrics mixed: Mobile APRU declined 8.7% QoQ (MOU down 0.9% QoQ to 446, RPM down 7.9% QoQ to Rs 0.52) to Rs 230 (in-line). Mobile traffic grew 6.6% QoQ (vs 2% growth in 2QFY10 and 6-8% growth in preceding three quarteRs ) due to elasticity, lower MOU arbitrage post tariff cuts, and likely seasonal strength. RPM declined 7.9% QoQ to Rs 0.52 and was 2.3% above estimate.

Upgrading earnings by 5-7%; maintain Buy: While 3QFY10 traffic growth (+6.6% QoQ) was below expectations, growth is likely to sustain driven by full migration of subscribeRs  to new tariff schemes. We upgrade FY11/FY12 revenue estimates by 2-4% to reflect better RPM, EBITDA by 2-4% (4% growth in FY11, 18% growth in FY12 as competitive intensity recedes) on relatively stable margin performance, and earnings by 5-7%. Bharti trades at EV/EBITDA of 7.4x FY11E and 6.2x FY12E; and P/E of 13.7x FY11E and 12.5x FY12E. While sector revenues and margins are likely to remain under pressure over the next 2-3 quarteRs  due to hypercompetition, Bharti remains best placed given low capex intensity, unlevered balance sheet, and scale advantage. We maintain Buy with a revised DCF based price target of Rs 414 (implied EV/EBITDA of 8x FY12E).