Bharti Airtel : Recommendation: Buy

STOCK UPDATE

Cluster: Apple Green
Recommendation: Buy
Price target: Rs789
Current market price: Rs588
Price target revised to Rs789

Key points 

• The Telecom Regulatory Authority of India (TRAI) has announced another set of amendments to the interconnection usage charges (IUC) regulation. The new regulations are applicable from April 1, 2009 and the key changes proposed are as follows:

  • A reduction of 10 paisa in the termination charge (TC; a charge levied by any telecommunications [telecom] operator on the other operator for the termination of a call on its network) to 20 paisa per minute for all types of domestic calls. 

  • An increase of 10 paisa in TC for the incoming international long distance (ILD) calls to 40 paisa per minute. 

  • A reduction in the transit charge from Level-II Trunk Automatic Exchange to Short Distance Charging Area (SDCA) or intra SCADA by around 5 paisa to 15 paisa per minute now.

• Given its large subscriber base, Bharti Airtel Ltd (BAL) receives a higher number of incoming calls from the networks of the other operators. Consequently, the reduction in TC for the domestic calls will have a negative impact of around 6.1% on BAL’s estimated earnings for FY2010.

• However, the negative impact would be partially mitigated by the positive impact of 1.6% on account of the increase of 10 paisa in TC for the ILD calls. Thus, the net impact of the changes in IUC regulation would be limited to 4.5% on BAL’s earnings for FY2010.

• At the current market price the stock trades at 11.2x FY2010 enterprise value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA) and 6.4x FY2010 revised earnings estimate for FY2010. We maintain our Buy recommendation on the stock with a revised price target of Rs789.