Bharti (Maintaining revenue leadership) Recommendation: Buy, Price target: Rs453 - Sharekhan

• For April-June 2009 quarter, Bharti Airtel (Bharti) has been successful in strengthening its gross revenue (GR) market share to 33.8% and maintaining its subscriber market share at 24%, despite the tough competition due to entry of new players. Further, the company continues to maintain its GR leadership in 13 out of 23 circles in India. 
• Despite strong fundamentals and revenue market share, Bharti?s stock price has relatively under performed the Sensex (the stock rose 32% since April 01, 2009 versus the 50% increase in the Sensex). This is mainly due to four reasons: 1) Uncertainty looming around the proposed Bharti-MTN deal; 2) Deterioration in key operating metrics like average revenue per user (ARPU) due to intensifying price competition; 3) Expected shift in subscriber and revenue market share of telecom operators with the anticipated introduction of mobile number portability (MNP); and 4) Introduction of per second billing system by Tata DoCoMo and Shyam-Sistema would further intensify the price war. 
• We believe that MTN?s implied deal valuation of 5.7x enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBITDA; CY2009E) is not expensive and in fact substantially lower compared to the EV/EBITDA multiple of 8x FY2010E for the Indian telecom companies. Further, as a long-term strategy, Bharti-MTN merger deal makes sense as it provides Bharti entry into 21 fast-growing and under-penetrated countries of Africa and the Middle East. Moreover, the operating metrics (ARPU and EBITDA margins) of MTN is better as compared to Bharti. 
• In our view, the introduction of MNP would have impact on subscriber and revenue market share of Indian telecom operators but only for short term because: 1) The mobile penetration level in India is very low at around 30%, which might provide growth opportunities to the players; and 2) Tariff rates are already very low in India which may not lead to price war with the introduction of MNP.
• Tata DoCoMo (TD) has introduced its per-second billing plan and offers call at the rate of 1paisa/second?the lowest in the country. We analyse that at the call rate of 1paisa/second all operators will generate a negative EBITDA margin of 22%, as the cost incurred will be higher than the price charged to the customers. We believe matching this offer would imply a loss for all operators. We do not expect even TD would be able to sustain this plan for long once its network capacity utilisation rises. 
• We maintain our positive stance on Bharti on the back of: 1) The company?s low cost business model that would help it sustain its EDITDA margin in the range of 40-42% despite the increase in competition, 2) Bharti?s superior execution capabilities; and 3) Bharti?s healthy return ratios (return on net worth of 30% and return on capital employed of 26% in FY2009). At the current market price, the stock trades at 13.4x its FY2011 estimated earnings and 7.4x EV/ EBITDA. We maintain our Buy recommendation and price target of Rs453 for the stock.