With spectrum auction out and the M&A rules defined, the telecom sector is finally getting out of the regulatory interference which is a big positive for all the telecom players in India. Though the debt level of the sector will further rise, consolidation and tariff rationalization will make the leverage position of the sector comfortable in next 1-2 years. Both the big telecom players Bharti and Idea Cellular appears attractive for investment at current levels but Bharti Airtel in particular is very attractively poised at current price of around Rs. 290. Here is why?
1. Back of the envelope calculation suggest limited downside and reasonable upside. Lets consider following valuation points assuming around Rs.92000 crores of revenue, Rs.30000 crores of EBIDTA and net debt of Rs.60000 crores for FY-15.
@ 6 times EV/EBIDTA expected enterprise valuation = Rs.1,80,000 crores. With debt at Rs.60,000 crores, expected market value= Rs.1,20,000 translating into a market price of around Rs.300
@ 7 times EV/EBIDTA, expected enterprise valuation = Rs.2,10,000 crores. With debt at Rs.60,000 crores, expected market value= Rs.1,50,000 translating into a market price of around Rs.375
@8 times EV/EBIDTA, expected enterprise valuation = Rs.2,40,000 crores. With debt at Rs.60,000 crores, expected market value= Rs.1,80,000 translating into a market price of around Rs.450
So if one holds the stock for a year, the worst case target price for the stock is estimated at around Rs. 300 and in the best case it could be as high as Rs.450.
2. Fundamentally Bharti Airtel is further establishing it's leadership position in the market as it acquired loop telecom and became no.1 player in Mumbai as well. With 200 million plus subscriber base in India and around 30% revenue market share, Bharti Airtel could witness high revenue growth in coming years due to tariff rationalization and data growth.
3. Bharti Airtel is also in advanced stage to sell it's tower assets in Africa which could fetch around $1.5 to $2 billion and reduce it's net debt level significantly. If the deal happen in next one year it could potentially increase the market value by another 9000 crores to 10000 crores inline with the reduction in debt.
4. Rel Jio is unlikely to play price war even if it enters voice space and fear of another price war appears largely unjustified. Rel Jio might create competition in data space which will increase penetration and acceptance while voice prices for the industry should go up by at least 6-7 percent every year.
In conclusion, Bharti Airtel appears very attractively priced at around 280 - 290 levels and one can consider accumulating the stock in this range for a holding period of 2 years.