Visit http://indiaer.blogspot.com/ for complete details Bharti Airtel - REDUCE- Regulatory uncertainty creeps up
Newspaper reports suggest that TCIL (Telecom Consultants of India
Ltd), the minority holders in Bharti Hexacom (Rajasthan circle
operations), will exit their 30% stake. We believe Bharti should be
reserve price of Rs18bn, as carried in media reports, which may lead
to ~2% EPS improvement. However, regulatory uncertainty around
interconnect charges, roaming charges and tariff transparency shows
that after a lull, uncertainty returns. We retain REDUCE.
Valuations at 9.7x trailing PE reasonably attractive, if the deal
happens at a valuation of Rs60bn: TCIL is a government-owned telecom
consultancy that was looking for an exit through the private route, as Bharti
wasn’t paying dividends and neither were there any plans to list the entity.
While the urgency shown by the government in disinvestment this year
makes this deal likely, lack of interest from other players could buy Bharti
some time and ensure that the valuation will not be materially more than the
reserve price.
As per the FY10 annual report of the company, Hexacom reported a PAT of Rs
6.2bn and an EBITDA of Rs10.1bn. Media reports suggest a reserve price of
Rs18bn for the 30% stake, translating to a Rs60bn valuation.
Hence, a valuation of ~9.7x on a trailing PE basis (and ~6x on trailing
EV/EBITDA) seems reasonably attractive. In comparison, Bharti trades at
~14x trailing PE. Since Bharti is the majority shareholder, we see no
imminent threat of counter-bidding from other players, and hence the final
price will be close to the reserve price.
EPS accretion from the transaction could be 1-2%, at a Rs60bn
valuation and an assumed 7% funding cost: Assuming 100% ownership
in Hexacom, Bharti will add a further Rs2.3bn (~30% of FY10 PBT) to its pretax
bottom-line. Also, an estimated funding cost of 7% for the payout
translates to an annual expense of Rs1.3bn.
bharati airtel share price decline 245
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