‘Telecom space uncertain, but some steam left in Bharti

Posted on January 19, 2012. Filed under: Uncategorized |

In an interview to CNBC-TV18, Sachin Gupta, telecom analyst at Nomura says MTN's fall won't have much impact on Bharti as the company has registered consistent progress in terms of EBITDA.

The government's regulations are likely to have an impact on the telecom sector as a whole and keep investors at a bay.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Let me ask you about the Nigerian situation and how are you summing it up because MTN fell 9% last wee as we hear talks about discontinuation of fuel subsidies etc. Do you think Bharti's African earnings could be at risk?

A: There will be some impact on the earnings, but I don't think we are quite concerned about this business at this stage. Bharti has been transitioning in terms of the earnings improvement quite consistently. In the last quarter they were running by 27% EBITDA margin.

The company still seems relatively confident that they can get up to 35-40% EBITDA margins in the next couple of years. We might see some hiccups here and there, but there is still a lot of scope left, there is a lot of opportunities left in the market. Hence we are not concerned from macro perspective at this stage.

Q: What about 3G roaming agreement band where the hearing is coming up today, do you expect that to be disallowed eventually?

A: Not only 3G roaming, but also are lot of other regulation that are playing at the moment. Sitting in India or outside India, it is hard to gauge or have a real feel of what is happening behind the scenes. How the whole thing is likely to be impacted with the government as undertaking on such a large magnitude of revisions in terms of spectrum, licence for renewals etc. But the timing of that is very short. So, we just have to see how the whole thing plays out but that is one thing that's likely to keep investors at bay, there is regular uncertainty in the sector as a whole.

Q: Reliance Communications went up quite a bit last week on hope that a private equity deal might be on the verge of getting stuck. Do you see balance sheet relief coming anytime soon for Reliance Communications and how are you approaching that name now?

A: That would be the biggest catalyst for the company. That company has been reviewing a number of different strategic divestments for the past 12 months be that in the form of tower sales or offloading stake in some of the other assets. That hasn't played out yet, if and when that happens the stock will get significantly rerated.

One of the big concern for Reliance is the balance sheet or the higher level gearing the company has. That pretty much has been overshadowing some of the operating trends where the company has done decent job in the past two-three quarters and that's something lot of people are waiting for.

There is a lot of speculations from time to time, their foreign partner might be looking to invest in the company, but nothing yet has played out. Even from a lot of foreign guys perspective the Indian regulatory environment is still unclear. That is one question mark which may not be removed anytime soon.

Q: What is your general view on the sector now in India, are you constructive or are you sceptical?

A: We are relatively sceptical, even though we have a neutral call on the stocks at the moment. Compared to lot of the regional telecos the Indian telecos looks very cheap. Bharti and Idea are two names where we seem to have more interest. They are trading anywhere between 15-20 times one year forward earnings, which is not cheap compared to other regional telecos.

Secondly, they are definitely improving on the operating front. But the element of the surprises on the upside has been somewhat limited compared to what the consensus has been forecasting. Thirdly, it is on regulations and it is very hard to put a financial figure on how everything is likely to unfold.

Q: How do you see the currency issues panning out for stocks like Bharti?

A: The currencies are definitely one of the biggest headwinds in the past two-three months for stock like Bharti and other names as well. Bharti currently has about USD 13 billion in debt. From what we understand based on the discussion with the company is about USD 2 billion of that is exposed to the movements at the P&L level.

In the September quarter, the company had about 2.3 billion worth of Fx losses. We are expecting the same in the current quarter as well. That will definitely have some adverse impact on the P&L. For lot of foreign shareholders as well this is one concern, but they need to consider the realised gains and losses they make on the investment as well. If the rupee continues to depreciate, that can erode some upside in the share prices which some people maybe anticipating.

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