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Bharti Airtel – Downgraded to Hold

February 19, 2008

Breaking NewsIn a report released just a while ago, Deutsche Bank [DB] AG has downgraded Bharti Airtel to HOLD from buy. DB is bullish on the long-term sector growth compared to the street and believe that the sector’s period of sustained out-performance is behind us. Bharti led to an exponential growth and a large revenue base (c18bn wireless revenues in 6-7 years) – a feat unmatched by any other sector in the last five years. However, both growth and margins are likely to be impacted as operators move deeper into the rural areas in search of revenues. A look back on Hindustan Unilever’s past performance reflects a similar dynamic.

With the entry of new GSM players into the market, expect revenue/min to fall 16% p.a for the next two years (prev est 10%). The vigorous infrastructure sharing efforts reflect the strategic challenge for operators over the next 2-3 years.

Bharti capex at Rs 360bn during FY08-10E compared to cash flow from operations of Rs 429bn. Bharti is likely to end FY08E with a capex of Rs133bn and management has indicated a capex of cRs 120bn($3bn) in FY09E.

DB expects Bharti to Rs 35.26 for FY08, Rs 44.69 for FY09 and Rs 51.35 for FY10. DB sets a target price of Rs 860/ share based on DCF and adds that Telecom sector may not outperform in the near term. In a somewhat bold move, DB does not ascribe any extra value to Bharti’s tower sharing initiatives through its 3-way JV of Indus towers. The presence of minority shareholders in the tower company will constrain Bharti from extracting the full value of the sharing.

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