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Citi recommends BUY on Bharti Airtel and Reliance Communications

January 7, 2007

Citigroup wireless research group in its report is extremely bullish on the Indian wireless growth story. It has pegged the Indian mobile phone subscriber tele-density at 27% at the end of March-2009. It is not now that Citigroup has turned bullish on the Indian wireless space, but right from May-2006, its Asian Telecom head was very optimistic about Bharti Airtel Ltd.

Bharti Airtel Ltd: Buy/Low Risk (1L) with a target price of Rs750

According to Citi research, it estimates an FY06 – 09E EPS CAGR of 46.5% or more than double that of the broader market report and expects EPS of Rs 20.7, Rs 30.3 and Rs 37.5 for the FY ending March in 2007, 2008 and 2009 respectively. Valuations adjusted for growth (EV/EBITDA of 11.8x FY08E) still look reasonable. 12-month forward target price of Rs750 (previously Rs600) is based on DCF, which suggests a fair value of Rs749 as of March 2008 (rolled forward from March 2007). This is based on WACC of 10.8%, terminal growth rate of 3.5% and beta of 0.9 (implying a terminal EV/EBITDA multiple of 8.0x).

Additionally, most regulatory concerns are behind us and 3G recommendations, though discomforting, cannot derail the growth path, in our view. The strategic shareholding of SingTel, which the company has increased over time, leaves us comfortable with execution issues and new initiatives (such as electronic recharge, vendor tie-ups or a One Alliance partnership).

Reliance Communications Ltd: Buy/Medium Risk (1M) with a target price of Rs570.

According to Citi research, it estimates an FY06 – 09E EBITDA CAGR of 63.4% and expects EPS of Rs 13.7, Rs 20.8 and Rs 28.8 for the FY ending March in 2007, 2008 and 2009 respectively. RCOM’s 12-month target price of Rs570 is based on 11.2x FY09E EV/EBITDA, similar to the implied target EV/EBITDA for Bharti based on our DCF estimate.

RCOM’s valuation multiples are likely to closely track Bharti’s due to the liquidity overflow from the latter, notwithstanding the risk of technology transition. In addition, the risks associated with technology shift to GSM may get significantly mitigated in case RCOM makes a successful bid for Hutch Essar, besides according it a clear market leadership. As a secondary valuation methodology, we apply a target P/E of 27.5x FY08E for a fair value of Rs570.

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