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RCom + Bharti Airtel, Mixed Recommendations

November 9, 2007

With Anil Ambani’s nexus in the Telecom Ministry becoming obvious form out of turn favors Reliance is receiving, causing a huge loss to Government exchequer. Sunil Mittal is not going to sit quiet this time and refused to withdraw the petition filed against DoT.

However, here are some mixed views from Research Analysts on the stocks of Bharti Airtel and Reliance Communications.

HSBC Global Research:
Solid 2Q08 results; strong subscriber growth and margin expansion offset by 6% q-o-q drop in ARPU. Increase capex forecast; more towers to be built to meet higher subscriber targets imposed by regulator. Maintain Overweight but trim DCF-based target price by 3% from INR1,170 to INR1,140 to reflect, higher capex, lower subscriber quality and faster subscriber growth.

Citigroup research has downgraded Reliance Communications and Idea Cellular to HOLD and maintained a BUY rating on Bharti Airtel with target price of Rs 1,170.

DSP Merrill Lynch is of the view that RCom may outperform in the short term, however, their pick for long term is still Bharti Airtel with a bear case price objective of Rs 1020 and a base case price objective of Rs 1,175. It maintains a BUY recommendation with a 12 month target price of Rs 1,300.

HDFC Securities says move with sentiments and make money: Bharti is trading at 11.3x FY09E EV/EBITDA, which is at 23% discount to RCOM’s 13.9x FY09E EV/EBITDA. The value migration from Bharti to RCOM is apparent during last quarter as Bharti has been trading historically at 10-15% premium to RCOM. This has vindicated our call of RCOM outperforming Bharti in the short to medium term. This is due to uncertain regulatory policies which could affect Bharti in respect of subscriber criteria for additional 2G spectrum allocation and spectrum usage charges.

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