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Bharti Airtel

Bharti Airtel 
Recommendation: Hold
Price target: Rs340
Current market price: Rs281

After dismal Q3FY2013 results and the negative regulatory developments appearing in the media pertaining to the telecom sector in general and Bharti Airtel in particular, Bharti Airtel’s stock price plummeted (-20% in two months) and underperformed the benchmark indices (-12% on relative basis). Taking cognizance of the improving domestic business environment, we believe that the quantum of the stock price decline is unwarranted and thus an opportunity for the investors to accumulate the stock.

Negative developments that hammered stock price:

Event 1: CBI makes Sunil Mittal co-accused in 2G excess spectrum case.

·         On Tuesday March 19, 2013, the Central Bureau of Investigation (CBI) court summoned Bharti Airtel (Bharti)’s founder and managing director Sunil Mittal, along with two other competitor executives, Ravi Ruia and Asim Ghosh, to face criminal charges in a case pertaining to the allocation of excess spectrum to the concerned companies.

Our assessment and analysis

·         We believe that Sunil Mittal’s inclusion in the excess spectrum charge sheet is sentimentally negative for Bharti. However, the financial impact of the same remains meagre (~Rs425 crore; less than 0.5% of revenues as well as balance sheet size).

Event 2: DoT orders Bharti to stop 3G services in seven circles, slaps Rs350 crore fine

·         The Department of Telecom (DoT) ordered Bharti to stop providing 3G services in Kolkata, Maharashtra, Gujarat and four other regions cracking the whip on companies offering 3G services in circles where they did not have permits.

·         The DoT also slapped a fine of Rs50 crore per circle, translating into a total fine of Rs350 crore for Bharti for the same.

Outlook and valuation After the recent developments, Bharti’s stock reacted negatively declining by around 10% in two days and the risk-reward has turned favourable. However, we believe that the regulatory uncertainties and the recent developments would limit any upside in the near term. Thus, we continue to maintain Hold rating on the stock with a revised price target of Rs340.