Bharti Airtel (Hold); Banking (Banking better)

STOCK UPDATE

Bharti Airtel
Cluster: Apple Green
Recommendation: Hold
Price target: Rs453
Current market price: Rs435

Downgraded to Hold

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      Bharti Airtel (Bharti) and MTN Group have disengaged from their discussions related to the proposed merger deal between the two companies as announced earlier on May 25, 2009. This comes on the back of South African government?s refusal to accept the deal in the current form primarily due to its insistence on the dual listing structure, which is not permitted by current regulations in India.
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      Cancellation of the deal would remove the overhang related to uncertainty of the proposed deal. Since the announcement of the deal Bharti?s stock has under-performed the BSE-30 index (Sensex) by 20%.
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      We believe that Bharti will now focus on its strategy of expansion in rural areas and successful launch of 3G services in India. Also, the company would continue to look out for overseas expansion, as it is important for it to diversify operations from saturating and highly competitive Indian telecom space and to sustain high growth.
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      We maintain our price target of Rs453, however we are downgrading the stock to Hold recommendation due to limited upside from current levels and as we do not see any near-term catalyst for re-rating the stock. At the current market price, the stock trades at 14.4x its FY2011 estimated earnings and 8x enterprise value (EV)/EBITDA

SECTOR UPDATE

Banking

Banking on better credit demand, easing asset quality concerns
Banking stocks have rallied sharply recently sending the banking stocks under our coverage close to our price objectives. In terms of valuation, current levels are not exactly cheap. Hence, any upside in banking stocks would be driven by better fundamental outlook only. We believe, sustained recovery at macro level would lead to further improvement in outlook towards two key parameters for the banking space?credit growth and asset quality.

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      Credit demand environment: While credit growth has been on a slide and likely to remain weak in Q3 (due to high base effect), we are optimistic about revival in the credit growth from Q4FY2010 onwards. We expect the industry credit growth to reach ~19% by the end of the current fiscal.
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      Further easing in asset quality concerns: Our recent interaction with the management of banks indicate default rate of 10-20% on assets restructured in the last two quarters. This is lower than our previous estimate and hence we are now factoring in ~30% default rate on restructured loans.
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      As a result of revision in our key estimates, especially those related to asset quality, we are upgrading our price target on the banks under our coverage. Among public sector banks, we prefer Bank of Baroda and IDBI Bank, while in private banking space our top pick is HDFC Bank.