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| Summary of Contents STOCK UPDATE Bharti Airtel
Recommendation: Hold
Price target: Rs450
Current market price: Rs403 Price target revised to Rs450 Key points - Bharti Airtel has seen renewed investor interest lately on the back of three key reasons: (1) the easing of concerns related to an aggressive (and potentially disruptive) launch of services by Reliance Jio (Mukesh Ambani's second innings in the telecom business); (2) a strong performance in Q1FY2015 (when its domestic operations showed a strong volume growth and uptick in realisation per minute); and (3) efforts taken to reduce debt and unlock value (through initiatives like selling passive infrastructure, ie telecom towers, in African operations). We find these developments satisfactory but the weakness in the African operations remains a concern for us.
- Additionally, we also believe that the bidding in the forthcoming spectrum auctions especially for the 900Mhz band in the A-category circles could be aggressive since the two other incumbents, Idea Cellular and Vodafone, would be interested in acquiring the limited uninterrupted 5Mhz blocks in certain circles to consolidate their leadership position.
- Contrary to the consensus view, we have been positive on Bharti Airtel for the past six months and the stock has delivered decent returns in spite of the pessimism post-spectrum auction last year. Even after the recent run-up, its valuations are also supportive at EV/EBITDA of 6.5x (FY2016E) despite the company's leadership position and the improving competitive dynamics of the sector. Thus, investors should continue to hold the stock and look to accumulate it on declines. Bharti Airtel remains our preferred pick in the telecom sector. Consequently, we maintain our Hold rating on the stock but revise its price target to Rs450 (partly due to the rolling-over of the valuations to the average of the FY2016 and FY2017 earnings estimates and partly to reflect the improving business conditions).
VIEWPOINT Gulf Oil Lubricants
Current market price: Rs313
View: Positive Re-structuring to trigger re-rating in line with peers Key points - Demerged entity a pure play on lubricant business: Gulf Oil Lubricants (GOL) was demerged from Gulf Oil Corporation (GOC) and was listed on the bourses on July 31, 2014. GOC was engaged in real estate, mining and energy businesses apart from business of lubricants. However, GOL was the most profitable and major earning driver for GOC. Post-demerger GOL has become a pure play on the lubricant business and the management could increase its focus on the business too which could unlock value by re-rating in line with peers.
- Incremental capacity and softening crude prices to drive earnings: GOL is expanding its existing capacity (running at 80% utilisation) in Silvassa from 75,000kl to 90,000kl and commissioning a greenfield project of 75,000kl in Chennai with a capital expenditure of Rs170 crore. The benefits to the earnings will accrue in FY2016 and FY2017. We believe the incremental capacity would drive the earnings as both the consumer industries, automobiles and industrials, are on the verge of a recovery now. Further, the softening of crude prices in the global markets (crude has already fallen to a 16-month low) would bring down the cost of input (base oil) and as the geo-political tensions (the Ukraine-Russia crisis) subside the crude prices will soften further in the coming months (which will be a near-term earnings trigger).
- Among the top 3 brands and poised to gain further market share: GOL has increased its market share from 5% to 7% now in the Indian lubricant market. It remains among the top three brands with a strong brand recall. The company has shown sound operating track record in the last six to seven years and it is important to note that its price realisation growth has been consistently around 5-6%. Going forward, the management aims to grow the business at around 10% (which is 2-3x the industry growth rate of about 2-3%) over FY2014-19 as it intends to grab incremental market share with brand development, additional tie-ups with original equipment manufacturers and higher distribution network. The number of distribution outlets has grown from 30,000 to 55,000 outlets in the last five years and the management aims to take it to 75,000 outlets in the next three to four years.
- High-quality business demerged; valuation to catch up with comparable peer: Earlier, the high-quality (high-margin with pricing power, strong return ratios and healthy free cash flow generation) business of lubricants was clubbed with the other low-margin businesses of GOC. Hence post-demerger, we see potential of value unlocking in the demerged entity, GOL, as it would be now directly comparable to Castrol India. With Castrol India trading at close to 33x one-year forward earnings and GOL trading at almost half of the valuation at 17x, GOL deserves a better valuation multiple with a 40% return on equity and improving earnings trajectory in the next three years. We believe the discount to Castrol India would decline gradually. Thus, we see a potential upside of 20-25% to the stock price in the next three to six months.
- Concern: GOL pays royalty to the parent company at 5% on its domestic sales and at 8% on its exports. However, any further hike in the royalty rate could affect the margin of the company.
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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