BNP Paribas: Upgrade Bharti Airtel to BUY

Riding 3G and rural growth
􀂃 Stable tariff and minutes growth to drive wireless revenue.
􀂃 Best positioned to monetize on 3G opportunity in India.
􀂃 Zain impact limited; TRAI 2G recommendations unlikely to be accepted.
􀂃 Upgrade to BUY; TP of INR440 (core: INR452; & Zain: -INR12).
Stable tariff & minutes growth
We expect the majority of the impact of
the tariff war to be reflected in the ARPM
in Bharti’s 2QFY11 results. We do not
expect new entrants to initiate another
round of tariff cuts below ARPM of
~INR0.40. Bharti has reported a
sequential improvement in the minutes
carried after bottoming out in 2QFY10.
We estimate the sequential growth in
volume of minutes, stable ARPM and
improvement in Africa operations will
enable EPS CAGR of 26% over FY11-13.
Best positioned to monetize 3G
We think that Bharti is best positioned of
Indian telecom operators to benefit from the 3G and BWA auction by
virtue of the superior spending power of its subscribers, as reflected in its
industry-leading ARPU. Based on our analysis, 5MHz of 3G spectrum is
adequate to decongest voice and accommodate demand for wireless
broadband services. We think that the capex required for 3G will be
minimal, and that operators can control the pace of deployment by falling
back on their 2.5G network beyond top cities. We see a business case
for Bharti’s 3G investments with data ARPU of INR150 and 3G capex per
subscriber of USD100.
Zain and regulatory drag on valuations within limits
We cut our FY11 and FY12 EPS estimates for Bharti due to higher
interest outflow and dilution due to the Zain acquisition. We attribute a
negative value of INR12 per share for Zain Africa, using a DCF valuation
method. The recent 2G recommendations, which were perceived to be
negative for the incumbents, have been referred back to an empowered
group of ministers for review, and are unlikely to be accepted in their
current form. In the worst case, we estimate an impact of INR51 on our
fair value in case recommendations are implemented without change,
which still provides upside potential from current levels.
Upgrade to BUY (from Hold) with TP of INR440.00
We upgrade Bharti to BUY. We raise our SoTP-based TP from INR300 to
INR440.00 (implying 8.6x FY12 EBITDA). We now value the core India
operations at INR452/share based on DCF, compared with EV/EBITDA
previously. We attribute a negative value to Zain operations at INR12 per
share, after accounting for the acquisition debt and minority interest. Key
risks to our thesis are: an outbreak of a tariff war in Africa leading to
lower-than-expected profitability from Zain; African currency depreciation;
poor response to 3G; negative regulations, and another round of tariff
cuts with the launch of MNP in India.