Motilal Oswal: Bharti Airtel: Out of turbulence

Bharti Airtel: Out of turbulence
US$10b free cash by FY14: Bharti has been impacted by competitive pressures in the
domestic market and uncertainty on Africa acquisition and 3G spectrum payouts. However,
with peak coverage capex and 3G payments through, Bharti's India business is poised to
generate substantial free cash. While the acquired Africa business would remain in an
investment mode, we expect it to be self-sustaining. Bharti is set to enter a period of
sustained high FCF - we expect >US$10b cumulative free cash generation by FY14 and
estimate FCF of Rs28/ share in FY12 and Rs37/share in FY13 from India and South Asia.
FCF generation to be strong: We believe that Bharti is entering a phase of strong FCF
generation in its domestic business, as peak coverage capex is behind, enhanced tower
sharing has supported capex savings, and acquisition of 3G spectrum in 13 circles will
enhance capacity in the urban centers. We believe FCF would be a key metric for Bharti,
going forward. We expect Bharti's India and South Asia business (excluding the 3G spectrum
payments and Africa business acquisition) to generate FCF of Rs22/share in FY11 and
Rs28/share in FY12.


Regulatory uncertainty, MNP, high gearing/forex exposure pose challenges: The
final policy on government levies and 2G spectrum allocation is awaited and remains an
overhang. While competitive intensity has declined, there could be aggressive marketing by
new GSM entrants post MNP implementation (in 3QFY11). Bharti's relatively high gearing at
net debt/equity of 1.4x and net debt/annualised EBITDA of 3.4x makes it vulnerable to
potential interest rate increases and forex fluctuations. Assuming ~US$10b forex exposure,
Bharti gets impacted by Rs2.6/share for every Re1 depreciation in INR v/s USD.
Raising price target to Rs430; maintain Buy: We upgrade our SOTP based target
price to Rs430-Rs488/share for India & SA business (8.7x FY12E EBITDA; 15% discount to
average 5-year EV/EBITDA of 10.2x) plus Rs84/share for Africa business (7x proportionate
FY12E EBITDA) less Rs141/share FY12E net debt of Rs533b. Our valuation implies a negative
value of Rs55/share for the Africa business. Maintain Buy.