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Bharti Airtel
Biggest Winner Of Regime Change
Bharti Airtel is India’s largest telecom company both in terms of
subscribers and revenues. As of September 2010, the company had
subscriber and revenue market share of 20.8% & 31.6% respectively in
India. The company provides services in 19 countries with a mobile
subscriber base of over 200mn. The company has acquired 3G
spectrum in 13 out of 22 circles for Rs123bn and is expected to launch
3G services in 1QCY11.
Key Investment Drivers
3G will help Bharti consolidate its leadership position further in
India: Bharti is in a better position to benefit from the launch of 3G
services due to its subscriber and revenue market leadership in 9 and 10
areas respectively where it has a 3G presence. Also, in all the 3G circles,
the company’s ARPU is higher than the average ARPU for that circle. This
reflects the company’s subscriber quality and its ability to monetise 3G
services. Also, the presence of only four 3G players in each circle
(compared with 11-12 players providing 2G services in each circle), will
help Bharti improve its market share.
A turnaround in Africa could be a key catalyst for Bharti’s share
price: During the first quarter of operation (2QFY11), Bharti managed to
improve subscriber base while maintaining ARPU. Launch of the Airtel
brand in Africa during the quarter will help the company consolidate its
position further. Also, the network outsourcing measures undertaken by
the company will help improve margins in the coming quarters.
Largely insulated from the current regulatory chaos: Bharti has
received incremental 2G spectrum (beyond 6.2MHz) in 13 out of 22
circles. Based on the Telecom Regulatory Authority of India’s
recommended methodology, for Bharti, we estimate potential liability on
this incremental spectrum will likely be Rs43.5bn (Rs11.5/share). Our
analysis suggests that once the regulatory dust settles, Bharti will
consolidate its position further and emerge as a stronger player in the
domestic market. We will explain this point in greater detail in our
forthcoming thematic on Indian Telcos.
Valuation, Recommendation and Outlook
Our revised target price for Bharti stands at Rs425/share (previous, Rs380).
This includes consolidated DCF-based valuation of Rs445/share and negative
contribution of Rs20/share (Rs11.5 for excess spectrum and Rs8.5 for renewal
of licence in 2015) on account of regulatory charges. The stock is currently
trading at 7.1x FY12E EV/EBITDA and our target price implies 8.2x FY12E
EV/EBITDA. We reiterate our BUY stance.
Key risks: (1) None or poor uptake of 3G services, leading to lower revenue
growth and pressure on margins; (2) potentially unfavorable regulatory
decisions during the months ahead; and (3) a delay in turnaround of the
African operations.
Bharti Airtel is India’s leading telecom company with
operations in 19 countries across Asia and Africa. The
company provides mobile, fixed line, broadband, IPTV,
DTH, turnkey telecom solutions for enterprises and
national and international long distance services to
carriers. The company has over 200 million customers
across its operations. The company also provides
passive infrastructure services in India through its
subsidiary Bharti Infratel (32,000 towers) and Indus
Towers — a joint venture between Bharti Infratel,
Vodafone and Idea Cellular (106,000 towers).
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