Motilal oswal:: Bharti Airtel: Buy with a target price of Rs410/sh

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Bharti Airtel: Operating environment in India continues to improve; Africa
business to be self-sustaining; maintain Buy
Interaction with senior management at Bharti reinforces our view that operating
environment in the India business continues to improve while Africa business is expected
to be self sustaining on cash flow basis. We continue to view Bharti as net beneficiary
of on-going regulatory upheaval and remain positive given improving operating and
regulatory environment in India and management confidence on Africa business. Bharti
trades at 7.5x FY12 proportionate EV/EBITDA. Maintain Buy with a target price of
Rs410/sh.

Key highlights
 Initial signs of elasticity in the Africa market are encouraging with significant
room for MOU expansion.
 Except for high tariffs there is no structural reason for MOU in Africa to be
significantly lower than India (112 min in Africa vs 454 min in India) implying
significant potential for MOU build-up going forward.
 Margin improvement in Africa business is likely only in FY12 due to expenses
being incurred on integration and restructuring.
 Bharti management remains confident that Africa business would be selfsustaining
on cash flow basis.
 Recent discussions with the communications ministry have been constructive
and Bharti expects to be a net beneficiary of the ongoing regulatory revamp.
 Operating environment in the India business continues to improve with lower
pressure on tariffs and strong traffic growth trends.
 The management believes that 3G presents a significant opportunity and has a
viable business case despite the high spectrum pay-outs.

Bharti Africa: Improving traction visible in KPIs; margin improvement likely
from FY12
 There has been pressure on the Africa margins since the company is still engaged in
integration and re-structuring activities.
 Bharti has already selected its outsourcing partners for Africa.
 The initial signs of elasticity have been encouraging.
 While RPM declined from 7.2 US cents in 1QFY11 to 6.6 US cents in 2QFY11, MOU
per subscriber increased to 112 minutes per month (vs 103 mins in 1QFY11).
 Bharti has been initially focusing on adding network capacity within the coverage area
before expanding the coverage footprint.
 Apart from MOU elasticity, data services is another critical growth driver for African
operations; Bharti already has 3G spectrum in 9/16 countries.
Africa business to be self-sustaining on cash flow basis
 Bharti management remains confident that Africa business would be self-sustaining
on cash flow basis.
 Bharti believes it has a superior capex and opex model which would drive significant
cost savings.
 Competitors to find it difficult to replicate Bharti given the scale differential and lack
of experience in using a managed services model.
Operating environment in the India business continues to improve
 There has been rationality and stability in the competitive intensity in the India business.
 Lower tariff pressure and strong operating environment should drive superior growth.
 Bharti remains confident of strong FCF in the India business that would be used to deleverage.
Management confident of a viable 3G business case despite high spectrum
payout
 Bharti believes that 3G presents a significant opportunity and has a viable business
case despite high spectrum payout given low broadband penetration (<1%) and data
revenue potential.
 Bharti has ‘semi-closed wallet’ license from the RBI which would be used to rollout
m-commerce services.
 The company believes that other similar utility services like m-banking, m-education,
m-health will strongly pick up given strong demand and lower cost of the mobile
platform v/s other mediums.

Valuation and view
 We believe that a potential policy revamp would be positive for Bharti.
 We expect India business revenue and EBITDA growth to rebound driven by: (1)
normalization of traffic growth, (2) abating tariff pressure, and (3) launch of 3G services.
 Bharti trades at proportionate EV/EBITDA of 9.7x FY11E and 7.5x FY12E.
 Reiterate Buy with a price target of Rs410 (8.5x EV/EBITDA for India business and
7x EV/EBITDA for Africa business).