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Shift in policy is a long-term positive; maintaining Buy, Rs460 target price
In a significant policy shift, the Indian telecom minister has signalled that spectrum
will be auctioned rather than bundled with a license as per the current practice.
The auction format bodes well for lower cost, spectrum constrained players such
as Bharti as its strong cash flow profile should aid spectrum acquisition. Our Buy
rating reflects a) reducing competitive intensity, stabilising tariffs and wireless
margins in India; b) the positive impact of 3G rollout; c) likely improvement in the
African operations; and d) valuations (FCF yield of 8.6%).
Market-based, one-time fee unlikely
Based on the statements made by the minister, we believe the government is
prepared to defend its prerogative on sector policy, which has been largely
promotional in its thrust. Competition and coverage have taken precedence over
revenue generation. Therefore, a one-time, market-linked payment for past
allocations beyond 6.2 MHz to companies such as Bharti may not comply with the
government’s extant policy objectives. Hence, we believe such an outcome is
unlikely – our view disagrees with market expectations.
3QFY11E – we expect stability in both Indian and African operations
Key metrics to watch for Indian wireless operations: rev/min – Rs0.44 (flat QoQ),
total minutes – 202bn (+32% YoY). We also expect revenues and margins in the
African operations to remain stable at 2Q levels. On a consolidated basis, our
forecasts are Rs159bn revenue, Rs54bn EBITDA and Rs17bn PAT. Our forecasts
do not include the cost impact of the major brand launch in Africa and India.
Trading at 11.5x FY12E P/E and 8.6% FY12E FCF yield; risks
We value Bharti at Rs460 using DCF. At the current price, Bharti trades at a 20%
discount to its regional peers on an FY12E P/E basis. Our overall WACC is 13.8%
(a weighted average of India and Africa). For India we assume a risk-free rate of
6.4%, a risk premium of 7.2%, beta of 1.0 and cost of debt of 8%, resulting in
WACC of 13.2%. We assume Africa WACC of 16.2%. Our terminal growth rate is
4%. We expect Bharti to generate FCF of Rs281bn ($6.7bn) over FY11-13E, which
should help pay down the $12bn debt raised for Africa and 3G spectrum. Risks
include a lower-than-forecast 3G impact and higher-than-estimated capex in the
African operations.
Key highlights
3QFY11E: look for stable tariff and margin trends reflecting reducing competitive
intensity
A read-through of the results from Bharti’s two listed peers, Idea and Tata Teleservices
Maharashtra (TTML), suggests that it should witness stability in its operations. Both
companies reported flat revenue per minute and robust growth in traffic. In addition, we
await management commentary on 3G rollout and impact of MNP.
For Africa, we expect continued stability revenues and margins. While Bharti has been very
aggressive in Kenya, its revenue and EBITDA contribution is minimal and hence should
impact financials. We also await management commentary on the status of ‘managed
capacity contracts’ which have not been awarded to any vendor.
Regulatory developments – neutral to positive for Bharti
We believe regulatory developments in the recent past have been incrementally favourable
for Bharti. The report from the Auditor General (CAG) has induced the government to
examine its current license and spectrum allocation policy. Recent statements from the new
telecom minister suggest a likely shift in the spectrum policy. The government believes that
the current level of competition warrants an auction for spectrum allocation. We believe this
is a favourable long-term outcome for cost-efficient operators such as Bharti. The change in
process would also provide a better visibility on long-term competition trends in the sector.
The key market concern about Bharti in the medium term has been the likely quantum of a
one-time, market-linked fee that Bharti may have to pay for spectrum beyond 6.2 MHz. Bharti
has more than 6.2 MHz in 13 out of its 22 operating circles. Using 3G auctions as a basis, the
fee could be around Rs55bn if calculated on a retrospective basis. However, we believe the
government is unlikely to impose a market-linked fee for past spectrum allocations on a
retrospective basis. Such action may not comply with the government’s current policy, which
focuses on competition and coverage over revenue generation.
Valuation
Bharti currently trades at 12x FY12E EPS, which is a 20% discount to its regional peers (see
Figure 3). We expect Bharti to generate FCF of Rs281bn ($6.7bn) over FY11-13E and the
current market price offers an 8.6% FCF yield (FY12E).
Bharti – our key forecasts
Bharti’s top-line growth should continue to be driven by Indian operations in the medium
term. We remain conservative on revenue growth in Africa. However, we do expect margins
to improve in both India and Africa. We expect Indian margins to improve due to falling
competitive intensity and the incrementally positive effect of the rollout of its 3G network.
We expect margins in the African operations to improve as a result of cost efficiencies.
Indian telecom policy – past,
present and future
The current policy framework for the Indian telecom sector is based on a document called
the NTP’99 (National Telecom Policy). The primary thrust of the policy has been to ensure
adequate competition, drive population coverage and ensure a level playing field among
operators. With respect to spectrum, the government has endeavored to promote efficient
usage by defining ascending subscriber benchmarks and progressive revenue share for larger
allocations. Revenue generation from license issuance or spectrum allocation is not a policy
goal in NTP’99. The Indian telecom license comes with an obligation on the part of the
government to provide start-up spectrum of 4.4 MHz and an additional amount up to 6.2 MHz
based on achieving the defined subscriber base. It also imposes rollout obligations on the
telecom operator.
Key policy decisions relating to license and spectrum
Over the last decade, we note that there have been three major decisions with respect to
spectrum allocation or license issuance:1) Allocation beyond 6.2 MHz, which was the original
contracted amount under the license (since 2002) – allocated to players such as Bharti, Idea,
Vodafone, BSNL and MTNL
2) Spectrum allocation under the dual spectrum policy (in 2007) – spectrum primarily
allocated CDMA incumbents Reliance Communications and Tata Teleservices
3) Issuance of new licenses on a first-come-first-serve basis (2007) – these include operators
such as Uninor, Aircel, Videocon, Idea (new circles), etc.
All of these decisions were preceded by recommendations from the sector regulator (TRAI)
after consultation and were later accepted and implemented by the Department of
Telecommunications.
Current scenario: impasse continues
The current situation was precipitated by a report by the CAG (Auditor General) that a)
computed a presumptive loss to the exchequer due to the issuance of licenses at historical
prices and b) indicated likely irregularities in the process.
Since his appointment, the new telecom minister has made several statements, which we
believe indicate the following: 1) the prerogative of policy making lies with the government
and all actions have complied with the National Telecom Policy (NTP 99); 2) competition and
coverage have been the key tenets of the policy; revenue maximisation has not been a policy
goal and hence a presumptive loss calculation is extraneous; and 3) procedural lapses are
being investigated and will be dealt with as per current rules.
Future: significant shift in spectrum policy
Indian telecom minister Kapil Sibal signaled a major shift in the spectrum allocation policy in
an official statement. Key takeaways from the minister’s statement include:
The government now believes the sector has reached a stage where the current level of
competition warrants a market-driven process of spectrum allocation. The current practice of
bundling spectrum with a license will be discontinued
The government plans to consider adopting an auction process for allocation and pricing of
spectrum beyond 6.2 MHz.
For new players with start-up spectrum of 4.4 MHz, the balance of 1.8 MHz will be allocated
at a price determined under the new policy provided that the licenses are valid after the
current vetting process.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Shift in policy is a long-term positive; maintaining Buy, Rs460 target price
In a significant policy shift, the Indian telecom minister has signalled that spectrum
will be auctioned rather than bundled with a license as per the current practice.
The auction format bodes well for lower cost, spectrum constrained players such
as Bharti as its strong cash flow profile should aid spectrum acquisition. Our Buy
rating reflects a) reducing competitive intensity, stabilising tariffs and wireless
margins in India; b) the positive impact of 3G rollout; c) likely improvement in the
African operations; and d) valuations (FCF yield of 8.6%).
Market-based, one-time fee unlikely
Based on the statements made by the minister, we believe the government is
prepared to defend its prerogative on sector policy, which has been largely
promotional in its thrust. Competition and coverage have taken precedence over
revenue generation. Therefore, a one-time, market-linked payment for past
allocations beyond 6.2 MHz to companies such as Bharti may not comply with the
government’s extant policy objectives. Hence, we believe such an outcome is
unlikely – our view disagrees with market expectations.
3QFY11E – we expect stability in both Indian and African operations
Key metrics to watch for Indian wireless operations: rev/min – Rs0.44 (flat QoQ),
total minutes – 202bn (+32% YoY). We also expect revenues and margins in the
African operations to remain stable at 2Q levels. On a consolidated basis, our
forecasts are Rs159bn revenue, Rs54bn EBITDA and Rs17bn PAT. Our forecasts
do not include the cost impact of the major brand launch in Africa and India.
Trading at 11.5x FY12E P/E and 8.6% FY12E FCF yield; risks
We value Bharti at Rs460 using DCF. At the current price, Bharti trades at a 20%
discount to its regional peers on an FY12E P/E basis. Our overall WACC is 13.8%
(a weighted average of India and Africa). For India we assume a risk-free rate of
6.4%, a risk premium of 7.2%, beta of 1.0 and cost of debt of 8%, resulting in
WACC of 13.2%. We assume Africa WACC of 16.2%. Our terminal growth rate is
4%. We expect Bharti to generate FCF of Rs281bn ($6.7bn) over FY11-13E, which
should help pay down the $12bn debt raised for Africa and 3G spectrum. Risks
include a lower-than-forecast 3G impact and higher-than-estimated capex in the
African operations.
Key highlights
3QFY11E: look for stable tariff and margin trends reflecting reducing competitive
intensity
A read-through of the results from Bharti’s two listed peers, Idea and Tata Teleservices
Maharashtra (TTML), suggests that it should witness stability in its operations. Both
companies reported flat revenue per minute and robust growth in traffic. In addition, we
await management commentary on 3G rollout and impact of MNP.
For Africa, we expect continued stability revenues and margins. While Bharti has been very
aggressive in Kenya, its revenue and EBITDA contribution is minimal and hence should
impact financials. We also await management commentary on the status of ‘managed
capacity contracts’ which have not been awarded to any vendor.
Regulatory developments – neutral to positive for Bharti
We believe regulatory developments in the recent past have been incrementally favourable
for Bharti. The report from the Auditor General (CAG) has induced the government to
examine its current license and spectrum allocation policy. Recent statements from the new
telecom minister suggest a likely shift in the spectrum policy. The government believes that
the current level of competition warrants an auction for spectrum allocation. We believe this
is a favourable long-term outcome for cost-efficient operators such as Bharti. The change in
process would also provide a better visibility on long-term competition trends in the sector.
The key market concern about Bharti in the medium term has been the likely quantum of a
one-time, market-linked fee that Bharti may have to pay for spectrum beyond 6.2 MHz. Bharti
has more than 6.2 MHz in 13 out of its 22 operating circles. Using 3G auctions as a basis, the
fee could be around Rs55bn if calculated on a retrospective basis. However, we believe the
government is unlikely to impose a market-linked fee for past spectrum allocations on a
retrospective basis. Such action may not comply with the government’s current policy, which
focuses on competition and coverage over revenue generation.
Valuation
Bharti currently trades at 12x FY12E EPS, which is a 20% discount to its regional peers (see
Figure 3). We expect Bharti to generate FCF of Rs281bn ($6.7bn) over FY11-13E and the
current market price offers an 8.6% FCF yield (FY12E).
Bharti – our key forecasts
Bharti’s top-line growth should continue to be driven by Indian operations in the medium
term. We remain conservative on revenue growth in Africa. However, we do expect margins
to improve in both India and Africa. We expect Indian margins to improve due to falling
competitive intensity and the incrementally positive effect of the rollout of its 3G network.
We expect margins in the African operations to improve as a result of cost efficiencies.
Indian telecom policy – past,
present and future
The current policy framework for the Indian telecom sector is based on a document called
the NTP’99 (National Telecom Policy). The primary thrust of the policy has been to ensure
adequate competition, drive population coverage and ensure a level playing field among
operators. With respect to spectrum, the government has endeavored to promote efficient
usage by defining ascending subscriber benchmarks and progressive revenue share for larger
allocations. Revenue generation from license issuance or spectrum allocation is not a policy
goal in NTP’99. The Indian telecom license comes with an obligation on the part of the
government to provide start-up spectrum of 4.4 MHz and an additional amount up to 6.2 MHz
based on achieving the defined subscriber base. It also imposes rollout obligations on the
telecom operator.
Key policy decisions relating to license and spectrum
Over the last decade, we note that there have been three major decisions with respect to
spectrum allocation or license issuance:1) Allocation beyond 6.2 MHz, which was the original
contracted amount under the license (since 2002) – allocated to players such as Bharti, Idea,
Vodafone, BSNL and MTNL
2) Spectrum allocation under the dual spectrum policy (in 2007) – spectrum primarily
allocated CDMA incumbents Reliance Communications and Tata Teleservices
3) Issuance of new licenses on a first-come-first-serve basis (2007) – these include operators
such as Uninor, Aircel, Videocon, Idea (new circles), etc.
All of these decisions were preceded by recommendations from the sector regulator (TRAI)
after consultation and were later accepted and implemented by the Department of
Telecommunications.
Current scenario: impasse continues
The current situation was precipitated by a report by the CAG (Auditor General) that a)
computed a presumptive loss to the exchequer due to the issuance of licenses at historical
prices and b) indicated likely irregularities in the process.
Since his appointment, the new telecom minister has made several statements, which we
believe indicate the following: 1) the prerogative of policy making lies with the government
and all actions have complied with the National Telecom Policy (NTP 99); 2) competition and
coverage have been the key tenets of the policy; revenue maximisation has not been a policy
goal and hence a presumptive loss calculation is extraneous; and 3) procedural lapses are
being investigated and will be dealt with as per current rules.
Future: significant shift in spectrum policy
Indian telecom minister Kapil Sibal signaled a major shift in the spectrum allocation policy in
an official statement. Key takeaways from the minister’s statement include:
The government now believes the sector has reached a stage where the current level of
competition warrants a market-driven process of spectrum allocation. The current practice of
bundling spectrum with a license will be discontinued
The government plans to consider adopting an auction process for allocation and pricing of
spectrum beyond 6.2 MHz.
For new players with start-up spectrum of 4.4 MHz, the balance of 1.8 MHz will be allocated
at a price determined under the new policy provided that the licenses are valid after the
current vetting process.
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