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We are upgrading our rating on Bharti Airtel to Overweight from N. Our new
Mar-12 price target is INR 410/share offering 21% upside from current levels
and we recommend building positions for the long term. Our upgrade is
driven by the India wireless segment where we expect pricing stability from
H2 FY12 (post the MNP impact). We also make an INR 28/share downward
adjustment for quantifiable regulatory regimes. Bharti is currently trading at
15x FY12E P/E and at our PT, Bharti would trade at 14x/15x FY13 JPM/cons
EPS. We highlight the strong earnings growth expected.
• India wireless: looking out to H2FY11: We expect pressure on post-paid
ARPM over the next two quarters as a result of MNP and forecast a breakaway from the recent trend of moderating price declines. However, we see
less pricing competition in the pre-paid segment based on recent checks
suggesting stability in ARPMs from H2FY12. Continued strength in net
adds is expected to drive volume growth of 20%/16% for FY12/FY13.
• Increased regulatory visibility; quantifying the impact: We expect
details of a new national telecom policy (NTP 2011) to usher in regulatory
clarity and be well received. While the outcome of the regulatory regime is
by no means certain, we have quantified the impact for Bharti from [1]
excess spectrum charge, [2] renewals [3] higher spectrum usage charges and
[4] benefits from lower license fees. Please see page 13 for full details.
• Africa margin concerns remain: We are encouraged by the strong
elasticity but are also cognizant of competition. Our main concerns for
Africa remain margin improvement. FY13 EBITDA margin: JPMe: 30% vs.
target of 40%. MTN‘s strong margins suggest the close ties with scale and
also highlight the muscle Bharti’s competitors are putting behind their key
markets.
• Mar-12 price target is INR 410 (vs. INR 370 earlier) driven by a wireless
led INR 68 increase in our valuation of Bharti’s businesses to INR 438 to
which we make an INR 28 regulatory adjustment. At our PT, Bharti would
trade at 13.8x/14.8x JPMe/cons FY13 EPS. JPMe is 7% ahead of cons
Investment Conclusions
We are upgrading our rating on Bharti Airtel to Overweight from Neutral and our
price target from INR 370 to INR 410/share. This is driven by:
I. India wireless: We have factored in the near-term risk that MNP poses to
ARPM but we have now assumed less pricing pressure in H2FY12 and beyond
primarily in the pre-paid segment. We expect Bharti to continue its focus on
revenue generating minutes driving some ARPM stability but sluggish volumes.
Recent subscriber additions have come in ahead of our estimates and we expect
this to drive volume growth going forward. Our valuation of Bharti’s
consolidated businesses increases by INR 68 from INR 370 to INR 438.
II. We have taken a quantified adjustment of INR 28/share for [1] a one-off
charge for excess spectrum, [2] renewals on license/spectrum [3] impact from
higher spectrum usage charges and [4] benefits from lower license fees. Please
see page 13 for full details.
Our concerns on Africa margins have not changed and we remain well below
management’s “targets” here. Elasticity has helped Bharti as it rebalanced tariffs and
we expect this to continue. However we still look for sustainability of margin
expansion in Africa and forecast 30% margin in FY13, 10pp below the target 40%.
We are not dismissive of the risks that MNP, lack of regulatory clarity and execution
in Africa present for Bharti, however we believe that the risk-reward ratio is shifting
more toward the positive and that Bharti is best positioned among its peers to absorb
these risks. Bharti is currently trading at 15x one-year forward P/E. Based on our
FY13E EPS of INR 29.6, our Mar-12 price target implies a one-year forward P/E of
13.8x/14.8 on JPMe/cons. On our estimates, Bharti offers 28%/33% EPS growth in
FY12/FY13 (consensus is looking for 29%/26% growth). This is ahead of JPM
estimates for the India market at 17% each year and consensus estimates for the
market at 20%/19%.
Valuation and rating analysis
Our March 2012 price target is INR 410 and now accounts for a quantified risk
relating to possible spectrum payments and other regulatory risks. Our earlier price
target was INR370 (Dec-11) and did not make an adjustment for the regulatory risk.
We value Bharti’s business segments at INR 438. This is based on our sum-of-theparts valuation of each business segment for Bharti. Our higher estimates on the
India wireless business drive our valuation of Bharti's core business of INR 383 (INR
329 earlier). Our valuation of the passive infrastructure and Indus businesses remain
largely unchanged while the drag from Africa is now -INR 11 vs. –INR 13 earlier on
account of slight improvement in margin estimates.
Risks to our view
We highlight the following risks to our rating and price target:
Downside risks: [1] Delay in clarity in the regulatory environment and the impact
exceeding the INR 28/share we factor in [2] High-end competition impact on Bharti
more than expected; [3] 3G data pricing competition [4] Slower subscriber growth
than we forecast [5] Higher capex requirements in Africa
Further upside risks: [1] Better-than-expected margins in Africa [2] near term impact
from MNP being more benign than expected [3] consolidation in the sector [4]
Monetization of tower assets
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We are upgrading our rating on Bharti Airtel to Overweight from N. Our new
Mar-12 price target is INR 410/share offering 21% upside from current levels
and we recommend building positions for the long term. Our upgrade is
driven by the India wireless segment where we expect pricing stability from
H2 FY12 (post the MNP impact). We also make an INR 28/share downward
adjustment for quantifiable regulatory regimes. Bharti is currently trading at
15x FY12E P/E and at our PT, Bharti would trade at 14x/15x FY13 JPM/cons
EPS. We highlight the strong earnings growth expected.
• India wireless: looking out to H2FY11: We expect pressure on post-paid
ARPM over the next two quarters as a result of MNP and forecast a breakaway from the recent trend of moderating price declines. However, we see
less pricing competition in the pre-paid segment based on recent checks
suggesting stability in ARPMs from H2FY12. Continued strength in net
adds is expected to drive volume growth of 20%/16% for FY12/FY13.
• Increased regulatory visibility; quantifying the impact: We expect
details of a new national telecom policy (NTP 2011) to usher in regulatory
clarity and be well received. While the outcome of the regulatory regime is
by no means certain, we have quantified the impact for Bharti from [1]
excess spectrum charge, [2] renewals [3] higher spectrum usage charges and
[4] benefits from lower license fees. Please see page 13 for full details.
• Africa margin concerns remain: We are encouraged by the strong
elasticity but are also cognizant of competition. Our main concerns for
Africa remain margin improvement. FY13 EBITDA margin: JPMe: 30% vs.
target of 40%. MTN‘s strong margins suggest the close ties with scale and
also highlight the muscle Bharti’s competitors are putting behind their key
markets.
• Mar-12 price target is INR 410 (vs. INR 370 earlier) driven by a wireless
led INR 68 increase in our valuation of Bharti’s businesses to INR 438 to
which we make an INR 28 regulatory adjustment. At our PT, Bharti would
trade at 13.8x/14.8x JPMe/cons FY13 EPS. JPMe is 7% ahead of cons
Investment Conclusions
We are upgrading our rating on Bharti Airtel to Overweight from Neutral and our
price target from INR 370 to INR 410/share. This is driven by:
I. India wireless: We have factored in the near-term risk that MNP poses to
ARPM but we have now assumed less pricing pressure in H2FY12 and beyond
primarily in the pre-paid segment. We expect Bharti to continue its focus on
revenue generating minutes driving some ARPM stability but sluggish volumes.
Recent subscriber additions have come in ahead of our estimates and we expect
this to drive volume growth going forward. Our valuation of Bharti’s
consolidated businesses increases by INR 68 from INR 370 to INR 438.
II. We have taken a quantified adjustment of INR 28/share for [1] a one-off
charge for excess spectrum, [2] renewals on license/spectrum [3] impact from
higher spectrum usage charges and [4] benefits from lower license fees. Please
see page 13 for full details.
Our concerns on Africa margins have not changed and we remain well below
management’s “targets” here. Elasticity has helped Bharti as it rebalanced tariffs and
we expect this to continue. However we still look for sustainability of margin
expansion in Africa and forecast 30% margin in FY13, 10pp below the target 40%.
We are not dismissive of the risks that MNP, lack of regulatory clarity and execution
in Africa present for Bharti, however we believe that the risk-reward ratio is shifting
more toward the positive and that Bharti is best positioned among its peers to absorb
these risks. Bharti is currently trading at 15x one-year forward P/E. Based on our
FY13E EPS of INR 29.6, our Mar-12 price target implies a one-year forward P/E of
13.8x/14.8 on JPMe/cons. On our estimates, Bharti offers 28%/33% EPS growth in
FY12/FY13 (consensus is looking for 29%/26% growth). This is ahead of JPM
estimates for the India market at 17% each year and consensus estimates for the
market at 20%/19%.
Valuation and rating analysis
Our March 2012 price target is INR 410 and now accounts for a quantified risk
relating to possible spectrum payments and other regulatory risks. Our earlier price
target was INR370 (Dec-11) and did not make an adjustment for the regulatory risk.
We value Bharti’s business segments at INR 438. This is based on our sum-of-theparts valuation of each business segment for Bharti. Our higher estimates on the
India wireless business drive our valuation of Bharti's core business of INR 383 (INR
329 earlier). Our valuation of the passive infrastructure and Indus businesses remain
largely unchanged while the drag from Africa is now -INR 11 vs. –INR 13 earlier on
account of slight improvement in margin estimates.
We highlight the following risks to our rating and price target:
Downside risks: [1] Delay in clarity in the regulatory environment and the impact
exceeding the INR 28/share we factor in [2] High-end competition impact on Bharti
more than expected; [3] 3G data pricing competition [4] Slower subscriber growth
than we forecast [5] Higher capex requirements in Africa
Further upside risks: [1] Better-than-expected margins in Africa [2] near term impact
from MNP being more benign than expected [3] consolidation in the sector [4]
Monetization of tower assets
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