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Bharti Airtel Ltd
(BRTI.BO / BHARTI IN)
COMPANY UPDATE
Fortune favours the bold
■
Management targets not aggressive: Based on our analysis of Bharti’s
Africa operations, management’s targets for this business are not aggressive.
We believe its strategy is to grow the business largely in line with the
industry, while taking EBITDA margins to the levels of other African peers.
■
Not after market share gains: Management’s US$5 bn revenue target
implies a CAGR of 11.3% (FY3/10-FY3/13) – broadly the midpoint of
consensus expectation (5-16%) for large African peers (MTN, Millicom and
Vodacom). However, any divergence in growth could be largely a reflection
of the players’ geographical diversity. Lack of significant revenue market
share gain also implies capex could remain low. Further, margins of 40%
could be achieved by FY3/13, if Bharti can bring its SG&A expenses (39% of
revenue) to a level similar to its African peers (24-26%).
■
Current expectations low; risks to the upside: While we believe that the
targets are not aggressive, there is a risk of slippage either on timing or on
investments required. In our model, we assume higher capex (36% higher
than management estimate) and higher interest costs (US$1.1 bn over three
years) than what management has indicated. We believe the market is more
negative; so, any near-term improvement (either on margins or revenue
growth) and more details about African performance could result in robust
share price performance.
■
Valuation: At 6.7x FY3/12E EV/EBITDA, Bharti is trading at the low end of
its historical trading range. The regulatory environment could lead to volatility
in share prices over the near term. However, with stable competition and
strong growth in India over the near term, coupled with improving visibility in
Africa, we stay positive on the stock with OUTPERFORM.
Fortune favours the bold
Bharti Africa CEO Mr Manoj Kohli has stated that he targets US$5 bn in revenue by
FY3/13, with EBITDA margin reaching 40% and capex US$800-1000 mn. In this note, we
examine if these targets are reasonable. First, we believe the top-line target does not
require a significant market share increase. Second, while the margin targets are
challenging, we see a number of opportunities to improve the cost structure from the
current level – with potential key savings in SG&A, employee costs and network opex.
So, while we agree that the targets for Africa operations are not easy to achieve for Bharti,
we believe the risks are on execution rather than strategy. Our valuation of negative Rs31
per share for the Zain acquisition adequately captures the downside involved in the
acquisition, in our view. We maintain our OUTPERFORM on Bharti and our target price of
Rs415.
Could Bharti achieve US$5 bn in revenue by FY3/13?
A look at the consensus expectations for other major listed African telecoms indicates that
expectations for Bharti are in line with the peers’ growth estimates. So, we believe that
Bharti targets to grow in line with the industry rather than gain revenue market share.
We believe Bharti’s African operations has some inherent advantages in terms of: (1) early
mover in nine countries and (2) reasonable quantity of spectrum. We also believe that
Bharti’s acquisition should remove one of the biggest obstacles for these operations –
access to adequate capital. History shows that the African telecom market presents
adequate opportunities to gain market share for companies with good quality assets,
strong processes and systems.
Further, we believe that a few characteristics of the African market could favour Bharti.
These include (1) regulation-driven move towards lower interconnect charges, (2) poor
network coverage and (3) multiple SIMs with users.
Margin improvement is the key
The most debated of management’s FY13 targets are the ones on margins (1,200 bp
EBITDA margin increase) and capex (US$800-1000 mn in annual capex).
We believe that Bharti’s capex targets should be viewed using the same prism as its
revenue targets. Bharti does not factor in significant revenue market share gains and so,
we conclude that consensus concerns about Bharti turning into a ‘price aggressor’ could
be wrong. This would not lead to a disproportionate increase in traffic and so could allow
for lower capex. Further, we also believe that Bharti could get significant (over 50%)
discount on its electronics capex.
We believe management largely expects margins to rebound to historical levels (Zain
Africa earned 38% margins in 2006). This is also realistic, given that Bharti’s African
operations currently spend 39% of sales on SG&A vs sub-26% for other African operators.
Key risks are currency and credit costs
Bharti has taken a loan of US$9 bn to fund its purchase of these African assets. We
believe that the African currency exposure is largely un-hedged and so could suffer if
currencies turn volatile. Further, the loan funding is tied to six-month LIBOR (195 bp over
six-month LIBOR) and could become expensive if LIBOR rises.
Further, there would be risks from operating in emerging economies of Africa. The
regulatory framework is at a nascent stage, and there could be political and security risks.
Further, tax laws and laws governing profit repatriation to a foreign company could also be
evolving.
Could Bharti achieve US$5 bn in
revenue by FY3/13?
Bharti Africa CEO stated he expects the African business to reach a revenue run rate of
US$5 bn by FY3/13. We find that these revenue targets are in line with growth rates of
other large pan-African telecoms (adjusted for geographical divergence). Hence, Bharti’s
management is not factoring in a significant revenue market share gain in its forecasts.
We agree that Bharti is new to African markets and hence could face some teething
delays in its plans. We also agree that Bharti’s track record outside India has not been
great. However, we argue that Bharti’s African operations has some inherent advantages:
(1) early mover in nine countries and (2) reasonable quantity of spectrum. We also believe
that Bharti’s acquisition would remove one of the biggest obstacles for this business –
access to adequate capital. Volatility in market share in African countries also indicate that
this market could present adequate opportunities to companies with good quality assets
and strong processes and systems.
Further, we believe that a few characteristics of the African market could favour Bharti.
These include (1) regulation-driven move towards lower interconnect charges, (2) poor
network coverage and (3) multiple SIMs with users. We thus believe that Bharti should be
able to reach its target of US$5 bn in revenue in the next three years.
Management guidance aka CEO’s personal target
Mr Manoj Kohli stated in July 2010 that he expects the African business to reach an
annual revenue run-rate of US$5 bn with 100 mn subscribers (from its US$3.6 bn p.a. runrate
and 40 mn current subscribers) and EBITDA of US$2 bn. He also said that capex p.a.
should stay under US$1 bn. The company later clarified that these were not formal
guidance but CEO’s personal targets. However, we believe that these numbers give a
flavour of management’s three-year goal.
Management revenue targets not aggressive
Comparing Bharti’s revenue targets with consensus expectations for other pan-African
telecom players, we find that these targets are broadly in sync with expectations for other
players. We recognise that Bharti management’s target is to grow its business faster than
consensus expectations for MTN and believe that this hinges on Bharti being able to come
up with a quick action plan to return to growth – especially in markets such as Nigeria
where it lost market share and revenue in 2008/09.
Margin improvement is the key
The most debated of Bharti management’s FY13 targets are the ones on margins (1,200
bp EBITDA margin increase) and capex (US$800-1000 mn annual capex). We try to
explore if these assumptions are reasonably achievable.
First, we note that management expects to take African operations back to the margins it
enjoyed in 2006. Second, Bharti’s African operations is significantly inefficient (SG&A is
39% of sales vs sub-26% for other African operators) and hence could be improved. Third,
increased tower sharing could help all African operators reduce network costs.
On capex, we believe that Bharti’s capex targets should be analysed while keeping its
revenue targets in view. Bharti management does not expect significant revenue market
share gains and hence we believe will not be a ‘price aggressor’. Thus, consensus view of
a significant rise in traffic could be belied. We also believe that Bharti will be able to
generate significant savings in electronics capex (~50%+) due to its scale in India. In this
regard, we believe that our estimate for US$3.8 bn capex over three years (vs
management estimate of US$2.4-3.0 bn) should comfortably help meet the growth targets.
Margin targets not challenging given the competition
The EBITDA target of US$2 bn by FY3/13 implies an EBITDA margin of 40% for Bharti’s
Africa business. Looking at other pan-African telecoms players, we find that Bharti
management is targeting an EBITDA level in line with its peers.
Key risks are currency and credit
costs
While we remain confident about Bharti’s ability to make the best of the market/margin
opportunities that we discussed in the earlier sections, our concerns remain on the
economic/regulatory factors. If recent volatility in African currency exchange rates were to
repeat, all of Bharti’s gains in operations could be erased. Further, volatility in economic
growth, dependence on fluctuating global factors and frequent changes to tax structures
reduce the overall predictability of the business, in our view. These remain the biggest
risks to Bharti’s African story.
Currency volatility could wipe out operational gains
All through the global economic slowdown, the African currencies that Bharti has exposure
to demonstrated significant volatility – as shown in Figure 58. There have been times
when currencies have depreciated 15%+ in just a month. Thus, any improvement in
operating margins/revenue growth could be quickly offset by currency movements.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Ltd
(BRTI.BO / BHARTI IN)
COMPANY UPDATE
Fortune favours the bold
■
Management targets not aggressive: Based on our analysis of Bharti’s
Africa operations, management’s targets for this business are not aggressive.
We believe its strategy is to grow the business largely in line with the
industry, while taking EBITDA margins to the levels of other African peers.
■
Not after market share gains: Management’s US$5 bn revenue target
implies a CAGR of 11.3% (FY3/10-FY3/13) – broadly the midpoint of
consensus expectation (5-16%) for large African peers (MTN, Millicom and
Vodacom). However, any divergence in growth could be largely a reflection
of the players’ geographical diversity. Lack of significant revenue market
share gain also implies capex could remain low. Further, margins of 40%
could be achieved by FY3/13, if Bharti can bring its SG&A expenses (39% of
revenue) to a level similar to its African peers (24-26%).
■
Current expectations low; risks to the upside: While we believe that the
targets are not aggressive, there is a risk of slippage either on timing or on
investments required. In our model, we assume higher capex (36% higher
than management estimate) and higher interest costs (US$1.1 bn over three
years) than what management has indicated. We believe the market is more
negative; so, any near-term improvement (either on margins or revenue
growth) and more details about African performance could result in robust
share price performance.
■
Valuation: At 6.7x FY3/12E EV/EBITDA, Bharti is trading at the low end of
its historical trading range. The regulatory environment could lead to volatility
in share prices over the near term. However, with stable competition and
strong growth in India over the near term, coupled with improving visibility in
Africa, we stay positive on the stock with OUTPERFORM.
Fortune favours the bold
Bharti Africa CEO Mr Manoj Kohli has stated that he targets US$5 bn in revenue by
FY3/13, with EBITDA margin reaching 40% and capex US$800-1000 mn. In this note, we
examine if these targets are reasonable. First, we believe the top-line target does not
require a significant market share increase. Second, while the margin targets are
challenging, we see a number of opportunities to improve the cost structure from the
current level – with potential key savings in SG&A, employee costs and network opex.
So, while we agree that the targets for Africa operations are not easy to achieve for Bharti,
we believe the risks are on execution rather than strategy. Our valuation of negative Rs31
per share for the Zain acquisition adequately captures the downside involved in the
acquisition, in our view. We maintain our OUTPERFORM on Bharti and our target price of
Rs415.
Could Bharti achieve US$5 bn in revenue by FY3/13?
A look at the consensus expectations for other major listed African telecoms indicates that
expectations for Bharti are in line with the peers’ growth estimates. So, we believe that
Bharti targets to grow in line with the industry rather than gain revenue market share.
We believe Bharti’s African operations has some inherent advantages in terms of: (1) early
mover in nine countries and (2) reasonable quantity of spectrum. We also believe that
Bharti’s acquisition should remove one of the biggest obstacles for these operations –
access to adequate capital. History shows that the African telecom market presents
adequate opportunities to gain market share for companies with good quality assets,
strong processes and systems.
Further, we believe that a few characteristics of the African market could favour Bharti.
These include (1) regulation-driven move towards lower interconnect charges, (2) poor
network coverage and (3) multiple SIMs with users.
Margin improvement is the key
The most debated of management’s FY13 targets are the ones on margins (1,200 bp
EBITDA margin increase) and capex (US$800-1000 mn in annual capex).
We believe that Bharti’s capex targets should be viewed using the same prism as its
revenue targets. Bharti does not factor in significant revenue market share gains and so,
we conclude that consensus concerns about Bharti turning into a ‘price aggressor’ could
be wrong. This would not lead to a disproportionate increase in traffic and so could allow
for lower capex. Further, we also believe that Bharti could get significant (over 50%)
discount on its electronics capex.
We believe management largely expects margins to rebound to historical levels (Zain
Africa earned 38% margins in 2006). This is also realistic, given that Bharti’s African
operations currently spend 39% of sales on SG&A vs sub-26% for other African operators.
Key risks are currency and credit costs
Bharti has taken a loan of US$9 bn to fund its purchase of these African assets. We
believe that the African currency exposure is largely un-hedged and so could suffer if
currencies turn volatile. Further, the loan funding is tied to six-month LIBOR (195 bp over
six-month LIBOR) and could become expensive if LIBOR rises.
Further, there would be risks from operating in emerging economies of Africa. The
regulatory framework is at a nascent stage, and there could be political and security risks.
Further, tax laws and laws governing profit repatriation to a foreign company could also be
evolving.
Could Bharti achieve US$5 bn in
revenue by FY3/13?
Bharti Africa CEO stated he expects the African business to reach a revenue run rate of
US$5 bn by FY3/13. We find that these revenue targets are in line with growth rates of
other large pan-African telecoms (adjusted for geographical divergence). Hence, Bharti’s
management is not factoring in a significant revenue market share gain in its forecasts.
We agree that Bharti is new to African markets and hence could face some teething
delays in its plans. We also agree that Bharti’s track record outside India has not been
great. However, we argue that Bharti’s African operations has some inherent advantages:
(1) early mover in nine countries and (2) reasonable quantity of spectrum. We also believe
that Bharti’s acquisition would remove one of the biggest obstacles for this business –
access to adequate capital. Volatility in market share in African countries also indicate that
this market could present adequate opportunities to companies with good quality assets
and strong processes and systems.
Further, we believe that a few characteristics of the African market could favour Bharti.
These include (1) regulation-driven move towards lower interconnect charges, (2) poor
network coverage and (3) multiple SIMs with users. We thus believe that Bharti should be
able to reach its target of US$5 bn in revenue in the next three years.
Management guidance aka CEO’s personal target
Mr Manoj Kohli stated in July 2010 that he expects the African business to reach an
annual revenue run-rate of US$5 bn with 100 mn subscribers (from its US$3.6 bn p.a. runrate
and 40 mn current subscribers) and EBITDA of US$2 bn. He also said that capex p.a.
should stay under US$1 bn. The company later clarified that these were not formal
guidance but CEO’s personal targets. However, we believe that these numbers give a
flavour of management’s three-year goal.
Management revenue targets not aggressive
Comparing Bharti’s revenue targets with consensus expectations for other pan-African
telecom players, we find that these targets are broadly in sync with expectations for other
players. We recognise that Bharti management’s target is to grow its business faster than
consensus expectations for MTN and believe that this hinges on Bharti being able to come
up with a quick action plan to return to growth – especially in markets such as Nigeria
where it lost market share and revenue in 2008/09.
Margin improvement is the key
The most debated of Bharti management’s FY13 targets are the ones on margins (1,200
bp EBITDA margin increase) and capex (US$800-1000 mn annual capex). We try to
explore if these assumptions are reasonably achievable.
First, we note that management expects to take African operations back to the margins it
enjoyed in 2006. Second, Bharti’s African operations is significantly inefficient (SG&A is
39% of sales vs sub-26% for other African operators) and hence could be improved. Third,
increased tower sharing could help all African operators reduce network costs.
On capex, we believe that Bharti’s capex targets should be analysed while keeping its
revenue targets in view. Bharti management does not expect significant revenue market
share gains and hence we believe will not be a ‘price aggressor’. Thus, consensus view of
a significant rise in traffic could be belied. We also believe that Bharti will be able to
generate significant savings in electronics capex (~50%+) due to its scale in India. In this
regard, we believe that our estimate for US$3.8 bn capex over three years (vs
management estimate of US$2.4-3.0 bn) should comfortably help meet the growth targets.
Margin targets not challenging given the competition
The EBITDA target of US$2 bn by FY3/13 implies an EBITDA margin of 40% for Bharti’s
Africa business. Looking at other pan-African telecoms players, we find that Bharti
management is targeting an EBITDA level in line with its peers.
Key risks are currency and credit
costs
While we remain confident about Bharti’s ability to make the best of the market/margin
opportunities that we discussed in the earlier sections, our concerns remain on the
economic/regulatory factors. If recent volatility in African currency exchange rates were to
repeat, all of Bharti’s gains in operations could be erased. Further, volatility in economic
growth, dependence on fluctuating global factors and frequent changes to tax structures
reduce the overall predictability of the business, in our view. These remain the biggest
risks to Bharti’s African story.
Currency volatility could wipe out operational gains
All through the global economic slowdown, the African currencies that Bharti has exposure
to demonstrated significant volatility – as shown in Figure 58. There have been times
when currencies have depreciated 15%+ in just a month. Thus, any improvement in
operating margins/revenue growth could be quickly offset by currency movements.
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