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Bharti Airtel (BHARTI)
We expect Bharti to be benefit most from weakening of competition
Revenue per minute set to improve; best placed to benefit from
3G as well. Remain cautious on Africa; expect usage to improve
Upgrade Bharti to Overweight; raise TP to INR425 (from INR370)
on rolling forward DCF
Investment summary
Bharti is our preferred pick in the Indian telecom
sector driven by high quality spectrum, strong
management capabilities and a proven track record
in the minute factory model.
The stock underperformed after the launch of GSM
services by Tata Teleservices and the entry of a
range of new greenfield operators that led to
irrational price competition. However, in the last 6-9
months the stock has bounced back as new GSM
operators have become defensive in terms of pricing
and roll-out of services. In fact, Bharti won back
c100bp of its revenue market share in the June
quarter, a clear indication of its dominance in the
Indian wireless space.
In our view, Bharti is well positioned in the Indian
market with the largest block of 900 MHz spectrum
and 3G spectrum in 13 circles that cover 68% of
India’s population; the largest amongst all operators.
We are still negative on its USD10.7bn
acquisition of Zain’s African assets (our target
price assumes negative contribution of INR33 per
share from the African operations); however, we
see local operators like MTN leaning towards
infrastructure sharing as a positive. In addition,
Africa provides great potential with lower teledensity
levels of c20%, robust economic growth
(c5% at least), and abundant spectrum of c20
MHz (scope for additional 10 MHz of 3G
spectrum where available). Moreover, there is
scope to drive usage elasticity with MOUs in
Africa one-fifth of the level in India. However,
concerns over lack of physical infrastructure and
high regulatory and currency risk in most African
countries prevent us from being positive in the
near term.
Revenue per minute and
wireless margin assumptions
Since launch by new entrants (March 2009),
revenue per minute (rpm) has declined by 30% for
Bharti (decline has been at a quarterly CAGR of
5%). However, some stability has been seen over the
past two quarters, with rpm declining marginally by
1.5%. With mobile number portability (MNP) still in
play, we expect rpm weakness to continue in the
near term; for FY12e we estimate revenue per
minute at INR0.43, c2% decline yoy. That said, we
expect Bharti’s efforts to boost revenue per minute
to come into force towards the last two quarters of
FY12e and gain momentum by FY13e. We believe
Bharti will decrease the amount of ‘freebies’ on offer
in its efforts to improve voice realizations. We
expect rpm to improve by c5% in FY13e, and reach
INR0.49 by FY15e, an absolute improvement of
c11% from current levels.
We expect subscriber growth to slow down for
Bharti and the sector overall. We estimate average
monthly net additions at 2.1m per month versus
2.7m at present. As suggested earlier, we forecast
MOU per subscriber per month to come down from
463 at present to 420 by FY15e, a decline of c9%.
However, we forecast healthy traffic growth at 16%
in FY12 and 10% in FY13e.
Estimate changes
On the back of building improvement in voice
realizations, we upgrade our revenue estimates for
FY12e and FY13e by c1.5% and c2.5%,
respectively. However, we have cut our FY12e and
FY13e earnings by c6.5% and c4.5%, respectively,
as we raise our depreciation estimates on the back of
the launch of 3G services.
Valuation & risks
We are turning positive on Bharti and upgrading
to Overweight from Neutral (V).
We believe Bharti is the best way to play the
improvement in voice realizations given its good
quality subscribers, deep coverage and network
advantage. We estimate FY12e EPS growth at
c27% and FY13e earnings growth at c37%. This
compares with Sensex earnings growth of c18%
over next two fiscal years and c20% earnings
growth at other large caps. A large part of the
forecast growth comes from improvement in
voice realized rates, pick up in 2G VAS and scale
benefits from tower business. We remain cautious
on Bharti’s Africa business and value it at
negative INR33.
In an attempt to factor in the regulatory risks, we
have adjusted our target price to allow for some
possible damage from the TRAI recommendations.
We adjust our target price downward for the TRAI
recommendations (see Figure 28) to the extent of
INR18. However, we note that we see very limited
chance of these recommendations being accepted in
the present format.
We are rolling our valuations from FY12e to FY13e
in line with our valuation methodology with respect
to other Indian stocks. We believe FY12e will be a
year of consolidation for both voice and data. With
3G launch to gain traction in the next 9-12 months
and focus on voice improvements to be more visible
in FY13e, we believe investors should now be
looking at FY13e.
We value Bharti using a blend of SOTP-based
DCF analysis and PE. Our valuation has two
components: India and the African operations. We
don’t value the tower business separately and
value this along with the India business. We value
the India business on a mix of PE and DCF,
assigning equal weights to each. For our DCF
analysis, we assume a WACC of 12%, cost of
equity of 12% (cost of debt 10%) to arrive at a
value of INR518 per share. Using PE we arrive at
a value of INR435 per share using a 12-month
forward PE of 15x applied to FY13e earnings
of INR29.
Bharti stock has traded at an average of 15x PE over
the past 24 months, and average PE has been on par
with the Sensex. But if we look at the overall trading
history it has traded 53% above Sensex.
Our decision to use a mid-cycle multiple is driven
by improvement in the pricing environment, the
likelihood of sector consolidation and also the fact
that risks related to 3G spectrum auctions are
behind us.
For non-volatile Indian stocks, our Neutral rating
band is 5 percentage points above and below a
hurdle rate of 11%, or 6-16% potential return. Our
new target price of INR425 (raised from INR370)
implies a potential return of 17.3%, thus, we
upgrade our rating on Bharti to Overweight from
Neutral (V). We are dropping the V flag as the
stock no longer meets our criterion for volatility.
The catalysts for the shares to outperform would
be progress toward sector consolidation and
evidence of ability to monetize tower assets.
The main risk to the downside would be
acceptance of the TRAI recommendations in the
current format.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI)
We expect Bharti to be benefit most from weakening of competition
Revenue per minute set to improve; best placed to benefit from
3G as well. Remain cautious on Africa; expect usage to improve
Upgrade Bharti to Overweight; raise TP to INR425 (from INR370)
on rolling forward DCF
Investment summary
Bharti is our preferred pick in the Indian telecom
sector driven by high quality spectrum, strong
management capabilities and a proven track record
in the minute factory model.
The stock underperformed after the launch of GSM
services by Tata Teleservices and the entry of a
range of new greenfield operators that led to
irrational price competition. However, in the last 6-9
months the stock has bounced back as new GSM
operators have become defensive in terms of pricing
and roll-out of services. In fact, Bharti won back
c100bp of its revenue market share in the June
quarter, a clear indication of its dominance in the
Indian wireless space.
In our view, Bharti is well positioned in the Indian
market with the largest block of 900 MHz spectrum
and 3G spectrum in 13 circles that cover 68% of
India’s population; the largest amongst all operators.
We are still negative on its USD10.7bn
acquisition of Zain’s African assets (our target
price assumes negative contribution of INR33 per
share from the African operations); however, we
see local operators like MTN leaning towards
infrastructure sharing as a positive. In addition,
Africa provides great potential with lower teledensity
levels of c20%, robust economic growth
(c5% at least), and abundant spectrum of c20
MHz (scope for additional 10 MHz of 3G
spectrum where available). Moreover, there is
scope to drive usage elasticity with MOUs in
Africa one-fifth of the level in India. However,
concerns over lack of physical infrastructure and
high regulatory and currency risk in most African
countries prevent us from being positive in the
near term.
Revenue per minute and
wireless margin assumptions
Since launch by new entrants (March 2009),
revenue per minute (rpm) has declined by 30% for
Bharti (decline has been at a quarterly CAGR of
5%). However, some stability has been seen over the
past two quarters, with rpm declining marginally by
1.5%. With mobile number portability (MNP) still in
play, we expect rpm weakness to continue in the
near term; for FY12e we estimate revenue per
minute at INR0.43, c2% decline yoy. That said, we
expect Bharti’s efforts to boost revenue per minute
to come into force towards the last two quarters of
FY12e and gain momentum by FY13e. We believe
Bharti will decrease the amount of ‘freebies’ on offer
in its efforts to improve voice realizations. We
expect rpm to improve by c5% in FY13e, and reach
INR0.49 by FY15e, an absolute improvement of
c11% from current levels.
We expect subscriber growth to slow down for
Bharti and the sector overall. We estimate average
monthly net additions at 2.1m per month versus
2.7m at present. As suggested earlier, we forecast
MOU per subscriber per month to come down from
463 at present to 420 by FY15e, a decline of c9%.
However, we forecast healthy traffic growth at 16%
in FY12 and 10% in FY13e.
Estimate changes
On the back of building improvement in voice
realizations, we upgrade our revenue estimates for
FY12e and FY13e by c1.5% and c2.5%,
respectively. However, we have cut our FY12e and
FY13e earnings by c6.5% and c4.5%, respectively,
as we raise our depreciation estimates on the back of
the launch of 3G services.
Valuation & risks
We are turning positive on Bharti and upgrading
to Overweight from Neutral (V).
We believe Bharti is the best way to play the
improvement in voice realizations given its good
quality subscribers, deep coverage and network
advantage. We estimate FY12e EPS growth at
c27% and FY13e earnings growth at c37%. This
compares with Sensex earnings growth of c18%
over next two fiscal years and c20% earnings
growth at other large caps. A large part of the
forecast growth comes from improvement in
voice realized rates, pick up in 2G VAS and scale
benefits from tower business. We remain cautious
on Bharti’s Africa business and value it at
negative INR33.
In an attempt to factor in the regulatory risks, we
have adjusted our target price to allow for some
possible damage from the TRAI recommendations.
We adjust our target price downward for the TRAI
recommendations (see Figure 28) to the extent of
INR18. However, we note that we see very limited
chance of these recommendations being accepted in
the present format.
We are rolling our valuations from FY12e to FY13e
in line with our valuation methodology with respect
to other Indian stocks. We believe FY12e will be a
year of consolidation for both voice and data. With
3G launch to gain traction in the next 9-12 months
and focus on voice improvements to be more visible
in FY13e, we believe investors should now be
looking at FY13e.
We value Bharti using a blend of SOTP-based
DCF analysis and PE. Our valuation has two
components: India and the African operations. We
don’t value the tower business separately and
value this along with the India business. We value
the India business on a mix of PE and DCF,
assigning equal weights to each. For our DCF
analysis, we assume a WACC of 12%, cost of
equity of 12% (cost of debt 10%) to arrive at a
value of INR518 per share. Using PE we arrive at
a value of INR435 per share using a 12-month
forward PE of 15x applied to FY13e earnings
of INR29.
Bharti stock has traded at an average of 15x PE over
the past 24 months, and average PE has been on par
with the Sensex. But if we look at the overall trading
history it has traded 53% above Sensex.
Our decision to use a mid-cycle multiple is driven
by improvement in the pricing environment, the
likelihood of sector consolidation and also the fact
that risks related to 3G spectrum auctions are
behind us.
For non-volatile Indian stocks, our Neutral rating
band is 5 percentage points above and below a
hurdle rate of 11%, or 6-16% potential return. Our
new target price of INR425 (raised from INR370)
implies a potential return of 17.3%, thus, we
upgrade our rating on Bharti to Overweight from
Neutral (V). We are dropping the V flag as the
stock no longer meets our criterion for volatility.
The catalysts for the shares to outperform would
be progress toward sector consolidation and
evidence of ability to monetize tower assets.
The main risk to the downside would be
acceptance of the TRAI recommendations in the
current format.
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