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Downgrade to Underperform
Bharti Airtel has outperformed the market by 42% on expectations of
improving fundamentals for India’s 2G business and ramp-up in Africa
operations. While we do see these playing out, in the medium term we do
not see any upside to our near term earning estimates. At 18x FY12CL
earnings, we believe the stock is factoring in these positives but not
adequately recognising risks of US$3.5bn of regulatory payments for
spectrum, licence renewals and US$2-3bn for compulsions to complete
spectrum footprint. Bharti’s ROIC has dropped 19ppt to 10% and turns
only in FY13CL. With no upside to our target price we downgrade the
stock from Outperform to Underperform.
We see 2G’s improvement and 3G subscribers in estimates.
In India’s 2G mobile segment, there have been withdrawals of freebies and
promotions, with eased competitive pressures but no tariff increase yet.
Meanwhile, we see discounts/counter offers for post-paid subscribers in the wake
of mobile number portability (MNP). Consequently, we estimate blended revenue
per minute (RPM) declines will moderate from 4% QoQ over last eight quarters to
less than 1% QoQ in FY12-13CL (flat including 3G). In the medium term, we
expect Bharti to gain share (from impending consolidation). For now Bharti has
seen 130bps YoY and a 374bp slip in revenue market share from the peak of
33.9%. India 2G penetration is at 69% and 55% even after adjusting for 20%
dual sims and therefore the focus is now on 3G. Here, despite an encouraging
start, 3G exasperation is inevitable with a mere 5MHz spectrum in 2.1GHz in only
13 of 22 circles across India. Limited spectrum is forcing voice/VAS and not 3G
data offering despite an unmatched opportunity in 1% broadband penetration.
Our estimates already factor in 19m 3G mobile subscribers for Bharti in FY13CL.
Africa’ target 12%QoQ Ebitda growth ambitious
While in Africa over a year after Bharti’s been running 16 country
operations subscribers are still at 44m subscribers (42m on acquisition), revenue
has not grown and Ebitda is down 15% YoY. Further despite competitive financing
of US$9bn acquisition debt (at ~200bps above Libor), Bharti registered US$350m
in losses. Meanwhile, management has maintained its 2013 target of 100m
subscribers, US$5bn in revenue and US$2bn in Ebitda for the region which implies
a 12% QoQ growth in Ebitda - a very high ask rate. The company has denied
access to meetings in Africa while our own visit suggested significant challenges,
such as usage pattern in the region may change only over time. Consequently, we
maintain our estimates at a 33% discount to management’s target.
Crumbling tower valuations and risks.
India tower valuations have crumbled with drought of third-party tenancies, low
3G rentals of 10-15,000 monthly and an imminent shakeout of weaker players.
Our Bharti tower valuations are 35% discount to the deals of 2008 and imply
US$87,000 EV per tower; we see no value unlocking here for now. Bharti’s ROIC
has dropped 19ppts from the peak to 10% and turns only in FY13CL. Bharti will
have US$6.6bn in free cashflows over the next three years to aid deleveraging of
US$14bn in debt but looming large is US$5-6bn risk of regulatory payments on
spectrum and NTP 2011 is now delayed to the end of year. Also should the
interest burden be just 1ppt higher, over our estimate of 4.2% (with 80% of debt
being foreign) earnings will be 6% lower. At 18x FY12CL earnings and 8.4x
EV/Ebitda (> 50% premium to peers) with no upside to our earnings estimates
and the stock at our target price, of Rs395 we downgrade our rating from
Outperform to Underperform.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Downgrade to Underperform
Bharti Airtel has outperformed the market by 42% on expectations of
improving fundamentals for India’s 2G business and ramp-up in Africa
operations. While we do see these playing out, in the medium term we do
not see any upside to our near term earning estimates. At 18x FY12CL
earnings, we believe the stock is factoring in these positives but not
adequately recognising risks of US$3.5bn of regulatory payments for
spectrum, licence renewals and US$2-3bn for compulsions to complete
spectrum footprint. Bharti’s ROIC has dropped 19ppt to 10% and turns
only in FY13CL. With no upside to our target price we downgrade the
stock from Outperform to Underperform.
We see 2G’s improvement and 3G subscribers in estimates.
In India’s 2G mobile segment, there have been withdrawals of freebies and
promotions, with eased competitive pressures but no tariff increase yet.
Meanwhile, we see discounts/counter offers for post-paid subscribers in the wake
of mobile number portability (MNP). Consequently, we estimate blended revenue
per minute (RPM) declines will moderate from 4% QoQ over last eight quarters to
less than 1% QoQ in FY12-13CL (flat including 3G). In the medium term, we
expect Bharti to gain share (from impending consolidation). For now Bharti has
seen 130bps YoY and a 374bp slip in revenue market share from the peak of
33.9%. India 2G penetration is at 69% and 55% even after adjusting for 20%
dual sims and therefore the focus is now on 3G. Here, despite an encouraging
start, 3G exasperation is inevitable with a mere 5MHz spectrum in 2.1GHz in only
13 of 22 circles across India. Limited spectrum is forcing voice/VAS and not 3G
data offering despite an unmatched opportunity in 1% broadband penetration.
Our estimates already factor in 19m 3G mobile subscribers for Bharti in FY13CL.
Africa’ target 12%QoQ Ebitda growth ambitious
While in Africa over a year after Bharti’s been running 16 country
operations subscribers are still at 44m subscribers (42m on acquisition), revenue
has not grown and Ebitda is down 15% YoY. Further despite competitive financing
of US$9bn acquisition debt (at ~200bps above Libor), Bharti registered US$350m
in losses. Meanwhile, management has maintained its 2013 target of 100m
subscribers, US$5bn in revenue and US$2bn in Ebitda for the region which implies
a 12% QoQ growth in Ebitda - a very high ask rate. The company has denied
access to meetings in Africa while our own visit suggested significant challenges,
such as usage pattern in the region may change only over time. Consequently, we
maintain our estimates at a 33% discount to management’s target.
Crumbling tower valuations and risks.
India tower valuations have crumbled with drought of third-party tenancies, low
3G rentals of 10-15,000 monthly and an imminent shakeout of weaker players.
Our Bharti tower valuations are 35% discount to the deals of 2008 and imply
US$87,000 EV per tower; we see no value unlocking here for now. Bharti’s ROIC
has dropped 19ppts from the peak to 10% and turns only in FY13CL. Bharti will
have US$6.6bn in free cashflows over the next three years to aid deleveraging of
US$14bn in debt but looming large is US$5-6bn risk of regulatory payments on
spectrum and NTP 2011 is now delayed to the end of year. Also should the
interest burden be just 1ppt higher, over our estimate of 4.2% (with 80% of debt
being foreign) earnings will be 6% lower. At 18x FY12CL earnings and 8.4x
EV/Ebitda (> 50% premium to peers) with no upside to our earnings estimates
and the stock at our target price, of Rs395 we downgrade our rating from
Outperform to Underperform.
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