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India Equity Research Reports, IPO and Stock News
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Bharti Airtel has outperformed the market by 42% on expectations of
improving fundamentals for India’s 2G business and ramp-up in Africa
operations. 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 the last eight quarters to less than 1% QoQ in FY12-13CL (flat
including 3G). In the medium term, we expect Bharti (BHARTI IS -
Rs401.4 - U-PF) 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, Bharti’s been running 16 country operations, but subscribers are
still at 44m (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 over
US$350m in losses. Meanwhile, management has failed to guide a slip in
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 revealed 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. 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 its 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 �� ��
Bharti Airtel has outperformed the market by 42% on expectations of
improving fundamentals for India’s 2G business and ramp-up in Africa
operations. 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 the last eight quarters to less than 1% QoQ in FY12-13CL (flat
including 3G). In the medium term, we expect Bharti (BHARTI IS -
Rs401.4 - U-PF) 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, Bharti’s been running 16 country operations, but subscribers are
still at 44m (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 over
US$350m in losses. Meanwhile, management has failed to guide a slip in
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 revealed 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. 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 its 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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