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India Equity Research Reports, IPO and Stock News
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● The rupee has depreciated sharply since the beginning of August
(6.7% over the last 40 days and 5% since the end of June). This is
important with respect to Bharti’s debt in USD (~US$10 bn),
mostly unhedged and largely related to Zain’s African acquisition.
● Under Bharti’s IFRS accounting, the resulting translation losses of
~US$500 mn do not have an impact on P&L, rather they are
adjusted to reserves.
● Every 1% depreciation in rupee reduces Bharti’s book value by
~0.9%, due to the above accounting treatment. Thus, we could
see ~4.5% book value reduction during the quarter due to
currency movement so far (see details for further adjustments).
● By taking unhedged foreign currency debt, we believe Bharti is
managing to keep annual interest costs lower by ~US$725 mn.
However, this could lead to share price volatility.
● However, we believe that on-the-ground fundamentals for the
telecom sector continue to improve, and we remain confident of
the business fundamentals for Bharti. We reiterate our
OUTPERFORM rating on the stock.
Sharp depreciation of the rupee versus USD
Starting early August, the rupee has depreciated sharply against USD,
depreciating 6.7% over the last 40 days. As against the closing rate of
the June quarter, the rupee has depreciated 5% against USD.
Bharti has significant unhedged debt exposure
Bharti has significant borrowings in USD terms, taken for its
acquisition of Zain’s African operations last year. As per the FY3/11
annual report, the company had Rs454 bn (US$10.2 bn) in USD
denominated borrowings (mostly unhedged).
Bharti restates its foreign currency liabilities (net) at the end of each
quarter, and as per the accounting rules of the company, the
gains/losses from such restatement will be adjusted with foreign
currency translation reserve. Thus, there will be no impact on P&L.
Our calculation indicates that every 1% depreciation in rupee will lead
to: (1) a 0.9% reduction in book value due to the restatement of
liabilities and (2) a 0.7% increase in book value due to the restatement
of goodwill, resulting in a net reduction of 0.2% on book value. Thus,
the currency movements QTD could lead to a ~1% reduction in
Bharti’s book value (4.5% ignoring the goodwill adjustment).
Our forex strategists view (Ray Farris and team) remains bullish on
the rupee with an expectation of strengthening. In our models, we
assume an exchange rate of Rs45/US$. If the exchange rate were to
remain at Rs47/US$, then our target price could go down by 4.5% (as
calculated above, excluding the goodwill impact).
We note that by taking an unhedged foreign currency borrowing,
Bharti has managed to keep its cost of funding for acquisition low (its
total cost of debt LTM was 4%). If, however, we were to replace this
with domestic (AAA yield of 9.4%) or hedged borrowing, additional
interest expenses would be US$725 mn (28%/11%/10% of
FY12/FY13/FY14 PBT, respectively). In our models, we have a
consolidated cost of debt of 5% in FY3/12 for Bharti.
Underlying fundamentals remain strong
On the ground, we continue to believe that the competitive scenario
improves for the better, for incumbents such as Bharti. In addition to
previous newsflow on tariff hikes and falling dealer commissions, our
recent store visits indicated that the industry is also reducing other
parts of the S&M spend (in-store promotions, number of layers in the
distribution system, etc. – see our note dated 7 September 2011).
These measures indicate a clear shift of focus from subscriber
quantity to quality (one of the key reasons for falling net adds
numbers), and could boost margins.
Rupee appreciation could lead to volatility in the stock price over the
near term; however, we remain confident of the long-term
fundamentals and maintain our OUTPERFORM rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The rupee has depreciated sharply since the beginning of August
(6.7% over the last 40 days and 5% since the end of June). This is
important with respect to Bharti’s debt in USD (~US$10 bn),
mostly unhedged and largely related to Zain’s African acquisition.
● Under Bharti’s IFRS accounting, the resulting translation losses of
~US$500 mn do not have an impact on P&L, rather they are
adjusted to reserves.
● Every 1% depreciation in rupee reduces Bharti’s book value by
~0.9%, due to the above accounting treatment. Thus, we could
see ~4.5% book value reduction during the quarter due to
currency movement so far (see details for further adjustments).
● By taking unhedged foreign currency debt, we believe Bharti is
managing to keep annual interest costs lower by ~US$725 mn.
However, this could lead to share price volatility.
● However, we believe that on-the-ground fundamentals for the
telecom sector continue to improve, and we remain confident of
the business fundamentals for Bharti. We reiterate our
OUTPERFORM rating on the stock.
Sharp depreciation of the rupee versus USD
Starting early August, the rupee has depreciated sharply against USD,
depreciating 6.7% over the last 40 days. As against the closing rate of
the June quarter, the rupee has depreciated 5% against USD.
Bharti has significant unhedged debt exposure
Bharti has significant borrowings in USD terms, taken for its
acquisition of Zain’s African operations last year. As per the FY3/11
annual report, the company had Rs454 bn (US$10.2 bn) in USD
denominated borrowings (mostly unhedged).
Bharti restates its foreign currency liabilities (net) at the end of each
quarter, and as per the accounting rules of the company, the
gains/losses from such restatement will be adjusted with foreign
currency translation reserve. Thus, there will be no impact on P&L.
Our calculation indicates that every 1% depreciation in rupee will lead
to: (1) a 0.9% reduction in book value due to the restatement of
liabilities and (2) a 0.7% increase in book value due to the restatement
of goodwill, resulting in a net reduction of 0.2% on book value. Thus,
the currency movements QTD could lead to a ~1% reduction in
Bharti’s book value (4.5% ignoring the goodwill adjustment).
Our forex strategists view (Ray Farris and team) remains bullish on
the rupee with an expectation of strengthening. In our models, we
assume an exchange rate of Rs45/US$. If the exchange rate were to
remain at Rs47/US$, then our target price could go down by 4.5% (as
calculated above, excluding the goodwill impact).
We note that by taking an unhedged foreign currency borrowing,
Bharti has managed to keep its cost of funding for acquisition low (its
total cost of debt LTM was 4%). If, however, we were to replace this
with domestic (AAA yield of 9.4%) or hedged borrowing, additional
interest expenses would be US$725 mn (28%/11%/10% of
FY12/FY13/FY14 PBT, respectively). In our models, we have a
consolidated cost of debt of 5% in FY3/12 for Bharti.
Underlying fundamentals remain strong
On the ground, we continue to believe that the competitive scenario
improves for the better, for incumbents such as Bharti. In addition to
previous newsflow on tariff hikes and falling dealer commissions, our
recent store visits indicated that the industry is also reducing other
parts of the S&M spend (in-store promotions, number of layers in the
distribution system, etc. – see our note dated 7 September 2011).
These measures indicate a clear shift of focus from subscriber
quantity to quality (one of the key reasons for falling net adds
numbers), and could boost margins.
Rupee appreciation could lead to volatility in the stock price over the
near term; however, we remain confident of the long-term
fundamentals and maintain our OUTPERFORM rating on the stock.
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