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Bharti Airtel (BHARTI)
Telecom
Quantifying Bharti’s currency exposure. Bharti’s FC debt (substantial at ~US$11 bn
at end-June 2011) and other FC liabilities (equipment payables, mostly in US$ and Euro)
exposes it to the risk of US$/Euro appreciation versus local functional currencies (INR
and various African currencies). P&L impact would be limited as translation losses on
acquisition debt (a large portion of FC exposure) are not routed through the P&L.
Valuation impact to the tune of Rs26/share, assuming a Re/US$ rate of 50, is priced in.
ADD.
Bharti’s FC exposure – some details
Bharti’s FY2011 annual report suggests that only about 16% of its total gross debt of Rs621 bn at
end-FY2011 was denominated in INR with the rest being non-INR. A majority (Rs454 bn) of this
non-INR gross debt of Rs520 bn was in US$ with Nigerian Naira (Rs35 bn) and Japanese Yen (Rs17
bn) contributing a bulk of the rest. In addition to the gross debt on the balance sheet, Bharti also
has non-INR currency exposure in the form of current liabilities (primarily equipment payables in
US$ and Euro, and some trade creditors). Equipment payables at end-FY2011 stood at Rs65 bn,
while trade creditors stood at Rs56 bn. Assuming 100% of equipment payables and 30% of trade
creditors are in non-INR currencies, this increases Bharti’s non-INR exposure by another Rs82 bn,
taking the total exposure including non-INR debt to Rs600 bn or around US$13 bn.
Impact on P&L and valuations should be looked at separately
It is important to look the impact of US$ and JPY strengthening on P&L and valuations separately.
Two reasons – (1) 100% impact is not routed through the P&L, and (2) mark-to-market (MTM)
impact routed through the P&L is a one-time impact on earnings and hence, multiple-based
valuations should exclude the P&L impact and adjust for the valuation impact separately.
P&L impact – what gets routed and what doesn’t?
Bharti’s FC exposure is at various subsidiary levels, each of which has its own functional currency.
There are two legs to translation of FC liabilities into the reporting currency, i.e. INR. In the first leg,
FC liabilities are translated into functional currency; for example, US$ debt in Nigeria is translated
into Nigerian Naira in this leg. Forex gains/losses on this first leg of translation are routed through
the P&L. The second leg of translation restates from functional currencies to the reporting currency,
INR. Translation impact of this leg is taken to the balance sheet in the form of foreign currency
translation reserve. Bharti had an FCTR balance of Rs12.8 bn as of end-June 2011.
Hence, from a P&L perspective, one does not need to worry about the second leg of translation.
This is important because a bulk of FC exposure (almost US$9.5 bn) is at the Netherlands
acquisition SPV level. The functional currency of this SPV is US$ and hence, there is no leg-1
translation impact and accordingly, no P&L impact.
PBT sensitivity – how much could 2QFY12E get hit?
Bharti’s FY2011 annual report gives the PBT impact of fluctuation in US$ and JPY versus the
Re (at a consolidated level, taking into account the non-designated hedges). It specifies
Rs5.23 bn PBT impact of a 5% move in the Re and Rs1.03 bn impact of a 5% move in
the JPY. This sensitivity applied to the FC exposure composition across currencies as of end-
March 2011. This would not have changed materially since, in our view.
Hence, the nearly 5.8% Re depreciation versus US$ and around 11% Re depreciation versus
the JPY versus end-June 2011 levels, at the time of writing (actual impact would be
determined on the basis of Re/US$ and Re/JPY levels on September 30, 2011), would impact
Bharti’s PBT by close to Rs8.3 bn. This implies an incremental forex loss of Rs6.6 bn qoq
versus Rs1.7 bn in 1QFY12. On our current revenue/EBITDA estimates for the quarter, this
could mean a net income just upwards of Rs10 bn for 2QFY12E, down from Rs12.2 bn in
1QFY12. FY2012E earnings go down by nearly 8% to Rs16.7 from the current estimate of
Rs18.2. We do note that this impact is MTM and would reverse if Rupee were to appreciate
later in the year.
Valuation impact
MTM forex losses on account of adverse currency movements are a one-time hit (unless the
currency continues to move adversely) on earnings and hence, a multiple-based valuation
should exclude forex gains and losses, in our view. Nonetheless, unhedged FC exposure has
a real cost (at some point, even if MTM is only notional at a particular timeframe) if
currencies sustain at adverse levels and valuations should reflect that.
A better way to assess the impact on valuations is to (1) look at the increase in INR net debt
the FC impact leads to, and (2) compute the present value of higher-than-assumed future
interest payments in INR on FC debt assuming Re/US$ sustains at current levels.
For example, assuming Re/US$ at 50 (versus 44.8 at end-June 2011) and similar movements
in JPY and other foreign currencies that Bharti is exposed to, the roughly 11.6% adverse
movement would lead to an increase of US$1.5 bn on the company’s net FC exposure
(including current liabilities in FC) of US$13 bn – roughly an impact of Rs20/share. One also
needs to add the roughly Rs3.4/share FCTR on the balance sheet as of end-June 2011.
Also, interest payout of roughly US$500 mn per annum assumed for the next five years in
our model goes up by roughly 11.6% every year. This translates into a PV impact of US$210
mn or roughly Rs2.8/share. Total impact, assuming Re/US$ goes to 50 and sustains as a
long-term level, is Rs26/share. Stock’s recent fall largely prices this in, in our view. We
remain constructive with a target price of Rs460/share. ADD.
Bharti - currency-wise gross debt as of end-March 2011
Currency Gross debt (Rs mn)
INR 1 01
USD 454
JPY 17
NGN (Naira) 3 5
XAF 5
Others 8
Total 621
Source: Company
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI)
Telecom
Quantifying Bharti’s currency exposure. Bharti’s FC debt (substantial at ~US$11 bn
at end-June 2011) and other FC liabilities (equipment payables, mostly in US$ and Euro)
exposes it to the risk of US$/Euro appreciation versus local functional currencies (INR
and various African currencies). P&L impact would be limited as translation losses on
acquisition debt (a large portion of FC exposure) are not routed through the P&L.
Valuation impact to the tune of Rs26/share, assuming a Re/US$ rate of 50, is priced in.
ADD.
Bharti’s FC exposure – some details
Bharti’s FY2011 annual report suggests that only about 16% of its total gross debt of Rs621 bn at
end-FY2011 was denominated in INR with the rest being non-INR. A majority (Rs454 bn) of this
non-INR gross debt of Rs520 bn was in US$ with Nigerian Naira (Rs35 bn) and Japanese Yen (Rs17
bn) contributing a bulk of the rest. In addition to the gross debt on the balance sheet, Bharti also
has non-INR currency exposure in the form of current liabilities (primarily equipment payables in
US$ and Euro, and some trade creditors). Equipment payables at end-FY2011 stood at Rs65 bn,
while trade creditors stood at Rs56 bn. Assuming 100% of equipment payables and 30% of trade
creditors are in non-INR currencies, this increases Bharti’s non-INR exposure by another Rs82 bn,
taking the total exposure including non-INR debt to Rs600 bn or around US$13 bn.
Impact on P&L and valuations should be looked at separately
It is important to look the impact of US$ and JPY strengthening on P&L and valuations separately.
Two reasons – (1) 100% impact is not routed through the P&L, and (2) mark-to-market (MTM)
impact routed through the P&L is a one-time impact on earnings and hence, multiple-based
valuations should exclude the P&L impact and adjust for the valuation impact separately.
P&L impact – what gets routed and what doesn’t?
Bharti’s FC exposure is at various subsidiary levels, each of which has its own functional currency.
There are two legs to translation of FC liabilities into the reporting currency, i.e. INR. In the first leg,
FC liabilities are translated into functional currency; for example, US$ debt in Nigeria is translated
into Nigerian Naira in this leg. Forex gains/losses on this first leg of translation are routed through
the P&L. The second leg of translation restates from functional currencies to the reporting currency,
INR. Translation impact of this leg is taken to the balance sheet in the form of foreign currency
translation reserve. Bharti had an FCTR balance of Rs12.8 bn as of end-June 2011.
Hence, from a P&L perspective, one does not need to worry about the second leg of translation.
This is important because a bulk of FC exposure (almost US$9.5 bn) is at the Netherlands
acquisition SPV level. The functional currency of this SPV is US$ and hence, there is no leg-1
translation impact and accordingly, no P&L impact.
PBT sensitivity – how much could 2QFY12E get hit?
Bharti’s FY2011 annual report gives the PBT impact of fluctuation in US$ and JPY versus the
Re (at a consolidated level, taking into account the non-designated hedges). It specifies
Rs5.23 bn PBT impact of a 5% move in the Re and Rs1.03 bn impact of a 5% move in
the JPY. This sensitivity applied to the FC exposure composition across currencies as of end-
March 2011. This would not have changed materially since, in our view.
Hence, the nearly 5.8% Re depreciation versus US$ and around 11% Re depreciation versus
the JPY versus end-June 2011 levels, at the time of writing (actual impact would be
determined on the basis of Re/US$ and Re/JPY levels on September 30, 2011), would impact
Bharti’s PBT by close to Rs8.3 bn. This implies an incremental forex loss of Rs6.6 bn qoq
versus Rs1.7 bn in 1QFY12. On our current revenue/EBITDA estimates for the quarter, this
could mean a net income just upwards of Rs10 bn for 2QFY12E, down from Rs12.2 bn in
1QFY12. FY2012E earnings go down by nearly 8% to Rs16.7 from the current estimate of
Rs18.2. We do note that this impact is MTM and would reverse if Rupee were to appreciate
later in the year.
Valuation impact
MTM forex losses on account of adverse currency movements are a one-time hit (unless the
currency continues to move adversely) on earnings and hence, a multiple-based valuation
should exclude forex gains and losses, in our view. Nonetheless, unhedged FC exposure has
a real cost (at some point, even if MTM is only notional at a particular timeframe) if
currencies sustain at adverse levels and valuations should reflect that.
A better way to assess the impact on valuations is to (1) look at the increase in INR net debt
the FC impact leads to, and (2) compute the present value of higher-than-assumed future
interest payments in INR on FC debt assuming Re/US$ sustains at current levels.
For example, assuming Re/US$ at 50 (versus 44.8 at end-June 2011) and similar movements
in JPY and other foreign currencies that Bharti is exposed to, the roughly 11.6% adverse
movement would lead to an increase of US$1.5 bn on the company’s net FC exposure
(including current liabilities in FC) of US$13 bn – roughly an impact of Rs20/share. One also
needs to add the roughly Rs3.4/share FCTR on the balance sheet as of end-June 2011.
Also, interest payout of roughly US$500 mn per annum assumed for the next five years in
our model goes up by roughly 11.6% every year. This translates into a PV impact of US$210
mn or roughly Rs2.8/share. Total impact, assuming Re/US$ goes to 50 and sustains as a
long-term level, is Rs26/share. Stock’s recent fall largely prices this in, in our view. We
remain constructive with a target price of Rs460/share. ADD.
Bharti - currency-wise gross debt as of end-March 2011
Currency Gross debt (Rs mn)
INR 1 01
USD 454
JPY 17
NGN (Naira) 3 5
XAF 5
Others 8
Total 621
Source: Company
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