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Bharti Airtel
Tough times! Good time to enter
Event
Bharti stock is 15% below its near-term peak (Rs440) and ~9% down from
early September, when the INR started to depreciate sharply. This is partly
driven by general market weakness. More importantly, three concerns are
being raised – INR depreciation, concerns on spectrum charges and the 3G
price war (details on each item can be found on pages 2-9). We still believe
that Bharti is a great stock to own in this environment. It is one of our global
top picks in the telecom sector. We re-iterate our Outperform rating.
Impact
Forex impact is primarily a non-cash item: A 5% depreciation of the INR
versus the USD impacts PBT by ~6.5%. However this is primarily a translation
related (non-cash) item. We estimate the cash impact to be less than 1% of
EBITDA for a quarter. The medium-term hedging policy could limit this further.
No price war in 3G – even though prices will fall further: We don’t see
recent price cuts in 3G by most operators as a signal that a ‘2008 style’ price
war is about to begin. Based on global comps in fact, implied ARPU at Rs500
is still 38% higher than our FY13 estimate. We continue to expect further price
cuts to drive penetration even as margins improve. We expect trends to be
similar to those seen in 2G in 2003–08 (Fig 5). This should be driven by the
oligopolistic nature of the 3G market and similar pricing (albeit falling).
Low probability of negative policy outcome: We expect the new telecom
policy to support consolidation – through a combination of spectrum sharing,
exit options and M&A rules. The only issue that could rock the boat is if the
spectrum payments are higher than those proposed by the TRAI in February
2011. We believe these recommendations are built into street expectations. If
the proposed ‘excess spectrum’ charges are also applied on the first 6.2 MHz
at time of renewal, it would lead to a US$1.8bn hit to Bharti’s valuation. Our
target price would fall to Rs460/ share, still offering upside from current levels.
This would however impact earnings from FY15 onwards and lead to a return
of policy overhang due to appeal/ litigation by Bharti, Idea and Vodafone. The
probability of this outcome is less than 10% in our view.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs483.00 based on a Sum of Parts methodology.
Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy.
Action and recommendation
Maintain Outperform on Bharti, one of our top global sector picks and a
good defensive play. We believe its balance sheet has the capacity to absorb
the excess spectrum charges. As discussed, we expect the new policy to
generally favour incumbents. This is due to increased consolidation and
pricing power. If this is indeed the case, we expect further earnings upgrades.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel
Tough times! Good time to enter
Event
Bharti stock is 15% below its near-term peak (Rs440) and ~9% down from
early September, when the INR started to depreciate sharply. This is partly
driven by general market weakness. More importantly, three concerns are
being raised – INR depreciation, concerns on spectrum charges and the 3G
price war (details on each item can be found on pages 2-9). We still believe
that Bharti is a great stock to own in this environment. It is one of our global
top picks in the telecom sector. We re-iterate our Outperform rating.
Impact
Forex impact is primarily a non-cash item: A 5% depreciation of the INR
versus the USD impacts PBT by ~6.5%. However this is primarily a translation
related (non-cash) item. We estimate the cash impact to be less than 1% of
EBITDA for a quarter. The medium-term hedging policy could limit this further.
No price war in 3G – even though prices will fall further: We don’t see
recent price cuts in 3G by most operators as a signal that a ‘2008 style’ price
war is about to begin. Based on global comps in fact, implied ARPU at Rs500
is still 38% higher than our FY13 estimate. We continue to expect further price
cuts to drive penetration even as margins improve. We expect trends to be
similar to those seen in 2G in 2003–08 (Fig 5). This should be driven by the
oligopolistic nature of the 3G market and similar pricing (albeit falling).
Low probability of negative policy outcome: We expect the new telecom
policy to support consolidation – through a combination of spectrum sharing,
exit options and M&A rules. The only issue that could rock the boat is if the
spectrum payments are higher than those proposed by the TRAI in February
2011. We believe these recommendations are built into street expectations. If
the proposed ‘excess spectrum’ charges are also applied on the first 6.2 MHz
at time of renewal, it would lead to a US$1.8bn hit to Bharti’s valuation. Our
target price would fall to Rs460/ share, still offering upside from current levels.
This would however impact earnings from FY15 onwards and lead to a return
of policy overhang due to appeal/ litigation by Bharti, Idea and Vodafone. The
probability of this outcome is less than 10% in our view.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs483.00 based on a Sum of Parts methodology.
Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy.
Action and recommendation
Maintain Outperform on Bharti, one of our top global sector picks and a
good defensive play. We believe its balance sheet has the capacity to absorb
the excess spectrum charges. As discussed, we expect the new policy to
generally favour incumbents. This is due to increased consolidation and
pricing power. If this is indeed the case, we expect further earnings upgrades.
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