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Re-farming and risks
Even as recent sharp INR depreciation against USD and JPY could cause
an 8% downgrade to Bharti Airtel FY12CL earnings, our key concern
remains regulatory uncertainty on spectrum policies. The much awaited
New Telecom Policy is now expected only in 2012 and carries significant
risks not just on one time spectrum charges and 2G licence renewal costs
but also re-farming. Re-farming of 900MHz spectrum carries serious risk
of business disruption and could cause additional financial burden.
Bharti’s ROIC has dropped 11pptsYoY to 10% and regulatory risks will
further hit returns and hinder planned deleveraging efforts. Maintain UPF.
Re-farming of 900MHz can cause business disruption
NTP will be the final word on re-farming of 900MHz spectrum as 2G GSM
licences expire. Bharti possesses 23% industry share (107MHz) of 900
spectrum maximum amongst private telecom operators (57% higher than
Vodafone India) and has its most important Delhi circle licence come up for
renewal in November 2014. Even as GSM incumbents claim that refarming is
really a proposed redistribution and reallocation and is unwarranted, refarming
if implemented will cause serious business disruption. If 900MHz is
re-farmed Bharti will require complete redesign/recast of network RF
architecture including more base stations and significant increase in capex.
Consequently operators in order not to disturb RF network will be willing to
pay additional fee to retain the golden spectrum.
Multiple spectrum issues and delays to telecom policy
Also the NTP itself has been further delayed and is now expected only in early
2012, extending the high regulatory overhang. The NTP will bring forth risks
of US$5-6bn of regulatory payments on spectrum for Bharti. These include
US$800m for excess 2G spectrum >6.2MHz, US$2.7bn NPV for 2G licence
renewals and investments required to complete spectrum footprint in 3G
(nine circles) and 4G (18 circles). NTP also holds back M&A which is critical
for the sector’s sustenance including providing an exit route to certain
operators and change from an environment of fragmented spectrum and an
alternative for leading operators like Bharti to acquire further spectrum.
Risk of 8% earnings cut in FY12CL; Maintain U-PF.
Meanwhile INR depreciation of 9% against USD and over 15% against JPY in
2QFY12 has added risks to earnings. Bharti FY11 annual report specifies 5%
move in INR/USD impacts PBT by Rs5.2bn and INR/JPY by Rs1bn. Accordingly
FY12CL earnings could see 8% downgrade assuming no change in hedging
post FY11. Including USD currency debt, equipment supply payable and
creditors Bharti total exposure is US$13bn. While translation loss on Bharti’s
US$9bn of Africa acquisition debt is routed through Balance Sheet. Bharti’s
ROIC has already dropped 11pptsYoY to 10% and upcoming significant
regulatory risks will further hit returns and hinder its planned deleveraging
efforts. We maintain our Underperform rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Re-farming and risks
Even as recent sharp INR depreciation against USD and JPY could cause
an 8% downgrade to Bharti Airtel FY12CL earnings, our key concern
remains regulatory uncertainty on spectrum policies. The much awaited
New Telecom Policy is now expected only in 2012 and carries significant
risks not just on one time spectrum charges and 2G licence renewal costs
but also re-farming. Re-farming of 900MHz spectrum carries serious risk
of business disruption and could cause additional financial burden.
Bharti’s ROIC has dropped 11pptsYoY to 10% and regulatory risks will
further hit returns and hinder planned deleveraging efforts. Maintain UPF.
Re-farming of 900MHz can cause business disruption
NTP will be the final word on re-farming of 900MHz spectrum as 2G GSM
licences expire. Bharti possesses 23% industry share (107MHz) of 900
spectrum maximum amongst private telecom operators (57% higher than
Vodafone India) and has its most important Delhi circle licence come up for
renewal in November 2014. Even as GSM incumbents claim that refarming is
really a proposed redistribution and reallocation and is unwarranted, refarming
if implemented will cause serious business disruption. If 900MHz is
re-farmed Bharti will require complete redesign/recast of network RF
architecture including more base stations and significant increase in capex.
Consequently operators in order not to disturb RF network will be willing to
pay additional fee to retain the golden spectrum.
Multiple spectrum issues and delays to telecom policy
Also the NTP itself has been further delayed and is now expected only in early
2012, extending the high regulatory overhang. The NTP will bring forth risks
of US$5-6bn of regulatory payments on spectrum for Bharti. These include
US$800m for excess 2G spectrum >6.2MHz, US$2.7bn NPV for 2G licence
renewals and investments required to complete spectrum footprint in 3G
(nine circles) and 4G (18 circles). NTP also holds back M&A which is critical
for the sector’s sustenance including providing an exit route to certain
operators and change from an environment of fragmented spectrum and an
alternative for leading operators like Bharti to acquire further spectrum.
Risk of 8% earnings cut in FY12CL; Maintain U-PF.
Meanwhile INR depreciation of 9% against USD and over 15% against JPY in
2QFY12 has added risks to earnings. Bharti FY11 annual report specifies 5%
move in INR/USD impacts PBT by Rs5.2bn and INR/JPY by Rs1bn. Accordingly
FY12CL earnings could see 8% downgrade assuming no change in hedging
post FY11. Including USD currency debt, equipment supply payable and
creditors Bharti total exposure is US$13bn. While translation loss on Bharti’s
US$9bn of Africa acquisition debt is routed through Balance Sheet. Bharti’s
ROIC has already dropped 11pptsYoY to 10% and upcoming significant
regulatory risks will further hit returns and hinder its planned deleveraging
efforts. We maintain our Underperform rating.
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