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Strong FCF and African operations should temper India policy risk
Our Buy rating on Bharti reflects strong FCF generation (Rs368bn over FY12-
14E) and relative resilience to global factors. We highlight improving business
momentum in India driven by tariff increases and 3G rollout, and the solid
progress in its African operations. However, these should be partially offset by
negative impact of policy changes, which we factor in our estimates. We
reduce our FY13E/FY14E EBITDA by 14%/12% and target price by 9% to
Rs420. The EPS cut is higher (35%/24% in FY13E/14E) due to Bharti’s
operating and financial leverage.
India: steady progress but policy risk is material
We expect Bharti's Indian operations to generate FCF (before spectrum/license
payments) of Rs80bn/138bn/186bn in FY12E/13E/14E. The impact of higher
tariffs (c20%) should percolate through the subscriber base over the next six
months, leading revenue growth to inch back to 15% YoY. Our estimates
factor the likely cost of excess spectrum (around Rs43bn) but not the cost of
extension of key licenses during FY15/16 (around Rs57bn). While the impact of
regulatory costs is material, Bharti is better placed than its incumbent peers to
absorb them.
Africa: we expect operations to close the cashflow gap by FY14E
Bharti's revenue and EBITDA run-rate in Africa stands at $3.7bn/$1bn. Margin
has continued to improve (26.3% 2QFY12), and we forecast a level of
30%/32% in FY13/FY14. Bharti has increased its FY12E capex guidance to
$1.5bn and believes that its unit capex costs are lower than competition.
Results commentary of its key competitors suggests that it has made
aggressive tariff cuts in markets such as Ghana and Kenya but has been more
restrained in Nigeria. We forecast FY13/FY14 EBITDA and FCF at $1.4/$1.7bn
and $350m/$85m, respectively.
Target price of Rs420, trading at 6.5xFY13E EV/EBITDA and 7% FCF yield
We use DCF to value Bharti (details on pg 13). Our target price implies
7.8xFY13 EV/EBITDA for Indian ops assuming 5.0x for Africa. The reduction in
target price is due to Indian operations (Rs460 vs Rs500 earlier); we continue
imply African ops at equity value of Rs40/shr. Adverse policy outcome is the
key risk.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong FCF and African operations should temper India policy risk
Our Buy rating on Bharti reflects strong FCF generation (Rs368bn over FY12-
14E) and relative resilience to global factors. We highlight improving business
momentum in India driven by tariff increases and 3G rollout, and the solid
progress in its African operations. However, these should be partially offset by
negative impact of policy changes, which we factor in our estimates. We
reduce our FY13E/FY14E EBITDA by 14%/12% and target price by 9% to
Rs420. The EPS cut is higher (35%/24% in FY13E/14E) due to Bharti’s
operating and financial leverage.
India: steady progress but policy risk is material
We expect Bharti's Indian operations to generate FCF (before spectrum/license
payments) of Rs80bn/138bn/186bn in FY12E/13E/14E. The impact of higher
tariffs (c20%) should percolate through the subscriber base over the next six
months, leading revenue growth to inch back to 15% YoY. Our estimates
factor the likely cost of excess spectrum (around Rs43bn) but not the cost of
extension of key licenses during FY15/16 (around Rs57bn). While the impact of
regulatory costs is material, Bharti is better placed than its incumbent peers to
absorb them.
Africa: we expect operations to close the cashflow gap by FY14E
Bharti's revenue and EBITDA run-rate in Africa stands at $3.7bn/$1bn. Margin
has continued to improve (26.3% 2QFY12), and we forecast a level of
30%/32% in FY13/FY14. Bharti has increased its FY12E capex guidance to
$1.5bn and believes that its unit capex costs are lower than competition.
Results commentary of its key competitors suggests that it has made
aggressive tariff cuts in markets such as Ghana and Kenya but has been more
restrained in Nigeria. We forecast FY13/FY14 EBITDA and FCF at $1.4/$1.7bn
and $350m/$85m, respectively.
Target price of Rs420, trading at 6.5xFY13E EV/EBITDA and 7% FCF yield
We use DCF to value Bharti (details on pg 13). Our target price implies
7.8xFY13 EV/EBITDA for Indian ops assuming 5.0x for Africa. The reduction in
target price is due to Indian operations (Rs460 vs Rs500 earlier); we continue
imply African ops at equity value of Rs40/shr. Adverse policy outcome is the
key risk.
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