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Bharti Airtel (BHARTI)
Telecom
A closer look at Street’s concerns; we remain positive. A variety of concerns on
Bharti has sprung in recent times, the latest one being the fuel subsidy removal in
Nigeria, which in our view is a non-event. Among other key concerns are regulatory
risks, potential structural wireless volume slowdown in India, Bharti’s sustained loss of
market share (especially to Vodafone and Idea), and currency woes. We agree most of
these can be seen as concerning; nonetheless, the recent correction is pricing in the
worst-case on the most, in our view. We remain constructive.
The latest concern – fuel subsidy removal in Nigeria
The Nigerian Government recently announced removal of fuel subsidy to shore up the fiscal. We
see this as a non-event largely. Firstly, there is no direct impact of this move on costs – fuel subsidy
removal pertains only to petrol; diesel, which is the fuel used by telcos to power their network
when grid power is not available, was deregulated many years ago. Secondly, the indirect impact
on volumes on account of inflationary pressure exerted by petrol subsidy removal, as being
mentioned as a risk by sections of media and Street, is a stretched assumption, in our view. We
note that inflation has been high (mid-double digits; now closer to 10%) in Nigeria for the past 3+
years. We would not be unduly worried on this front. We do note that some trade unions have
called for an indefinite strike from Jan 9 to oppose the Government’s decision. This could have
some near-term disruption on operations – prolonged disruption is a risk worth monitoring.
Regulations – look beyond immediate news flow
Regulatory noise has amplified in recent months with ‘blink and you miss’ news flow. We believe
(1) the final decision on most issues (around spectrum, roaming, MTR, 3G ICR, etc.) will take some
time coming, and (2) most decisions are likely to be challenged by industry players at the TDSAT
and/or Supreme Court; these issues could drag for a while. Timeline uncertainty aside, we believe
focusing on absolute negative first-order impact on individual players amounts to narrow framing
and does not take into consideration the second-order impact on the industry and reaction from
the industry. In addition, recent correction in Bharti’s stock price now builds in pretty much the
worst on regulations, in our view.
Structural volume slowdown in India wireless?
A poor Sep quarter on volumes for large incumbents and sharp deceleration in net adds pace in
recent months have led to valid concerns on a structural and sharp slowdown in wireless volumes
in India. We sort of agree with the structural slowdown thesis, but not with the ‘sharp’ part of the
argument.
Volume growth slowdown as market’s base grows larger and elasticity to price cuts erodes is
natural in any wireless market’s evolution. The key really is the pace of slowdown and there
we think volume growth deceleration pace will be gradual. Our view is not based on an
expectation of substantial new subs additions in the industry in the coming years. We
believe there is residual vintage effect (growth in a subs’ usage as he ages on the network)
left in the system, which should provide the additional volume growth kicker beyond that
contributed by new sub adds, for the next couple of years at least. That said, we are building
in a slowdown in volume growth pace over the coming years (see Exhibit 1 for our volume
growth projections for Bharti and Idea).
Bharti’s sustained loss of competitive positioning for the past few quarters
This is a valid concern; Bharti’s revenue market share loss over the past 2+ years compares
poorly to the market share gains reported by its two closest competitors, Vodafone and Idea.
More importantly, market share gains for Vodafone and Idea have come on the back of
strong market share protection and/or gain in their established circles and not just because
they expanded into a few new circles. Exhibits 2-5 illustrate our point in greater detail.
Now, what has led to the all-around RMS loss for Bharti over the past (almost) two years?
Wasn’t it supposed to be the case with several new network rollouts (RCOM/TTSL GSM,
Aircel expansion, Idea/Vodafone expansion, Uninor) happening? The answer is – yes and no.
Even as Aircel and TTSL, among the new GSM operators, have managed a 135 bps RMS
gain each since June 2009, not all incumbents have lost. Bharti is the RMS loss leader along
with RCOM and BSNL. The other two incumbents, Vodafone and Idea have in fact managed
to gain RMS in this timeframe, as discussed above.
We have struggled to point a finger on what’s ailing Bharti on this front. However, we are
closely watching these metrics as this, we think, is a genuine concern on Bharti. FY2013E
estimates (ours as well as Street’s) call for a reversion (or substantial moderation, at the least)
in the RMS loss trend for Bharti and hence, disappointment on this front would mean
earnings downgrades as well as some de-rating, in our view.
Currency woes
Bharti has substantial (US$10 bn+) unhedged net foreign currency exposure (mostly USD,
some JPY) in the form of debt and net current liabilities (equipment payables invoiced in FC).
Sharp appreciation in both USD and JPY over the past few months has the market worried
on the impact on Bharti, and rightly so. We just wish to make a couple of points –
�� While worrying about the negatives arising out of Bharti’s BS exposure to appreciating
currencies (versus the reporting currency INR), positives arising from appreciation of
African currencies on Africa P&L translation into INR are largely being ignored by the
market. To illustrate, for 3QFY12, Re depreciation versus Bharti’s weighted average
basked of African currencies is driving a 13% qoq increase in INR revenues versus 5.5%
qoq in local currency, per our estimates. Positive INR EBITDA impact of Re movement
versus African currencies should be noted while forming an overall currency impact view.
We do note that we are not commenting on the direction of any currency here.
�� From a cash flow perspective, a bulk of the FC impact arises on account of the USD debt
raised for Zain Africa acquisition. The debt is on the books of the Netherlands SPV created
for the acquisition. Now, Bharti takes a cash flow hit in INR terms, if Bharti India INR cash
flow is used to repay this debt. Bharti management has indicated that it intends to use
free cash generated from its Africa ops to repay this debt, as and when repayment comes
due (average remaining maturity of the debt is a little under 4 years, per our estimate).
Even as we do not forecast enough free cash flow from Bharti Africa ops over the next
few years to take care of the repayment, we do note that Bharti has the option of
refinancing the FC debt through another FC debt raise on the back of what we believe
should be a healthier EBITDA/FCF position in Africa ops. In this light, worries on
acquisition debt on account of INR/USD movement miss the cash flow picture.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI)
Telecom
A closer look at Street’s concerns; we remain positive. A variety of concerns on
Bharti has sprung in recent times, the latest one being the fuel subsidy removal in
Nigeria, which in our view is a non-event. Among other key concerns are regulatory
risks, potential structural wireless volume slowdown in India, Bharti’s sustained loss of
market share (especially to Vodafone and Idea), and currency woes. We agree most of
these can be seen as concerning; nonetheless, the recent correction is pricing in the
worst-case on the most, in our view. We remain constructive.
The latest concern – fuel subsidy removal in Nigeria
The Nigerian Government recently announced removal of fuel subsidy to shore up the fiscal. We
see this as a non-event largely. Firstly, there is no direct impact of this move on costs – fuel subsidy
removal pertains only to petrol; diesel, which is the fuel used by telcos to power their network
when grid power is not available, was deregulated many years ago. Secondly, the indirect impact
on volumes on account of inflationary pressure exerted by petrol subsidy removal, as being
mentioned as a risk by sections of media and Street, is a stretched assumption, in our view. We
note that inflation has been high (mid-double digits; now closer to 10%) in Nigeria for the past 3+
years. We would not be unduly worried on this front. We do note that some trade unions have
called for an indefinite strike from Jan 9 to oppose the Government’s decision. This could have
some near-term disruption on operations – prolonged disruption is a risk worth monitoring.
Regulations – look beyond immediate news flow
Regulatory noise has amplified in recent months with ‘blink and you miss’ news flow. We believe
(1) the final decision on most issues (around spectrum, roaming, MTR, 3G ICR, etc.) will take some
time coming, and (2) most decisions are likely to be challenged by industry players at the TDSAT
and/or Supreme Court; these issues could drag for a while. Timeline uncertainty aside, we believe
focusing on absolute negative first-order impact on individual players amounts to narrow framing
and does not take into consideration the second-order impact on the industry and reaction from
the industry. In addition, recent correction in Bharti’s stock price now builds in pretty much the
worst on regulations, in our view.
Structural volume slowdown in India wireless?
A poor Sep quarter on volumes for large incumbents and sharp deceleration in net adds pace in
recent months have led to valid concerns on a structural and sharp slowdown in wireless volumes
in India. We sort of agree with the structural slowdown thesis, but not with the ‘sharp’ part of the
argument.
Volume growth slowdown as market’s base grows larger and elasticity to price cuts erodes is
natural in any wireless market’s evolution. The key really is the pace of slowdown and there
we think volume growth deceleration pace will be gradual. Our view is not based on an
expectation of substantial new subs additions in the industry in the coming years. We
believe there is residual vintage effect (growth in a subs’ usage as he ages on the network)
left in the system, which should provide the additional volume growth kicker beyond that
contributed by new sub adds, for the next couple of years at least. That said, we are building
in a slowdown in volume growth pace over the coming years (see Exhibit 1 for our volume
growth projections for Bharti and Idea).
Bharti’s sustained loss of competitive positioning for the past few quarters
This is a valid concern; Bharti’s revenue market share loss over the past 2+ years compares
poorly to the market share gains reported by its two closest competitors, Vodafone and Idea.
More importantly, market share gains for Vodafone and Idea have come on the back of
strong market share protection and/or gain in their established circles and not just because
they expanded into a few new circles. Exhibits 2-5 illustrate our point in greater detail.
Now, what has led to the all-around RMS loss for Bharti over the past (almost) two years?
Wasn’t it supposed to be the case with several new network rollouts (RCOM/TTSL GSM,
Aircel expansion, Idea/Vodafone expansion, Uninor) happening? The answer is – yes and no.
Even as Aircel and TTSL, among the new GSM operators, have managed a 135 bps RMS
gain each since June 2009, not all incumbents have lost. Bharti is the RMS loss leader along
with RCOM and BSNL. The other two incumbents, Vodafone and Idea have in fact managed
to gain RMS in this timeframe, as discussed above.
We have struggled to point a finger on what’s ailing Bharti on this front. However, we are
closely watching these metrics as this, we think, is a genuine concern on Bharti. FY2013E
estimates (ours as well as Street’s) call for a reversion (or substantial moderation, at the least)
in the RMS loss trend for Bharti and hence, disappointment on this front would mean
earnings downgrades as well as some de-rating, in our view.
Currency woes
Bharti has substantial (US$10 bn+) unhedged net foreign currency exposure (mostly USD,
some JPY) in the form of debt and net current liabilities (equipment payables invoiced in FC).
Sharp appreciation in both USD and JPY over the past few months has the market worried
on the impact on Bharti, and rightly so. We just wish to make a couple of points –
�� While worrying about the negatives arising out of Bharti’s BS exposure to appreciating
currencies (versus the reporting currency INR), positives arising from appreciation of
African currencies on Africa P&L translation into INR are largely being ignored by the
market. To illustrate, for 3QFY12, Re depreciation versus Bharti’s weighted average
basked of African currencies is driving a 13% qoq increase in INR revenues versus 5.5%
qoq in local currency, per our estimates. Positive INR EBITDA impact of Re movement
versus African currencies should be noted while forming an overall currency impact view.
We do note that we are not commenting on the direction of any currency here.
�� From a cash flow perspective, a bulk of the FC impact arises on account of the USD debt
raised for Zain Africa acquisition. The debt is on the books of the Netherlands SPV created
for the acquisition. Now, Bharti takes a cash flow hit in INR terms, if Bharti India INR cash
flow is used to repay this debt. Bharti management has indicated that it intends to use
free cash generated from its Africa ops to repay this debt, as and when repayment comes
due (average remaining maturity of the debt is a little under 4 years, per our estimate).
Even as we do not forecast enough free cash flow from Bharti Africa ops over the next
few years to take care of the repayment, we do note that Bharti has the option of
refinancing the FC debt through another FC debt raise on the back of what we believe
should be a healthier EBITDA/FCF position in Africa ops. In this light, worries on
acquisition debt on account of INR/USD movement miss the cash flow picture.
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