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High leverage, slowdown, regulatory risks abound
Consistent deterioration in operating metrics, a steep increase in leverage,
regulatory risk and a slowdown in incremental subscriber addition drive our
negative view on Bharti Airtel and we argue against its perceived ‘defensive’
nature. We believe, going forward, the above factors are likely to continue
exerting pressure on the stock. We assign a Sell rating and a SOTP-based target
price of Rs300 to the stock, implying 9% downside from the CMP. It should be
noted that our FY13 EPS estimate is 17.7% below consensus estimates.
‘Defensive’ argument not a convincing one: Given that Bharti is largely a domestic
theme not dependent on global economic prospects, some views on the street imply
that the stock is a defensive bet in a volatile market. We do not concur with the
defensive stock argument for the following reasons: (1) Significant deterioration in
operating metrics over the past few quarters as against the perceived stability of a
defensive stock (2QFY12 net profit fell 38.2% YoY, the seventh consecutive quarter of
decline), (2) A significant increase in financial leverage (over 500%) and a steep rise in
goodwill and intangibles (964% increase, 42% of balance sheet size in 2QFY12), all of
which do not characterise a defensive bet, and (3) Ever-present regulatory risks,
leading to a Rs138.6bn NPV relating to licence renewal and ‘excess spectrum’
charges, thereby shaving off Rs36 from our TP. Given 73% dollar-denominated debt,
this exposes Bharti to currency risks and if the rupee remains weak against the
dollar, it is likely to adversely impact cash flows by nearly Rs12bn in FY12.
Net subscriber addition slowdown signifies rising saturation level: Over the past
few months, Bharti’s subscriber addition in India has fallen significantly and
stood at just 0.96mn in November 2011, the lowest in nearly six years. This, we
believe, is a sign that the Indian telecom market is nearing saturation and going
forward, subscriber addition will continue to steadily taper down. Going forward, it is
apparent that incremental subscriber addition will consist of rural subscribers who
typically take time to ramp up their usage. Thus, Bharti needs to grow revenues not
merely through subscriber addition but also through better pricing, which may not be
easy. Data revenue growth through 3G services is likely to take time to ramp up. Nonavailability
of vernacular content is another issue that could hamper 3G off-take.
Valuation: We value Bharti on SOTP basis. We assign an EV/EBITDA multiple of 5.5x
for the India business, 4.5x for the consolidated Africa business and EV/tower of
Rs4.8mn for the passive infrastructure services business. Regulatory risks (one-time
‘excess spectrum’ fee and current value of licence renewal costs), knock off Rs36 from
our TP. We arrive at an implied equity value of Rs1,139bn resulting in a TP of Rs300,
which implies 9% downside from the CMP. Hence we assign a Sell rating to Bharti with
a target price of Rs300.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
High leverage, slowdown, regulatory risks abound
Consistent deterioration in operating metrics, a steep increase in leverage,
regulatory risk and a slowdown in incremental subscriber addition drive our
negative view on Bharti Airtel and we argue against its perceived ‘defensive’
nature. We believe, going forward, the above factors are likely to continue
exerting pressure on the stock. We assign a Sell rating and a SOTP-based target
price of Rs300 to the stock, implying 9% downside from the CMP. It should be
noted that our FY13 EPS estimate is 17.7% below consensus estimates.
‘Defensive’ argument not a convincing one: Given that Bharti is largely a domestic
theme not dependent on global economic prospects, some views on the street imply
that the stock is a defensive bet in a volatile market. We do not concur with the
defensive stock argument for the following reasons: (1) Significant deterioration in
operating metrics over the past few quarters as against the perceived stability of a
defensive stock (2QFY12 net profit fell 38.2% YoY, the seventh consecutive quarter of
decline), (2) A significant increase in financial leverage (over 500%) and a steep rise in
goodwill and intangibles (964% increase, 42% of balance sheet size in 2QFY12), all of
which do not characterise a defensive bet, and (3) Ever-present regulatory risks,
leading to a Rs138.6bn NPV relating to licence renewal and ‘excess spectrum’
charges, thereby shaving off Rs36 from our TP. Given 73% dollar-denominated debt,
this exposes Bharti to currency risks and if the rupee remains weak against the
dollar, it is likely to adversely impact cash flows by nearly Rs12bn in FY12.
Net subscriber addition slowdown signifies rising saturation level: Over the past
few months, Bharti’s subscriber addition in India has fallen significantly and
stood at just 0.96mn in November 2011, the lowest in nearly six years. This, we
believe, is a sign that the Indian telecom market is nearing saturation and going
forward, subscriber addition will continue to steadily taper down. Going forward, it is
apparent that incremental subscriber addition will consist of rural subscribers who
typically take time to ramp up their usage. Thus, Bharti needs to grow revenues not
merely through subscriber addition but also through better pricing, which may not be
easy. Data revenue growth through 3G services is likely to take time to ramp up. Nonavailability
of vernacular content is another issue that could hamper 3G off-take.
Valuation: We value Bharti on SOTP basis. We assign an EV/EBITDA multiple of 5.5x
for the India business, 4.5x for the consolidated Africa business and EV/tower of
Rs4.8mn for the passive infrastructure services business. Regulatory risks (one-time
‘excess spectrum’ fee and current value of licence renewal costs), knock off Rs36 from
our TP. We arrive at an implied equity value of Rs1,139bn resulting in a TP of Rs300,
which implies 9% downside from the CMP. Hence we assign a Sell rating to Bharti with
a target price of Rs300.
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