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F u n d a m e n t a l s t r e n g t h t o p a y o f f …
Bharti Airtel is the market leader in telecom with ~30.9% revenue market
share and strongest fundamentals in the industry. Falling capex intensity,
repayment of debt and reduced interest expense thereon, margin
expansion in African business and high quality subscribers (first takers of
3G) led uptake in 3G services would drive EPS CAGR of 17.3% over FY11-
14E. Spectrum pricing and other regulatory overhang may remain in the
near term but it seems to be already priced in. We reiterate our BUY
rating on Bharti Airtel with a target price of | 450 per share.
3G revenue to drive growth
Bharti Airtel has the highest number of 3G subscribers in the industry. The
company has disproportionately higher revenue market share indicating
cream of the subscribers, who would be the first ones to migrate to 3G
and consume data services. We expect Bharti’s 3G subscriber base to
increase to 6% of total subscribers by FY14E and 10% by FY16E.
Debt repayment resulting in higher EPS growth
Bharti Airtel is expected to generate free cash flow of ~ | 34986 crore
over the next three years, which would be utilised to repay debt. On
account of reduction in debt of about | 24,000 from current levels, we
expect interest expenses to decline by 42.8% by FY14E. This coupled
with margin expansion would aid higher profitability growth. We expect
EBITDA and PAT CAGR of 17.1% and 17.3%, respectively, over FY11-14E.
Margin expansion in Africa
Airtel’s foray into the African market with relatively less penetration give it
further room for growth. Initiatives like BPO, IT and network management
outsourcing and passive infrastructure sharing would help expand the
margins in the long run. Going forward, we expect African revenues and
EBITDA to grow to | 29,372.7 crore and | 9,063.1 by FY14 at a CAGR of
30.9% and 40.4%, respectively, over FY11-14E.
Valuations
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/ share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate
BUY rating on Bharti Airtel.
Company background
Bharti Airtel is one of the world’s leading providers of telecommunication
services with a significant presence in India, 16 countries of Africa, Sri
Lanka and Bangladesh. As of September 2011, Airtel served an aggregate
237 million customers. The services they provide include
telecommunication services under wireless and fixed line technology,
integrated suite of telecom solutions to enterprise customers and
provision of long distance connectivity both nationally and internationally.
They also offer digital TV and IPTV services. All these services are
rendered under a unified brand Airtel. The company also manages
passive infrastructure pertaining to telecom operations through its
subsidiary and joint venture entity.
Bharti earns 75% of its revenues from mobile services. Out of this, 51% is
contributed by the Asian operations whereas the remaining 24% is
contributed by African mobile operations. Passive infrastructure forms
12% of Bharti’s revenue. Telemedia and enterprise contribute 5% and
6%, respectively while the DTH business along with others contributes
2%
Investment Rationale
Dominant player in domestic market
Bharti Airtel is the largest player in the domestic industry both in terms of
subscriber and revenue market share. The company has a subscriber
base of 174.7 million as on November 2011 indicating a subscriber market
share of 19.9%. An 88.9% visitor location register (VLR) subscriber base
against ~70% for the overall industry implies an active subscriber share
of 25.3%
We expect the mobile subscriber base for Bharti Airtel in the domestic
market to grow at a CAGR of 7.1% (FY11-14E) to 199.1 million.
Though the company has lost subscriber share with lower share in net
adds since the onslaught of new players, it has fared much better in the
revenue market share. The revenue market share has declined only by
4.2% points over Q1FY08-Q2FY12
3G to be future growth driver
Airtel has the highest 3G subscribers in the industry. The company has
disproportionately higher revenue market share indicating the cream of
the subscribers, who would be the first ones to migrate to 3G and
consume data services. We expect Bharti’s 3G subscriber base to reach
11.9 million by FY14.
Tower business
Bharti Airtel holds 85% stake in Bharti Infratel, which owns 33,056 towers
with a tenancy of 1.8x as on September 2011 and Bharti Infratel holds a
42% stake in Indus Towers, which owns 1,08,998 towers with a tenancy
of 1.9x.
Indus Towers has the largest and best tower portfolio in the country in
terms of the three anchor tenants (Bharti Airtel, Vodafone and Idea
Cellular), the largest in the industry with a combined revenue and
subscriber market share of 67.3% and 48.9%, respectively. These three
companies collectively have 67.3% and 48.9% revenue and subscriber
market share, respectively, in the 15 circles, Indus Towers operates in.
This also insulates Indus Towers from the risk arising from consolidation
in telecom service providers, since the anchor tenants are the three
largest players.
African operations
Airtel’s foray into the African market with relatively less penetration give it
further room for growth. The revenue has grown from $838.0 million in
Q2F11 to $1030.2 million in Q2FY12 while EBITDA has grown from $201
million to $270.4 million implying a CQGR of 5.3% and 7.7%, respectively.
Though the management’s target of $5 billion revenue and $2 billion
EBITDA by 2013 may seem a little far fetched, the overall scenario in
Africa is improving for Bharti Airtel. Initiatives like BPO, IT and network
management outsourcing and passive infrastructure sharing would help
expand the margins in the long run.
Going forward, we expect the African revenue and EBITDA to grow to |
29372.7 crore and | 9063.1 by FY14 at a CAGR of 30.9% and 40.4%,
respectively, over FY11-14E, led by 16.7% and 10.9% CAGR in
subscribers and ARPU, respectively, over the same period. The EBITDA
margin is expected to expand to 30.9% by FY14 from 25.0% in FY11.
Valuation
DCF based target price of | 450/ share
The stock has been de-rated due to the dual impact of regulatory
overhang and hyper-intensive competition in the domestic market. We
expect Airtel’s valuation multiples to expand on account of reducing
regulatory uncertainty, improving key metrics and profitability. We expect
a higher EPS CAGR of 17.3% over FY11-14E against revenue CAGR of
14.5% over the same period primarily due to repayment of debt.
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/ share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate our
BUY rating on Bharti Airtel.
Key risks to our target price are unfavourable regulatory outcomes and
slower than expected improvement in African operations.
Exhibit : DCF assumptions
| in Crore
WACC 10.7%
Revenue CAGR over FY11-20E 10.8%
Present Value of Cash Flow till FY20E 41,820.9
Terminal Growth 3.0%
Present Value of terminal cash flow 190,791.9
PV of firm 232,612.8
Less: Current Debt 61,670.8
Total present value of the Equity 170,942.0
Number of Equity Shares outstanding 379.6
DCF - Target price (|) 450
Source: Company, ICICIdirect.com Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
F u n d a m e n t a l s t r e n g t h t o p a y o f f …
Bharti Airtel is the market leader in telecom with ~30.9% revenue market
share and strongest fundamentals in the industry. Falling capex intensity,
repayment of debt and reduced interest expense thereon, margin
expansion in African business and high quality subscribers (first takers of
3G) led uptake in 3G services would drive EPS CAGR of 17.3% over FY11-
14E. Spectrum pricing and other regulatory overhang may remain in the
near term but it seems to be already priced in. We reiterate our BUY
rating on Bharti Airtel with a target price of | 450 per share.
3G revenue to drive growth
Bharti Airtel has the highest number of 3G subscribers in the industry. The
company has disproportionately higher revenue market share indicating
cream of the subscribers, who would be the first ones to migrate to 3G
and consume data services. We expect Bharti’s 3G subscriber base to
increase to 6% of total subscribers by FY14E and 10% by FY16E.
Debt repayment resulting in higher EPS growth
Bharti Airtel is expected to generate free cash flow of ~ | 34986 crore
over the next three years, which would be utilised to repay debt. On
account of reduction in debt of about | 24,000 from current levels, we
expect interest expenses to decline by 42.8% by FY14E. This coupled
with margin expansion would aid higher profitability growth. We expect
EBITDA and PAT CAGR of 17.1% and 17.3%, respectively, over FY11-14E.
Margin expansion in Africa
Airtel’s foray into the African market with relatively less penetration give it
further room for growth. Initiatives like BPO, IT and network management
outsourcing and passive infrastructure sharing would help expand the
margins in the long run. Going forward, we expect African revenues and
EBITDA to grow to | 29,372.7 crore and | 9,063.1 by FY14 at a CAGR of
30.9% and 40.4%, respectively, over FY11-14E.
Valuations
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/ share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate
BUY rating on Bharti Airtel.
Company background
Bharti Airtel is one of the world’s leading providers of telecommunication
services with a significant presence in India, 16 countries of Africa, Sri
Lanka and Bangladesh. As of September 2011, Airtel served an aggregate
237 million customers. The services they provide include
telecommunication services under wireless and fixed line technology,
integrated suite of telecom solutions to enterprise customers and
provision of long distance connectivity both nationally and internationally.
They also offer digital TV and IPTV services. All these services are
rendered under a unified brand Airtel. The company also manages
passive infrastructure pertaining to telecom operations through its
subsidiary and joint venture entity.
Bharti earns 75% of its revenues from mobile services. Out of this, 51% is
contributed by the Asian operations whereas the remaining 24% is
contributed by African mobile operations. Passive infrastructure forms
12% of Bharti’s revenue. Telemedia and enterprise contribute 5% and
6%, respectively while the DTH business along with others contributes
2%
Investment Rationale
Dominant player in domestic market
Bharti Airtel is the largest player in the domestic industry both in terms of
subscriber and revenue market share. The company has a subscriber
base of 174.7 million as on November 2011 indicating a subscriber market
share of 19.9%. An 88.9% visitor location register (VLR) subscriber base
against ~70% for the overall industry implies an active subscriber share
of 25.3%
We expect the mobile subscriber base for Bharti Airtel in the domestic
market to grow at a CAGR of 7.1% (FY11-14E) to 199.1 million.
Though the company has lost subscriber share with lower share in net
adds since the onslaught of new players, it has fared much better in the
revenue market share. The revenue market share has declined only by
4.2% points over Q1FY08-Q2FY12
3G to be future growth driver
Airtel has the highest 3G subscribers in the industry. The company has
disproportionately higher revenue market share indicating the cream of
the subscribers, who would be the first ones to migrate to 3G and
consume data services. We expect Bharti’s 3G subscriber base to reach
11.9 million by FY14.
Tower business
Bharti Airtel holds 85% stake in Bharti Infratel, which owns 33,056 towers
with a tenancy of 1.8x as on September 2011 and Bharti Infratel holds a
42% stake in Indus Towers, which owns 1,08,998 towers with a tenancy
of 1.9x.
Indus Towers has the largest and best tower portfolio in the country in
terms of the three anchor tenants (Bharti Airtel, Vodafone and Idea
Cellular), the largest in the industry with a combined revenue and
subscriber market share of 67.3% and 48.9%, respectively. These three
companies collectively have 67.3% and 48.9% revenue and subscriber
market share, respectively, in the 15 circles, Indus Towers operates in.
This also insulates Indus Towers from the risk arising from consolidation
in telecom service providers, since the anchor tenants are the three
largest players.
African operations
Airtel’s foray into the African market with relatively less penetration give it
further room for growth. The revenue has grown from $838.0 million in
Q2F11 to $1030.2 million in Q2FY12 while EBITDA has grown from $201
million to $270.4 million implying a CQGR of 5.3% and 7.7%, respectively.
Though the management’s target of $5 billion revenue and $2 billion
EBITDA by 2013 may seem a little far fetched, the overall scenario in
Africa is improving for Bharti Airtel. Initiatives like BPO, IT and network
management outsourcing and passive infrastructure sharing would help
expand the margins in the long run.
Going forward, we expect the African revenue and EBITDA to grow to |
29372.7 crore and | 9063.1 by FY14 at a CAGR of 30.9% and 40.4%,
respectively, over FY11-14E, led by 16.7% and 10.9% CAGR in
subscribers and ARPU, respectively, over the same period. The EBITDA
margin is expected to expand to 30.9% by FY14 from 25.0% in FY11.
Valuation
DCF based target price of | 450/ share
The stock has been de-rated due to the dual impact of regulatory
overhang and hyper-intensive competition in the domestic market. We
expect Airtel’s valuation multiples to expand on account of reducing
regulatory uncertainty, improving key metrics and profitability. We expect
a higher EPS CAGR of 17.3% over FY11-14E against revenue CAGR of
14.5% over the same period primarily due to repayment of debt.
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/ share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate our
BUY rating on Bharti Airtel.
Key risks to our target price are unfavourable regulatory outcomes and
slower than expected improvement in African operations.
Exhibit : DCF assumptions
| in Crore
WACC 10.7%
Revenue CAGR over FY11-20E 10.8%
Present Value of Cash Flow till FY20E 41,820.9
Terminal Growth 3.0%
Present Value of terminal cash flow 190,791.9
PV of firm 232,612.8
Less: Current Debt 61,670.8
Total present value of the Equity 170,942.0
Number of Equity Shares outstanding 379.6
DCF - Target price (|) 450
Source: Company, ICICIdirect.com Research
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