The Bharti Airtel (Bharti) stock has underperformed the Nifty by 23% YTD. Most negatives, in our view, are in the price. A likely strong tariff environment, reduced intensity of competition and regulatory clarity in the next couple of months, makes us believe that it is time to stock up on Bharti. A Marginal tweaking of assumptions is leading to a 1% reduction in EBITDA in FY13 and FY14, but likely forex losses in Q1FY13 is leading to a 6% cut in FY13 earnings. At 6.1x FY13E EV/EBITDA, nearly the lowest it has traded historically, we urge investors to partake in the company’s strong cash flow generation story. Maintain ‘BUY’.
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It’s hard to go wrong at this price
Everything that could go wrong has gone wrong for Bharti as well as the sector in the past couple of years. Over the past couple of years, policy has played havoc, the company lost share in the domestic market, initial strategy in Africa has come to naught and the exchange rate too is playing spoilsport. What else can go wrong? Nothing really, except continuation of the current scenario for a prolonged period. Ergo, at current valuation, most negatives seem to be priced in.
Where is the upside?
In H2FY12, the industry reported healthy volume growth coupled with ARPU surge, an indication that the market is still expanding. Supreme Court induced consolidation has led to market share shifts benefiting larger players. Over the next few months, uncertainties surrounding spectrum pricing and allotment will clear and investors will then turn focus on operations. With a strong tariff environment likely and reducing intensity of competition, Bharti is set to generate FCF of USD 2bn p.a. FY14E onwards. An increase of 2% in tariffs would lead to INR 19bn NPV accretion to Bharti.
Outlook and valuations: Robust cash flow story; maintain BUY
Bharti’s DCF price adjusting for the policy impact is INR380. We believe an earnings upgrade is not necessary and the stock will re-rate on cash flow generation certainty. While it is hard to perfectly time entry into the stock, we believe, Bharti’s cash flow generation story is compelling and a great opportunity for investors with a long-term view to ‘BUY’ the stock. Maintain ‘BUY/ Sector Outperformer’ rating.
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