Bharti Airtel Ltd_LKP

Regulatory concerns easing significantly

In line with the positive expectations stemming from the eased regulatory environment fueling hopes of less aggression from competition, we expect the business environment for Bharti would be much better than what it was a couple of quarters back. Government’s decision of sharing the excess spectrum charge between all the leading telecom players has acted as a relief for Bharti. The renewal of spectrum coming up in Mumbai and Delhi and the partial refarming of 900 MHZ spectrum may add a negative regulatory outgo, but the situation is still better than what it was estimated a quarter back as the lukewarm response to the 2G auctions for 1800 MHz spectrum has itself reduced the reserve price of further spectrum auctions. Regulatory charge on competitors may make them less aggressive, thus ruling outchances of market share attracting schemes from them. This will assist Bharti to get back into the groove as the competitive environment gets benign.

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Tariff hike on the cards

With regulatory outgo pressurizing the balance sheets of most of the telcos, there is a high possibility that the companies may pass a significant chunk of it to the customers, thus maintaining their level of profitability. In some of the circles, companies like Bharti, Idea and Vodafone have already started modifying their existing schemes by initiatives like reducing free call allowances, reducing validity of discount vouchers and reduction in actual discount along with launch of innovative plans to increase the monthly outgo from customers. Though these are indirect ways of increasing tariffs, the day is not far away when direct tariff hikes will be taken by telcos. This would help the company to improve margins which have fallen by 550 bps at the EBITDA levels over the past couple of years. Also, the proliferation of high margin data business will help the company to take its profit profile to the next level of growth.

Africa showing strong signs of improvement

Improving minutes of usage (20% qoq in Q2 FY13) and at the same time stable ARPU are indicative of the good times in the African business. The geography has also posted a good jump in the margins of late, which indicates there is an improvement in the quality of subscribers. Reducing access charge, and tremendous scope for data business growth through the 11 3G licenses getting recently operational will provide a boost to margins further. Lower level of wireless penetration (46% v/s 70% in India) and favorable demographics provide ample leeway for this geography to grow further. Reducing capex outlay will add to the profitability.

Outlook and valuation

We have turned positive on the telecom sector, within which we believe that Bharti will be the key beneficiary of the regulatory softening and benign competitive environment. Listing of Bharti Infratel reduces the debt levels considerably. India as well as Africa provide a strong opportunity for growth mainly through data. We value Bharti at Rs 380 based on SOTP valuation for DCF and relative valuation using EV/EBITDA methodology. We rate the stock a BUY.