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Bharti Airtel (BHARTI)
OW: Improvement in pricing environment to sustain
Recent tariff hikes by Bharti to sustain, in our view
We note that the positive impact of recent tariff hikes will be
back-end-loaded and more visible from 3QFY12 onwards
Reiterate OW and raise SOTP-based TP to INR488 (INR425)
Improvement in pricing environment to sustain, but reflected in earnings only from
3QFY12. As per news reports, Bharti has raised its tariffs in six circles by 20%. Based on our
channel checks we find the hikes apply only to on-net calls on the full talk time plans and not
across all schemes. We believe these hikes are sustainable and expect Bharti to replicate the
trend across all product categories and circles over the next few months. Moreover we expect
the competition to follow (it appears that the process has already been initiated). However the
likes of Uninor may decide to raise tariffs but keep them a tag below the average price as it
continues to have excess capacity in our view. We believe the key issue is not acceptance by
likes of Uninor or Tata but acceptance by Vodafone and Idea Cellular. As most of the
subscribers across operators are on a one-year validity plan, the positive impact on revenue per
minute is back-end-loaded and a positive impact on earnings is unlikely before 3QFY12.
Further, we are building for a drop in MOU per sub as the recent price hikes may have some
impact on usage, in our view.
It’s about wallet share now. The slowdown in subscriber additions and decline in share of
subscriber net additions for new entrants highlight that the game has now has shifted to
enhancing wallet share from clocking subscriber numbers. Further 3G services are at an
evolutionary stage and unlikely to be meaningful in the next four quarters. For 3G to have
meaningful impact, all 3G operators would have to make investments in network, back-end
and customer awareness, which is impossible without having better returns on voice pricing.
We believe positive news flow for the sector is likely to continue and post increase in voice
prices, we also expect 2G data rates to move up, and this will facilitate 3G growth.
Valuation and risks. We retain our OW rating on Bharti and raise our target price to INR488.
We value the India business at INR521 per share and the Africa business at –INR33. We value
Bharti using sum-of-the-parts based on a mix of PE and DCF. We raise our PE multiple from
15x to 18x given the sustainability of the improvement in pricing environment. Key downside
risks would be Vodafone and Idea Cellular not following the price hikes initiated by Bharti, refarming
of spectrum in 900 MHz band and regulatory approvals, broadening the scope of
voice over internet protocol (VOIP) services. Key catalysts would be faster-than-estimated
margin improvement in Africa and accelerated enrolment of subscribers for 3G services.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI)
OW: Improvement in pricing environment to sustain
Recent tariff hikes by Bharti to sustain, in our view
We note that the positive impact of recent tariff hikes will be
back-end-loaded and more visible from 3QFY12 onwards
Reiterate OW and raise SOTP-based TP to INR488 (INR425)
Improvement in pricing environment to sustain, but reflected in earnings only from
3QFY12. As per news reports, Bharti has raised its tariffs in six circles by 20%. Based on our
channel checks we find the hikes apply only to on-net calls on the full talk time plans and not
across all schemes. We believe these hikes are sustainable and expect Bharti to replicate the
trend across all product categories and circles over the next few months. Moreover we expect
the competition to follow (it appears that the process has already been initiated). However the
likes of Uninor may decide to raise tariffs but keep them a tag below the average price as it
continues to have excess capacity in our view. We believe the key issue is not acceptance by
likes of Uninor or Tata but acceptance by Vodafone and Idea Cellular. As most of the
subscribers across operators are on a one-year validity plan, the positive impact on revenue per
minute is back-end-loaded and a positive impact on earnings is unlikely before 3QFY12.
Further, we are building for a drop in MOU per sub as the recent price hikes may have some
impact on usage, in our view.
It’s about wallet share now. The slowdown in subscriber additions and decline in share of
subscriber net additions for new entrants highlight that the game has now has shifted to
enhancing wallet share from clocking subscriber numbers. Further 3G services are at an
evolutionary stage and unlikely to be meaningful in the next four quarters. For 3G to have
meaningful impact, all 3G operators would have to make investments in network, back-end
and customer awareness, which is impossible without having better returns on voice pricing.
We believe positive news flow for the sector is likely to continue and post increase in voice
prices, we also expect 2G data rates to move up, and this will facilitate 3G growth.
Valuation and risks. We retain our OW rating on Bharti and raise our target price to INR488.
We value the India business at INR521 per share and the Africa business at –INR33. We value
Bharti using sum-of-the-parts based on a mix of PE and DCF. We raise our PE multiple from
15x to 18x given the sustainability of the improvement in pricing environment. Key downside
risks would be Vodafone and Idea Cellular not following the price hikes initiated by Bharti, refarming
of spectrum in 900 MHz band and regulatory approvals, broadening the scope of
voice over internet protocol (VOIP) services. Key catalysts would be faster-than-estimated
margin improvement in Africa and accelerated enrolment of subscribers for 3G services.
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