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Bloated by intangibles
Bharti’s FY11 annual report reveals a tenfold rise in goodwill/intangibles to
US$14bn, reflecting the Zain Africa deal and no impairments. Debt rose six
times to US$14bn: 97% is floating rate and US$10bn is US-dollar
denominated. The litigation risk in Nigeria is significant and Bharti’s liberal
policy carries a risk of a step-up in depreciation or onetime write-offs in the
future. We cut FY12/13CL earnings by 8/4%. It faces a rising interest burden,
ROIC down 11ppt YoY to 10%, and the further risk of regulatory payments.
With the stock at 9x EV/Ebitda and 20x PE in FY12CL, we maintain UPF.
Intangibles of US$14bn: no impairment.
Bharti’s intangibles were Rs637bn/US$14bn at end-FY11: a tenfold YoY increase.
Goodwill rose to Rs388bn/US$8.6bn, led by Rs346bn/US$7.7bn from the
Africa/Zain deal. Licence fees grew to Rs236bn/US$5.2bn reflecting 3G and BWA
spectrum costs. Goodwill under IFRS represents the excess of the cost of
acquisition over the net fair value of identifiable assets and liabilities, and is tested
for impairment annually unlike IGAAP, where the excess is written off over the
licence or 10 years, whichever is less. Bharti’s accounts are in IFRS and it has not
provided for any impairment.
High debt of US$14bn: 97% floating rate.
Bharti’s debt increased sixfold in FY11 to Rs621bn/US$14bn, funding the Zain
Africa deal and 3G/BWA auctions. The debt breakdown shows US$10bn (73%) is
US-dollar denominated and 97% of the total is on a floating rate basis. A 100bps
rise in US-dollar interest rates would hit earnings by 7%, while a 5ppt adverse
movement of the Rupee against the dollar would also take 6% off PBT. However,
only 14% of Bharti debt is due in FY12, with 68% is due after FY13.
Pending Nigeria litigation: no provisions.
After Bharti’s Africa deal, the number of subsidiaries has increased from 17 to 67
and the largest - Airtel Networks Nigeria (c.29% of region sales) - is still
defending a case filed by Econet Wireless. Econet is claiming a breach of its preemption
rights. Bharti has not provided for any claims in FY11 and has stated that
it cannot make an estimate of the financial effect.
Liberal depreciation policy: an issue.
Bharti continues to depreciate network equipment over 3-20 years (average 10)
versus five to seven by regional peer, China Mobile. Bharti’s liberal policy carries a
risk of a step-up in depreciation or onetime write-offs in the future.
Earnings cut of 8-4% in FY12-13CL; maintain U-PF.
Post Bharti’s FY11 annual report and lower-than-expected 1QFY12 earnings (rising
net interest costs and depreciation), we are cutting FY12CL earnings 8% and
FY13CL by 4%. Also, unless dismissed by NTP-11, Bharti faces several risks: a
Rs35.8bn (US$800m) additional one-time payment for 2G spectrum beyond
6.2MHz; a net-present-value fee of Rs123.3bn (US$2.7bn) for renewing 2G
licences; and requirements to complete its spectrum footprint in 3G (nine circles)
and 4G (18 circles). Bharti’s ROIC has already dropped 11ppts YoY to 10% and
regulatory risks will further hit returns and hinder its deleveraging efforts. We
maintain our Underperform rating and our Rs395 target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bloated by intangibles
Bharti’s FY11 annual report reveals a tenfold rise in goodwill/intangibles to
US$14bn, reflecting the Zain Africa deal and no impairments. Debt rose six
times to US$14bn: 97% is floating rate and US$10bn is US-dollar
denominated. The litigation risk in Nigeria is significant and Bharti’s liberal
policy carries a risk of a step-up in depreciation or onetime write-offs in the
future. We cut FY12/13CL earnings by 8/4%. It faces a rising interest burden,
ROIC down 11ppt YoY to 10%, and the further risk of regulatory payments.
With the stock at 9x EV/Ebitda and 20x PE in FY12CL, we maintain UPF.
Intangibles of US$14bn: no impairment.
Bharti’s intangibles were Rs637bn/US$14bn at end-FY11: a tenfold YoY increase.
Goodwill rose to Rs388bn/US$8.6bn, led by Rs346bn/US$7.7bn from the
Africa/Zain deal. Licence fees grew to Rs236bn/US$5.2bn reflecting 3G and BWA
spectrum costs. Goodwill under IFRS represents the excess of the cost of
acquisition over the net fair value of identifiable assets and liabilities, and is tested
for impairment annually unlike IGAAP, where the excess is written off over the
licence or 10 years, whichever is less. Bharti’s accounts are in IFRS and it has not
provided for any impairment.
High debt of US$14bn: 97% floating rate.
Bharti’s debt increased sixfold in FY11 to Rs621bn/US$14bn, funding the Zain
Africa deal and 3G/BWA auctions. The debt breakdown shows US$10bn (73%) is
US-dollar denominated and 97% of the total is on a floating rate basis. A 100bps
rise in US-dollar interest rates would hit earnings by 7%, while a 5ppt adverse
movement of the Rupee against the dollar would also take 6% off PBT. However,
only 14% of Bharti debt is due in FY12, with 68% is due after FY13.
Pending Nigeria litigation: no provisions.
After Bharti’s Africa deal, the number of subsidiaries has increased from 17 to 67
and the largest - Airtel Networks Nigeria (c.29% of region sales) - is still
defending a case filed by Econet Wireless. Econet is claiming a breach of its preemption
rights. Bharti has not provided for any claims in FY11 and has stated that
it cannot make an estimate of the financial effect.
Liberal depreciation policy: an issue.
Bharti continues to depreciate network equipment over 3-20 years (average 10)
versus five to seven by regional peer, China Mobile. Bharti’s liberal policy carries a
risk of a step-up in depreciation or onetime write-offs in the future.
Earnings cut of 8-4% in FY12-13CL; maintain U-PF.
Post Bharti’s FY11 annual report and lower-than-expected 1QFY12 earnings (rising
net interest costs and depreciation), we are cutting FY12CL earnings 8% and
FY13CL by 4%. Also, unless dismissed by NTP-11, Bharti faces several risks: a
Rs35.8bn (US$800m) additional one-time payment for 2G spectrum beyond
6.2MHz; a net-present-value fee of Rs123.3bn (US$2.7bn) for renewing 2G
licences; and requirements to complete its spectrum footprint in 3G (nine circles)
and 4G (18 circles). Bharti’s ROIC has already dropped 11ppts YoY to 10% and
regulatory risks will further hit returns and hinder its deleveraging efforts. We
maintain our Underperform rating and our Rs395 target price.
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