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Bharti Airtel (BRTI.BO): Easing competition; reducing regulatory
risk benefits yet to reflected; add to CL-Buy
We reiterate our Buy rating on Bharti and add it to our Conviction List as
we expect the company operator to benefit from the improving
regulatory environment and declining competition.
Source of opportunity
Expect continued MOU growth and 3G benefits in coming
quarters: We believe competitive intensity will further improve and
the incumbent operators will gain incremental revenue market share
as new operators further struggle to raise funds/refinance debt and
could risk losing focus on strategy in the near-term.
Declining regulatory risks: We see downside risk to regulatory
payments related to excess 2G spectrum pricing for Bharti if the
Telcos commission/TDSAT decides to use the price determined in
auction rather than TRAI determined prices. We believe any price
determined in a potential 2G auction may be lower than TRAI’s 2G
excess spectrum pricing (Rs11/share for Bharti), as the demand for
1800 MHz spectrum is relatively lower.
Estimate about nine percentage point improvement in Africa
margins over the next 18 months: Following our visits to
Nigeria/Kenya and conversations with industry participants in other
Bharti Africa markets, we have more comfort and clarity on Bharti’s
strategy on distribution, network enhancement and pricing, and
believe that Bharti has made significant improvements in each of
these areas. We expect these initiatives to lead to c.9pp expansion in
Bharti’s Africa margins in the next 18 months. We consider Bharti’s
strategy to be sound, but believe that macro headwinds and slight
slippage in execution vs. our earlier expectations are near-term
risks.
Catalysts
1) Further tariff increases and potential increase in ARPU/RPM; 2) Lower
than TRAI recommended excess spectrum pricing.
Valuation
We increase our FY13E/14E revenue and EPS by 2%-3% and 5%-7%,
respectively, as we factor in less intense competition and resultant gain
in market share. Accordingly, we raise our 12m SOTP based TP to Rs475
from Rs430. Bharti is trading at FY13E P/E of 15.5X (vs. Asian telcos avg
of 15.0X), and offers FY11-14E EPS CAGR of 32% (vs. Asian telcos
average of 4%).
Key risks
1) Lower-than-expected tariff increases/material rollbacks; 2) Higherthan-
expected regulatory payments for license renewal/excess spectrum;
3) Slower-than-expected turnaround in Bharti’s African operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BRTI.BO): Easing competition; reducing regulatory
risk benefits yet to reflected; add to CL-Buy
We reiterate our Buy rating on Bharti and add it to our Conviction List as
we expect the company operator to benefit from the improving
regulatory environment and declining competition.
Source of opportunity
Expect continued MOU growth and 3G benefits in coming
quarters: We believe competitive intensity will further improve and
the incumbent operators will gain incremental revenue market share
as new operators further struggle to raise funds/refinance debt and
could risk losing focus on strategy in the near-term.
Declining regulatory risks: We see downside risk to regulatory
payments related to excess 2G spectrum pricing for Bharti if the
Telcos commission/TDSAT decides to use the price determined in
auction rather than TRAI determined prices. We believe any price
determined in a potential 2G auction may be lower than TRAI’s 2G
excess spectrum pricing (Rs11/share for Bharti), as the demand for
1800 MHz spectrum is relatively lower.
Estimate about nine percentage point improvement in Africa
margins over the next 18 months: Following our visits to
Nigeria/Kenya and conversations with industry participants in other
Bharti Africa markets, we have more comfort and clarity on Bharti’s
strategy on distribution, network enhancement and pricing, and
believe that Bharti has made significant improvements in each of
these areas. We expect these initiatives to lead to c.9pp expansion in
Bharti’s Africa margins in the next 18 months. We consider Bharti’s
strategy to be sound, but believe that macro headwinds and slight
slippage in execution vs. our earlier expectations are near-term
risks.
Catalysts
1) Further tariff increases and potential increase in ARPU/RPM; 2) Lower
than TRAI recommended excess spectrum pricing.
Valuation
We increase our FY13E/14E revenue and EPS by 2%-3% and 5%-7%,
respectively, as we factor in less intense competition and resultant gain
in market share. Accordingly, we raise our 12m SOTP based TP to Rs475
from Rs430. Bharti is trading at FY13E P/E of 15.5X (vs. Asian telcos avg
of 15.0X), and offers FY11-14E EPS CAGR of 32% (vs. Asian telcos
average of 4%).
Key risks
1) Lower-than-expected tariff increases/material rollbacks; 2) Higherthan-
expected regulatory payments for license renewal/excess spectrum;
3) Slower-than-expected turnaround in Bharti’s African operations.
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