Bharti Airtel : TP: INR265 Neutral ::Motilal oswal

CEO Track – Mr Akhil Gupta
Sector/country fundamentals intact; irrational competition hurting
Core essence
 Sector/country fundamentals remain intact but adverse industry structure
and irrational competition are hurting financial health.
 The industry has taken some corrective initiatives recently; unless these
initiatives sustain and succeed, the outlook remains weak.
Industry insights
 High sales and distribution expenses due to rotational churn remain a
significant drag on margins.
 Data and 3G pick-up remain key long-term growth drivers, e.g. Bharti already
has 39m data users out of its overall India subscriber base of ~190m. Data is
growing at 25%+ QoQ.
 Most operators have deep pockets, which is driving irrational competition.
Company vision and strategy
 Aim to reduce Net Debt/EBITDA for the company to 2.5x (2.9x in 1QFY13).
 Taking initiatives to curb irrational competition in terms of sales and
distribution expenses.
 Expect steady growth in Africa, but very high growth is unlikely, as tariffs
remain relatively high (>5 cents per minute v/s less than 1 cent in India).
Key triggers/milestones/challenges
 Regulatory clarity on spectrum payments/allocation.
 Industry has been, over the last month, trying to ensure no negative landing,
which should be positive for margins.
 Political will for reform and pro-industry/pro-growth measures remain low,
dampening the investment mood.

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Managment interaction takeaways
Post the sharp margin pressure witnessed in 1QFY13, industry leaders have
initiated corrective measures like rationalizing channel commissions,
promotions, freebies, etc, which should plug the leakages and drive RPM
improvement. However, these measures will also negatively impact subscriber/
traffic growth in the near term.
Industry taking corrective measures like refraining from “negative
landing”; driving revenue growth could be a key challenge, in our view
 While Bharti’s aggressive pricing and promotions since 4QFY12 helped restore
market share, margin performance has been significantly impacted.


 The industry majors have now initiated corrective measures, which if sustained,
would plug the leakages and reduce rotational churn.
 The key initiative would be to desist from offers having “negative landing”.
 These measures would impact subscriber addition/traffic in the near term, but
should help in reducing churn rate.
 We believe that growing traffic and revenue while implementing these measures
would be the key challenge; margin improvement could be difficult on a sluggish
revenue growth trajectory, given the high proportion of fixed costs.
2G cloud to clear post auction; expect participants to take circle-wise
approach
 Given the cabinet decision of relatively high reserve price of INR140b for a 5MHz
block in the upcoming 2G auction, higher spectrum price is a business reality.
 However, 2G auction will remove the current regulatory uncertainty and let
operators take informed business decisions.
 Over-bidding in 2G auction appears unlikely, given challenges on the balance
sheet front for most operators. Participants are likely to take a selective circlewise
approach. Probability of incumbents bidding in a significant way is low.
 Current hyper competition in the market is unlikely to sustain.
Africa: Investing in 3G; data to be the revenue driver
 Bharti has been relatively cautious in reducing tariffs to induce elasticity in the
Africa market.
 Given relatively high tariff levels and no scope for significant tariff cuts in Africa,
voice growth will remain modest.
 However, Bharti is focusing on significant investment in 3G network so that data
can drive growth without cannibalizing the voice revenue/EBITDA.
Valuation and view
Bharti trades at EV/EBITDA of 6.7x FY13 and 5.6x FY14. We are placing Neutral rating
(Under Review earlier) with a target price of INR265/sh based on 7x FY14 EV/EBITDA
for India & SA; 5x FY14 EV/EBITDA for Africa business, and INR142b potential regulatory
outlay.