Upload
others
View
26
Download
0
Embed Size (px)
Citation preview
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Edelweiss Securities Limited
The Bharti Airtel (Bharti) stock has underperformed the Nifty by 23% YTD.
Most negatives, in our view, are in the price. A likely strong tariff
environment, reduced intensity of competition and regulatory clarity in
the next couple of months, makes us believe that it is time to stock up on
Bharti. A Marginal tweaking of assumptions is leading to a 1% reduction
in EBITDA in FY13 and FY14, but likely forex losses in Q1FY13 is leading to
a 6% cut in FY13 earnings. At 6.1x FY13E EV/EBITDA, nearly the lowest it
has traded historically, we urge investors to partake in the company’s
strong cash flow generation story. Maintain ‘BUY’.
It’s hard to go wrong at this price
Everything that could go wrong has gone wrong for Bharti as well as the sector in the
past couple of years. Over the past couple of years, policy has played havoc, the
company lost share in the domestic market, initial strategy in Africa has come to
naught and the exchange rate too is playing spoilsport. What else can go wrong?
Nothing really, except continuation of the current scenario for a prolonged period.
Ergo, at current valuation, most negatives seem to be priced in.
Where is the upside?
In H2FY12, the industry reported healthy volume growth coupled with ARPU surge, an
indication that the market is still expanding. Supreme Court induced consolidation has
led to market share shifts benefiting larger players. Over the next few months,
uncertainties surrounding spectrum pricing and allotment will clear and investors will
then turn focus on operations. With a strong tariff environment likely and reducing
intensity of competition, Bharti is set to generate FCF of USD 2bn p.a. FY14E onwards.
An increase of 2% in tariffs would lead to INR 19bn NPV accretion to Bharti.
Outlook and valuations: Robust cash flow story; maintain BUY
Bharti’s DCF price adjusting for the policy impact is INR380. We believe an earnings
upgrade is not necessary and the stock will re-rate on cash flow generation certainty.
While it is hard to perfectly time entry into the stock, we believe, Bharti’s cash flow
generation story is compelling and a great opportunity for investors with a long-term
view to ‘BUY’ the stock. Maintain ‘BUY/ Sector Outperformer’ rating.
BHARTI AIRTEL Take the forbidden call
EDELWEISS 4D RATINGS
Absolute Rating BUY
Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Low
Sector Relative to Market Overweight
MARKET DATA (R: BRTI.BO, B: BHARTI IN)
CMP : INR 301
Target Price : INR 380
52-week range (INR) : 448 / 280
Share in issue (mn) : 3,797.5
M cap (INR bn/USD mn) : 1,145 / 20,769
Avg. Daily Vol.BSE/NSE(‘000) : 5,698.2
SHARE HOLDING PATTERN (%)
* Promoters pledged shares
(% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW
Telecommunication
Index
1 month (2.7) (7.7) (5.0)
3 months (12.7) (9.3) (16.4)
12
months (21.6) (13.4) (19.4)
Ganesh Duvvuri
+91 22 4040 7586
India Equity Research| Telecom
June 7, 2012
Promoters*
69%
MFs, FIs &
Banks
8%
FIIs
17%
Others
6%
Financials
Year to March FY11 FY12 FY13E FY14E
Revenue (INR mn) 594,948 714,508 811,599 890,289
Rev. growth (%) 42.2 20.1 13.6 9.7
EBITDA (INR mn) 199,996 236,573 285,518 324,872
Diluted EPS (INR) 16.0 11.2 20.0 23.6
EPS growth (%) (32.3) (30.0) 78.5 17.9
Diluted P/E (x) 18.8 26.8 15.0 12.8
EV/ EBITDA (x) 8.9 7.7 6.1 5.1
ROACE (%) 12.1 8.8 11.6 13.9
Telecom
2 Edelweiss Securities Limited
All negatives well quantified and discounted
In the past couple of years, Bharti has had to grapple with high debt due to the Zain
acquisition and auction of 3G and BWA spectrum. It has lost market share and growth has
lagged even that of ‘weaker’ peers. Policy and spectrum pricing rules are likely lead to
significant cash outflow. Moreover, the Enforcement Directorate is investigating a case of
money laundering against the company and DoT has put up a tax demand for under
reporting of revenue. Further, the INR depreciation against the USD of about 20% in the
past two years will lead to higher cash outflow to repay debt taken to acquire Zain in future.
Thus, all that could go wrong has gone wrong for Bharti over the past couple of years,
leading to the stock’s severe de-rating. In this section we discuss all these negatives
including the proposed policy changes and spectrum pricing norms. The negative impact of
all the regulatory changes including the spectrum cost is INR 100 per share on Bharti.
Table 1: Summary of the impact of proposed policy changes and spectrum charges
INR mn INR per share
One-time excess spectrum to be paid in FY13 65,797 17
PV of cost of spectrum to be paid on l icense renewal between 2014-2025 304,548 80
PV of benefit from reduction in revenue share of license and spectrum fees (86,276) (23)
PV of impact of removing termination charge 45,966 12
PV of impact on imposing Licence fee of 8% on towerco revenues 50,852 13
Net impact 380,887 100 Source: TRAI, Media reports, Edelweiss research
The INR depreciation is expected to raise Bharti’s USD loan liability by 20% at the prevailing
rate of INR 56/USD. We are not taking the impact currently as it is not certain since the loan
maturity is more back ended with 70% of it to be repaid in 2016 and 2017. Also, it is
uncertain if Bharti would refinance that loan or choose to repay it.
Excess spectrum charges to impact FY13 cash flows
TRAI’s proposal and DoT’s policy to delink spectrum from licence will lead to operators
paying for the entire quantum of spectrum in their possession. But, given that the earlier
policy (NTP 2012 was recently cleared by the cabinet) permitted contracted spectrum along
with the licence, DoT will impose charges on spectrum held beyond the contracted amount.
Thus, GSM operators who possess spectrum beyond 6.2MHz and CDMA operators who have
more than 5MHz spectrum will have to shell out excess spectrum charges. In our calculation,
we are using prices recommended by the DoT panel (as per media reports), which are about
15% higher than those recommended by TRAI, as reserve price for auctioning spectrum in
the 1800MHz band. As Bharti holds 8-10 MHz of spectrum in most of the key circles, it
would have to pay about INR 66bn as excess spectrum charges. This payment would have to
be made in FY13 after the auctions are conducted (expected by August 31, 2012 as directed
by the SC).
Bharti Airtel
3 Edelweiss Securities Limited
Table 2: Computation of impact of excess spectrum charges
Pro-rata excess
Circle (900 MHz) (1800 MHz) Spectrum
Upto 8Mhz Over 8Mhz Upto 8Mhz Over 8Mhz Charges (INR mn)
A. P. 7.8 2.2 6,689 8,695 3,344 4,348 7,559
Assam 4.4 1.8 202 263 101 131 -
Bihar 6.2 3.0 991 1,288 495 644 1,307
Delhi 8.0 2.0 16,157 21,004 8,078 10,502 17,530
Gujarat 6.2 5,242 6,814 2,621 3,407 -
Haryana 6.2 1,084 1,410 542 705 -
H. P. 6.2 - 181 236 91 118 -
J & K 6.2 - 148 192 74 96 -
Karnataka 7.8 2.2 7,696 10,005 3,848 5,002 8,903
Kerala 6.2 1,522 1,979 761 989 -
Kolkata 6.2 1.8 2,651 3,446 1,326 1,723 835
M. P. 8.0 1,259 1,636 629 818 755
Maharashtra 8.2 6,127 7,965 3,063 3,982 4,085
Mumbai 9.2 15,816 20,561 7,908 10,281 17,716
Orissa 6.2 1.8 473 614 236 307 334
Punjab 7.8 - 1,568 2,039 784 1,020 945
Tamil Nadu 6.2 3.0 7,136 9,277 3,568 4,638 4,495
U. P. (E) 6.2 1.0 1,776 2,308 888 1,154 697
U. P. (W) 6.2 - 2,504 3,255 1,252 1,628 -
West Bengal 4.4 1.8 602 783 301 392 -
North East 4.4 1.8 206 268 103 134 -
Rajasthan 6.2 2.0 1,564 2,033 782 1,016 636
Total 100.40 68.40 81,593 106,071 40,797 53,036 65,797
Spectrum prices as per DoT panel (INR per MHz)
900 Mhz 1800Mhz
Alotted Spectrum
Source: TRAI, Media reports, Edelweiss research
Minimal risk of losing 900MHz spectrum, but payment a certainty
TRAI recently recommended that DoT should take away spectrum in the 900 MHz band
allotted to GSM operators and re-auction it in 2013. However, the latter believes that
spectrum in the 900MHz band should be re-allocated only on licence expiry, else it will lead
to litigation. The first license for Bharti expires in November 2014 in the circles of Delhi (10%
of revenues) and Kolkata (2.2% of revenues). In a market which is likely to consolidate by
the time 900MHz spectrum is auctioned, we believe, existing operators will get an
opportunity to win atleast some of it back when auctions are conducted. Also, with the
proposed spectrum auction in the 700MHz band (which can be used to offer 4G services), it
remains to be seen if a new operator like Reliance Infotel would prefer to be aggressive to
acquire 900MHz spectrum.
We believe, very few operators (apart from Reliance Infotel and the top three GSM
operators) would have the cash flows to bid for the more expensive (~INR 84bn per MHz
pan-India) 900MHz spectrum. Hence, we estimate that Bharti will have to pay INR 304bn
(present value of spectrum payments between 2014 and 2025) to retain 900 MHz spectrum
using the price recommended by the DoT panel. If Bharti is forced to vacate spectrum in the
900 MHz band and is given spectrum in the 1800 MHz band it would have to pay only INR
190bn but incur additional capex to reconfigure its network architecture and improve
coverage. In any case, we believe, INR 304bn (INR 80 per share) is probably the worst case
cash outflow for Bharti for retaining current spectrum.
Telecom
4 Edelweiss Securities Limited
Table 3: Computation of impact of spectrum charges on license renewal
License PV (INR mn) of Spectrum
Circle (900 MHz) (1800 MHz) Date charges to be paid
900 Mhz 1800Mhz at the time of renewal
A. P. 7.8 2.2 12-Dec-95 6,689 3,344 38,782
Assam 4.4 1.8 8-Jul-04 202 101 219
Bihar 6.2 3.0 10-Feb-04 991 495 1,687
Delhi 8.0 2.0 29-Nov-94 16,157 8,078 108,463
Gujarat 6.2 28-Sep-01 5,242 2,621 4,789
Haryana 6.2 28-Sep-01 1,084 542 991
H. P. 6.2 - 12-Dec-95 181 91 709
J & K 6.2 - 10-Feb-04 148 74 198
Karnataka 7.8 2.2 15-Feb-96 7,696 3,848 43,593
Kerala 6.2 28-Sep-01 1,522 761 1,391
Kolkata 6.2 1.8 29-Nov-94 2,651 1,326 13,587
M. P. 8.0 28-Sep-01 1,259 629 1,484
Maharashtra 8.2 28-Sep-01 6,127 3,063 7,404
Mumbai 9.2 28-Sep-01 15,816 7,908 22,284
Orissa 6.2 1.8 10-Feb-04 473 236 725
Punjab 7.8 - 12-Dec-95 1,568 784 7,711
Tamil Nadu 6.2 3.0 29-Nov-95 7,136 3,568 35,604
U. P. (E) 6.2 1.0 10-Feb-04 1,776 888 2,571
U. P. (W) 6.2 - 28-Sep-01 2,504 1,252 4,576
West Bengal 4.4 1.8 11-Feb-04 602 301 690
North East 4.4 1.8 12-Dec-05 206 103 186
Rajasthan 6.2 2.0 22-Apr-96 1,564 782 6,796
Total 100.40 68.40 81,593 40,797 304,439
Spectrum prices as per DoT panelAlotted spectrum
(INR per MHz)
Source: TRAI, Media reports, Edelweiss research
Impact of removing inter-connection charges
TRAI has proposed to cut the inter-connection charge from the current INR0.2 per minute.
In its paper, the telecom authority has discussed various scenarios, including halving the
charge as well as doing away with it. Bharti being the largest operator is a net receiver of
the inter-connection charge. We have assumed that inter-connection charges will be
eliminated and hence the impact on Bharti would be INR 46bn or INR 12 per share.
Bharti Airtel
5 Edelweiss Securities Limited
Table 4: Computation of impact of withdrawal of inter-connection charges (INR mn)
FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Total minutes (mn) 1,101,283 1,184,616 1,241,220 1,282,830 1,318,759 1,352,119 1,386,287
Existing MTC per minute (INR) 0.2 0.2 0.2 0.2 0.2 0.2 0.2
All India incoming ratio (%) 51.0 51.0 51.0 51.0 51.0 51.0 51.0
Assumed incoming ratio (%) 53.0 53.0 53.0 53.0 53.0 53.0 53.0
Assumed outgoing ratio (%) 47.0 47.0 47.0 47.0 47.0 47.0 47.0
Assumed incoming minutes 583,680 627,846 657,847 679,900 698,942 716,623 734,732
Assumed outgoing minutes 517,603 556,769 583,374 602,930 619,817 635,496 651,555
All India on-net cal ls (%) 42.0 42.0 42.0 42.0 42.0 42.0 42.0
Assumed on-net cal ls for Bharti (%) 46.0 46.0 46.0 46.0 46.0 46.0 46.0
Assumed MTC received 63,037 67,807 71,047 73,429 75,486 77,395 79,351
Assumed MTC paid 55,901 60,131 63,004 65,116 66,940 68,634 70,368
Net MTC received 4,781 5,143 5,389 5,570 5,726 5,870 6,019
PV 4,781 4,512 4,147 3,759 3,390 3,049 2,742
Terminal value 19,586
NPV 45,966
No. of shares 3,798
NPV per share (INR) 12 Source: TRAI, Edelweiss research
Imposing license fees on towercos would have a negative impact
TRAI has recommended that towercos should be brought under the purview of licence
conditions and consequently pay recurring licence fees of 8% of revenue. We believe that if
towercos pay license fees they would also get the benefit of Sec. 80IA i.e. tax exemptions for
a period of 10 years. But the net cost would likely be passed on by towercos to the
operators in the form of higher rentals. We estimate the impact of this at INR 51bn or INR
13 per share.
Table 5: Computation of impact of towercos passing on license fees to Bharti (INR mn)
FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Total tower revenues (Bharti Infratel + 42% of Indus towers) 71,372 76,224 82,112 88,140 94,308 100,618 107,068
License fees @8% 5,710 6,098 6,569 7,051 7,545 8,049 8,565
Estimated tax saving 1,784 1,906 2,053 2,203 2,358 2,515 2,677
PV of post-tax l icense fee impact 3,925 3,677 3,475 3,272 3,071 2,874 2,683
Terminal value 27,874
NPV 50,852
No. of shares 3,798
NPV per share (INR) 13
Source: TRAI, Edelweiss research
Bharti has been losing market share
Bharti has been losing market share continually. Its revenue market share has declined from
32.8% to 29.8% over the past two years. In early FY12, it hiked tariffs and waited to assess
the impact on volumes. But, Idea and Uninor continued to pursue volume growth and Bharti
continued to lose market share.
Telecom
6 Edelweiss Securities Limited
Chart 1: Bharti has been constantly losing revenue market share
26.0
28.0
30.0
32.0
34.0
36.0
Q1
FY
10
Q2
FY
10
Q3
FY
10
Q4
FY
10
Q1
FY
11
Q2
FY
11
Q3
FY
11
Q4
FY
11
Q1
FY
12
Q2
FY
12
Q3
FY
12
(%)
Bharti Revenue market share (%)
Source: TRAI, Edelweiss research
Also, Bharti reported revenue growth of 10% YoY in FY12, significantly lower than
Vodafone’s 20% and Idea’s 25%. But, in the past couple of months, it has retaliated, which is
evident in its subscriber addition figures. As the company has over 35% revenue market
share in five of its top seven circles, it is a challenge defending it as the market expands due
to marginal customers. Thus, we expect, Bharti to continue to lose market share, but its
cash flow generation will be stronger than peers.
Chart 2: Bharti has gained incremental market share in the past couple of months
0%
20%
40%
60%
80%
100%
Dec-11 Jan-12 Feb-12 Mar-12 Apr-12
Market share of net subscriber additions
Idea Vodafone Bharti
Source: TRAI, Edelweiss research
INR depreciation impact way out in future
Bharti has an outstanding loan of USD8bn taken to acquire Zain in June 2010. The loan is to
be repaid over four years, starting with 10% in 2013, 20% in 2014, 30% in 2015 and 40% in
2016. The loan was taken at a very attractive interest rate of about LIBOR + 195 bps (~2.6%
currently) when the exchange rate was INR 45.8/USD. At the current exchange rate of
INR55/USD, the INR loan of INR440bn has ballooned to INR550bn. As the USD loan will be
partly repaid through Africa cash flows that are in USD and the balance will be refinanced
Bharti Airtel
7 Edelweiss Securities Limited
and repaid over the long term, we believe concerns are overdone. Having said that, we do
agree that refinancing the loan will lead to higher interest outgo of about USD 150mn p.a.
(assuming repayment of USD 3bn by 2016 through USD cash flows generated from Africa
and current rate of LIBOR + 500bps), which we have assumed in our forecasts. In Q1FY13,
we estimate, Bharti will likely report forex loss of INR 2.5bn. Our economics team forecasts
an average exchange rate of INR 50/USD in FY14.
Telecom
8 Edelweiss Securities Limited
Positives tinged with scepticism
The negatives from policy changes, TRAI’s recommendation on spectrum pricing, Bharti’s
acquisition of Zain and its failure to execute as per initial plans and competitive intensity
leading to loss of revenue market share have been quantified, understood and, in our view,
discounted in the stock. But, the positives like higher entry barriers, consolidation and
reduced staying power of operators leading to more price discipline in the market and
strong cash flow generation in the long term are being viewed with scepticism. In H2FY12,
all operators reported surge in ARPU along with strong volume growth, implying that the
market is still expanding and market share shifts are likely to lead to healthy cash flow
generation.
Recurring licence and spectrum fee cuts to trim outgo
DoT has agreed to TRAI’s proposal of imposing a uniform licence fee of 8% of revenue p.a.
instead of the current slab structure of 10% in metros and A circles, 8% in B circles and 6% in
C circles. As Bharti derives 58% revenue from metros and A category circles, it currently pays
about 8.6% of revenue as licence fee. TRAI has also proposed reduction in spectrum fees to
3% of revenue from the current slab structure of 3% for 4.4MHz, 4% for 6.2MHz, 5% for
8MHz and 6% for 10MHz spectrum. Since Bharti possesses 8MHz or more in most circles, it
currently pays about 5.5% of revenue as spectrum fee. With the proposed reduction, the
combined fees will reduce to 11% of revenue from the current 14%. This would lead to
additional generation of INR 86bn of cash flow or add INR 23 per share to Bharti’s DCF.
Table 6: Computation of benefit from lower revenue share of license and spectrum fees (INR mn) FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Bharti India mobile revenues 479,864 525,791 561,523 590,534 614,903 635,512 655,097
Current license and spectrum fees 65,406 71,666 76,536 80,490 83,811 86,620 89,290
as % of revenues (%) 13.6 13.6 13.6 13.6 13.6 13.6 13.6
Proposed l icense and spectrum fee charge (%) 11.0 11.0 11.0 11.0 11.0 11.0 11.0
Proposed l icense and spectrum fees 52,785 57,837 61,768 64,959 67,639 69,906 72,061
Savings 8,456 9,265 9,895 10,406 10,835 11,198 11,544
PV 8,456 8,127 7,614 7,024 6,415 5,816 5,259
Terminal value 37,565
NPV 86,276
No. of shares 3,798
NPV per share 23 Source: TRAI, Edelweiss research
Consolidation spurring volumes
The Supreme Court’s order cancelling licences has led to consolidation in the industry.
Operators like Etisalat and S-Tel have already wound up operations while Uninor has
slackened a bit. In the past two months, Uninor’s subscriber additions have more than
halved to 1.1mn in April 2012 compared to 2.5mn in January 2012. Bharti’s subscriber
additions have jumped from less than 1mn per month uptil December 2011 to 2mn in April
2012. The incremental market share for the top three operators (Bharti, Vodafone and Idea)
has surged to 69.2% in March 2012 from 39.5% in January 2012. But Bharti seems to have
been the major beneficiary of this market share shift as its incremental market share
increased from 10.1% in December 2011 to 31.3% in March 2012.
Bharti Airtel
9 Edelweiss Securities Limited
Table 7: Bharti has gained incremental market share in the past three months Dec-11 Jan-12 Feb-12 Mar-12
Bharti Incremental market share (%) 10.1 13.2 24.4 31.3
Bharti subscriber additions 960,143 1,301,349 1,822,966 2,502,165 Source: TRAI, Edelweiss research
The reserve price of 1800 MHz spectrum in the ensuing auction would determine if some of
the new operators like Telenor or Sistema whose license has been cancelled would attempt
to make a comeback. Uninor is the most successful operator among the late entrants
grabbing over 4% subscriber market share since its launch about two years back. We
attribute its success to the dynamic discount offering which offers customers discounted
pricing depending on network utilisation and the higher incentives paid to the sales channel.
We believe, Uninor’s RPM at INR 0.27, which is 28% lower to its larger GSM peers and its
higher operating cost per minute driven by higher distributor commissions are the key
reasons for its market share gain. Its brand loyalty would be put to severe test if it manages
to raise its RPM to the levels of its peers either by withdrawing freebies or by raising tariffs.
Thus, we expect consolidation in the industry not due to fewer operators but due to market
share shifts away from the new operators who would have very limited ability to offer
discounts.
Entry barriers have risen and staying power has reduced
TRAI’s initial recommendation of imposing excess spectrum charges and charge for entire
quantum of spectrum at the time of licence renewal was expected to impact incumbents
like Bharti, Vodafone and Idea and make them less competitive since competitors will own
free spectrum for 17 more years. But, cancellation of new operators’ licences and the high
reserve price set by the DoT has raised the entry barrier for new operators and affected the
staying power of some existing operators like Aircel and Tata Docomo.
The telecom authority reiterated its stand of linking 2G spectrum prices to the 3G auction
price. TRAI has set the reserve price of 1800MHz spectrum at INR36bn per MHz pan-India.
While the licence fee is set at INR250mn compared to INR16.5bn earlier, spectrum price is
steep considering current tariffs. A new operator will have to invest about INR300bn to set
up a pan-India network catering to about 60mn customers. With this investment, assuming
voice RPM of INR0.37 (same as Bharti’s and Idea’s), the business will be negative NPV for
the duration of licence and spectrum i.e., 20 years.
Telecom
10 Edelweiss Securities Limited
Table 8: Key assumptions for computing the NPV for a new operator
Cost of 4MHz spectrum in the 1800MHz band (INR mn) 144,000
No of cell sites 40,000
No. of subscribers (mn) 65
RPM (INR/minute) 0.37
MOU (minutes per month) 300
License fees and spectrum charges as % of revenues 9%
Access and interconnect (INR/minute) 0.05
Employee cost as % of revenues 6%
SG&A expenses per subscriber (INR p.a.) 250
Tower rental (INR per month per cell site) 30,000 Source: Edelweiss research
Table 9: NPV of a Greenfield mobile business is negative due to high spectrum costs and lower tariffs (INR mn)
FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY25E FY33E
Subscribers 3.3 8.1 16.3 32.5 65.0 66.0 67.0 72.0 80.0
Revenues 4,329 10,823 21,645 43,290 86,580 87,912 89,244 95,904 106,560
Network operating cost 3,600 7,200 14,400 14,400 14,400 14,400 14,400 14,400 14,400
Employee cost 260 649 1,299 2,597 5,195 5,275 5,355 5,754 6,394
l icense fees 390 974 1,948 3,896 7,792 7,912 8,032 8,631 9,590
Access charges 293 731 1,463 2,925 5,850 5,940 6,030 6,480 7,200
SG&A 813 2,031 4,063 8,125 16,250 16,500 16,750 18,000 20,000
EBITDA (1,025) (763) (1,527) 11,347 37,093 37,885 38,677 42,638 48,976
Interest cost 3,601 5,182 6,230 7,278 7,278 5,095 3,566 599 35
Tax 14,071 16,162
Net profit (4,626) (5,946) (7,757) 4,068 29,815 32,791 35,111 27,968 32,779
Spectrum cost 144,000
Capex 20,000 20,000 10,000 10,000 10,000 2,198 2,231 2,398 2,664
Cashflow (173,772) (30,577) (21,873) (9,534) 16,213 28,071 31,115 25,274 30,098
PV (173,772) (27,797) (18,077) (7,163) 11,074 17,430 17,564 8,858 4,921
NPV (61,038) Source: Edelweiss research
All existing operators, except Bharti and Vodafone, are grappling with stretched balance
sheets and the risk of further investment required in the business by way of paying up for
spectrum. Aircel had net debt of about INR160bn and an operating profit of INR2bn in CY10.
It invested about INR100bn for acquiring 3G and 4G spectrum and paid interest of INR10bn
in CY10. Similarly, Tata Teleservices had debt of about INR220bn and incurred operating loss
of INR3bn in FY11. It also incurred interest cost of INR12bn in FY11. Thus, at the current
tariff and even assuming no further investments, some of these operators will find it
challenging to breakeven, let alone generate cash flow.
Bharti Airtel
11 Edelweiss Securities Limited
Table 10: Key financial parameters indicate poor health of smaller operators (INR mn)
Aircel Tata Teleservices
CY10 FY11
Net debt 172,466 174,758
Networth 39,142 174,643
Gross fixed assets incl. WIP 169,133 362,022
Interest payment 12,454 11,861
EBITDA (8,859) (2,992)
Net loss (15,688) (35,088)
Accumulated losses (22,058) (90,432) Source: Annual reports, Edelweiss research
Sowing the seeds of a richer harvest
The India telecom story has so far been about voice, with data still to take off. While
operators derive about 13-15% of revenue from data on mobile with half of that being
accounted for by SMS, voice still rules the roost and remains their bread and butter business.
Bharti has so far invested INR643bn in its India and South Asia mobile business, of which,
roughly a third is its investment in 3G and BWA network, which is currently contributing
minimally to revenue. Also, the company may have to incur excess spectrum charges and
pay for all the 900 MHz spectrum it has. Hence, all these investments are upfront or near
term, but the benefits will accrue over long term. But, due to the negative news flow,
investors are focused on the near term and concerned about the impact on cash flows,
ignoring the strong cash flow generation later as investment requirements will be met in the
next few years.
Table 11: 3G and BWA investments are upfront, cash inflows in future As of March 2012
Cumulative investments in India and SA mobile business (INR mn) 643,292
Total investment in 3G and BWA including spectrum cost (INR mn) 216,098
as % of total investments 33.6 Source: Company, DoT, Edelweiss research
The street is worried that the business is still in investment mode and that spectrum related
payments will erode cash flow generated from operations. Since most of the spectrum
related payments are expected on license renewal, which will happen from 2014 to 2025,
the cash flow situation for Bharti seems reasonable and we don’t see Bharti having to resort
to additional debt to run its business. We have also assumed the investment Bharti would
make to acquire Qualcomm’s stake in its BWA venture by FY14E.
Table 12: Matrix of yearly cash flows for Bharti (INR mn) FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
FCF from operations after capex 85,296 106,281 141,999 180,098 216,773 261,664 263,306 321,927
One-time excess spectrum fees (65,797)
Payment to Qualcomm for its BWA spectrum (9,075) (44,200)
Spectrum price to be paid on license renewal (169,083) (201,925) (11,306) - - -
Benefit from license and spectrum fee reduction 8,456 8,127 7,614 7,024 6,415 5,816 5,259
Impact of removing termination and roaming charges (4,781) (4,512) (4,147) (3,759) (3,390) (3,049) (2,742)
Imposing l icense fees of 8% on towercos (3,925) (3,677) (3,475) (3,272) (3,071) (2,874) (2,683)
Net free cash generation 10,423 61,830 (27,145) (21,835) 205,459 261,618 263,200 321,761 Source: Media reports, Edelweiss research
Telecom
12 Edelweiss Securities Limited
Tariff increases seem more likely in the present environment
Over the past couple of months, voice tariffs have remained stable with sporadic increases
in postpaid tariffs. Vodafone raised postpaid tariffs in Delhi in January 2012 and in Mumbai
in April 2012. Reliance Communications (RCOM) too raised postpaid tariffs in Mumbai in
May 2012. Thus, consolidation in the market is not only leading to market share shifts and
superior volumes for incumbents, but also bringing back some pricing power. The Street
remains sceptical of the sustainability of tariff hikes, going by the recent track record. In July
2011, Bharti took the lead and raised prepaid tariffs 20%, followed by Vodafone, Idea,
RCOM and Tata Docomo in a few circles. Thus, voice RPM rose 1% QoQ in Q2FY12, after
declining for 10 quarters consecutively and 3.5% QoQ in Q3FY12. But, this hurt its volume
growth and Bharti lost market share as some of its competitors like Idea introduced
promotional tariffs (read freebies) to fill up its network and improve margins. Thus, Bharti
had to retaliate, leading to RPM dilution in Q4FY12.
Table 13: RPM increase led to volume slowdown
Voice RPM (INR) Total minutes (bn) Voice RPM (INR) Total minutes (bn)
Q1FY12 0.365 222 0.360 109
Q2FY12 0.369 217 0.370 106
Q3FY12 0.382 219 0.372 114
Q4FY12 0.375 230 0.362 124
Bharti Idea
Source: Companies, Edelweiss research
But, in our view, this time the tariff hikes are sustainable as they are driven by consolidation
in favour of larger operators and also because new operators’ licences have been cancelled
and they will have to make significant incremental investments to retain their business,
forcing them to be more focused on profitability than just volume market share.
Uninor has been the most successful amongst the new operators, gaining significant market
share and brand awareness in the past 24 months. It generated revenue of INR29bn in the
past 12 months and incurred an EBITDA loss of INR24.9bn. Its RPM is INR0.272 and
operating cost per minute is INR0.45. Bharti is the lowest cost producer in India given its
unique outsourcing model and due to scale benefits with an operating cost per minute of
INR0.301. Even if we were to assume that Uninor will be able to bring cost of operations a
little lower than Bharti, it will still need to raise RPM from the current level to make money
on the operating front, notwithstanding its incremental investment in the business for
spectrum. Thus, in our view, even if new operators win spectrum in ensuing auctions, we
expect them to be more disciplined than before and hence, tariff hikes seem to be more
sustainable.
Table 14: Uninor will not make profits even if its cost reduces to Bharti’s level
Voice RPM Operating cost EBITDA
Bharti 0.375 0.301 0.155
Idea 0.362 0.338 0.097
Uninor 0.272 0.449 (0.171)
Per minute (INR)
Source: Companies, Edelweiss research
The earnings and cash flows are highly sensitive to RPM increase. Bharti carried about
890bn minutes on its network in FY12. For every increase in tariff of INR 0.01 (~1.7%
Bharti Airtel
13 Edelweiss Securities Limited
increase), its revenues increase by over INR 5bn each year and NPV rises by INR 19bn (INR 5
per share).
Table 15: Bharti’s cash flow sensitivity to RPM increase
Particulars FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Total minutes in India (bn) 1,006 1,101 1,185 1,241 1,283 1,319 1,352 1,386
Outgoing/Incoming ratio 53% 53% 52% 52% 50% 50% 50% 50%
Outgoing minutes (bn) 533 584 616 645 641 659 676 693
Assumed increase in tariff (INR/minute) 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Revenues (INR mn) 5,334 5,837 6,160 6,454 6,414 6,594 6,761 6,931
EBITDA margin 60% 60% 60% 60% 60% 60% 60% 60%
EBITDA (INR mn) 3,200 3,502 3,696 3,873 3,848 3,956 4,056 4,159
Post-tax profit (INR mn) 2,144 2,346 2,476 2,595 2,578 2,651 2,718 2,786
WACC 14% 14% 14% 14% 14% 14% 14% 14%
PV (INR mn) 2,058 1,905 1,751 1,527 1,377 1,238 1,114
PV of Terminal value (INR mn) 7,954
NPV (INR mn) 18,924
NPV per share (INR) 5.0
Source: Company, Edelweiss research
Brand seems to matter for scale benefits
The high competitive intensity and lack of pricing power gives a sense that the telecom
business is a commodity business in India. The markets associate brand power with pricing
power i.e. the ability to charge a premium. In the past couple of years, since the DoT
awarded more licenses, new operators have used discounts to create brand awareness and
gained subscriber market share. Strong brands such as Bharti, Vodafone and Idea have had
no choice but match discounts to defend market share. In the Indian telecom context,
strong brand doesn’t provide pricing power but enables to attract volumes and hence
provide scale benefits. As mentioned in our earlier observation, Uninor is able to attract
lower volumes compared to Idea even though it is offering discounted pricing. Similarly,
Bharti and Idea are able to attract similar volumes despite Idea being more aggressive. Thus,
Bharti’s strong brand may not provide it the pricing power but provides scale benefits and
hence better margins. Bharti, due to the scale, is able to eke out better deals from its
vendors, which explains the near 11% lower operating cost per minute compared to Idea.
Telecom
14 Edelweiss Securities Limited
Outlook and valuations: Strong cash flow story
Industry trend in Q4FY12 was encouraging. While RPM declined, operators reported strong
volume growth and increase in ARPU, for the second straight quarter and after nearly nine
quarters of decline. This indicated that the market is still not mature as most on the Street
believe and there is propensity of marginal customers, who have been added in the past
year or so, to pay for usage (against just use free minutes if it is offered). With consolidation
in the industry, market share shifts will benefit leading operators including Bharti. The
company has already reported incremental share of 31.3% in March 2012 compared to
10.1% in December 2011. While Bharti has disappointed the Street in the past four-six
quarters by missing analysts forecasts, we believe the stock will get re-rated if there is policy
certainty as most negatives seem to be priced in. Maintain Buy with a target price of IINR
380 (DCF price adjusted for policy impact).
Bharti has disappointed Street in the past three years
The explosive growth in subscriber additions, low base effect and margin expansion led to
Bharti beating Street forecasts year after year till FY08. The company beat the Street’s
forecast made at the beginning of the financial year by an average of 15% in FY06, FY07 and
FY08. This created high expectations and analysts pegged their forecasts even higher. These
high expectations led to a downgrade cycle starting FY10. Bharti’s FY10 reported net income
was 9% lower than original estimate, as margins cracked due to intense competition and
with the introduction of per second billing plan significantly denting RPM. The company
reported FY12 net income 49% lower than Street forecasts made 12 months earlier due to
lower margins and forex losses.
Table 16: Bharti has missed street estimates in the last three years (INR bn)
Estimate Actual Variation (%) Estimate Actual Variation (%) Estimate Actual Variation (%)
Sales 445 418 (6.0) 534 595 11.5 707 715 1.1
EBITDA 177 168 (5.4) 197 200 1.4 250 237 (5.2)
EBIT 120 105 (12.6) 106 98 (7.7) 130 103 (20.9)
Net Income 99 90 (9.0) 76 61 (19.5) 83 43 (49.0)
FY10 FY11 FY12
Source: Company, Bloomberg, Edelweiss research
Delivery on forecasts rather than earnings upgrade to lead to re-rating
The downgrade cycle of the past three years has dented investor confidence in forecasts
and cast a doubt on Bharti’s ability to deliver. This has led to significant de-rating of the
stock. In our view, current valuations seem attractive if the company meets estimates.
Going by the trend in the past three years, the market perceives a risk in Bharti missing
these estimates and the stock not being so cheap. We believe, if the company delivers on
current market expectations, that alone will lead to a re-rating of the stock. We believe, the
key trigger for the stock is policy uncertainty clearing away. Once, auctions are completed,
even if the spectrum price is set at the level recommended by the DoT panel and assumed in
our calculation, it would lift all uncertainties and stop being an overhang on the stock. The
focus would then shift on operations and cash flow generation.
Bharti Airtel
15 Edelweiss Securities Limited
Trading at historically low level of EV/EBITDA (x)
The Bharti stock was a favourite of many investors uptil 2008 before new licences were
awarded as it was expected to generate strong FCF, had high margin of over 40%,
generated ROCE of 33% and was growing at over 30% YoY due to limited competition. Thus,
it was trading at premium valuations. But, intense competition and adverse policies led to
significant de-rating of the stock. It is trading at 6x FY13E EV/EBITDA, close to the lowest
level it has ever traded at. The Street expects Bharti to report CAGR in EBITDA of 18% over
the next two years. In the past two months, Bharti has upped the ante and garnered
incremental subscriber market share of 31.3%. Thus, at the current levels, we believe,
downside is limited but if it poses a positive surprise then the upside is significant. The key
trigger for the stock is regulatory uncertainties clearing away and tariff hikes. Since, every
increase of INR 0.01 per minute in tariff would lead to cash flow generation of INR 19bn over
the license period, we believe, medium term triggers are in place.
Chart 3: Bharti trading at close to the bottom end of valuation (EV/EBITDA) level
0.0
3.6
7.2
10.8
14.4
18.0 M
ay
-06
No
v-0
6
Ma
y-0
7
No
v-0
7
Ma
y-0
8
No
v-0
8
Ma
y-0
9
No
v-0
9
Ma
y-1
0
No
v-1
0
Ma
y-1
1
No
v-1
1
Ma
y-1
2
(x)
Source: Bloomberg
Timing difficult, but downside limited and 27% upside potential
The regulatory uncertainty and high competitive intensity have led to severe under
performance and de-rating of the stock. Most investors believe that the worst is factored in
as its strong cash flows enable it to bear the brunt of high regulatory costs proposed to be
imposed. We note that institutional investors raised their holding in Bharti after the
company hiked tariffs in June 2011 but investors reduced their holding after the company
indicated in February 2012 that it would retaliate strongly to stem the decline in its market
share.
Telecom
16 Edelweiss Securities Limited
Chart 4: Institutional investors exposure to Bharti reduced in Q4FY12
1.0
1.8
2.6
3.4
4.2
5.0
Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12
(%)
Wt of BHARTI in FII Wt of BHARTI in DII
Source: Stock exchanges, Edelweiss research
In our interactions with investors we are often asked the timing to buy the stock. We believe
it is difficult to time the stock given the uncertainty on spectrum pricing and timing of
refarming of 900 MHz spectrum. But, given the current available information on the two
issues, we believe from the stock price level, there is not much downside, whereas upside
will be realised as soon as there is certainty. We believe the auction of 1800MHz spectrum
(expected by August 31, 2012, as per Supreme Court order) and announcement of policy
will bring in significant clarity on pricing of and demand for spectrum, competitive intensity
going forward based on the number of operators who will continue in the business and
modalities on spectrum sharing (hopefully rules will be relaxed).
In our worst case scenario we assume tariff wars and margin contraction in the domestic
business and Africa business targets set by the company getting delayed by five years. We
assume that voice RPMs will decline by 5% from the Q4FY12 levels and margins will remain
flat at 34% till perpetuity. Also, in Africa we assume RPM to decline by 5% in FY13, 3% in
FY14 and 2% in FY15 and expect EBITDA margins to remain flat at 28%. Under these
assumptions, the DCF after adjusting for the regulatory impact comes to INR290. Whereas,
on our current assumption of flat RPM and margin improvement due to domestic business,
our realistic DCF comes to INR380 after adjusting for the proposed regulatory charges. Thus,
there is hardly any downside but the stock offers a potential upside of 27%.
Bharti Airtel
17 Edelweiss Securities Limited
Table 17: Key Assumptions in the worst case scenario
Year to March FY12E FY13E FY14E FY15E FY15E FY15E FY15E FY15E FY15E
India mobile business
Total subscribers 181 202 216 224 228 230 232 233 234
growth 11.8 11.3 7.1 3.9 1.6 1.1 0.5 0.5 0.5
MOU 424 424 424 424 424 424 424 424 424
RPM (INR) 0.436 0.432 0.423 0.433 0.444 0.454 0.463 0.469 0.475
growth (1.4) (0.8) (2.1) 2.3 2.5 2.4 1.9 1.4 1.1
EBITDA margin 33.9 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0
Africa business
Total subscribers 53 60 68 74 78 83 88 93 96
growth 20.2 13.5 11.9 8.9 6.5 6.1 5.8 5.5 3.9
ARPU (USD) 7.0 6.5 6.3 6.3 6.5 6.9 7.1 7.4 7.7
growth (7.2) (3.0) 0.9 3.0 5.1 4.0 4.0 4.0
EBITDA margin 26.4 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0 Source: Edelweiss research
Table 18: Assumptions for worst case DCF
WACC Calculation
Rf (%) 8.0
ERP (%) 6.0
Beta (x) 1.1
COE (%) 14.6
Cost of Debt (%) 4.7
WACC (%) 14.1
Growth assumptions Years
Explicit forecast period 7
Second stage growth (FY20-24) (%) 8.0
Terminal growth (%) 0.0
Table 19: Worst case DCF calculation (INR mn) Particulars FY14E FY15E FY16E FY17E FY18E FY19E FY20E
EBITDA 296,640 326,377 354,435 383,218 413,511 440,749 468,292
Tax on operating income 45,307 50,702 54,789 59,087 63,875 (1,024) (5,446)
Operating income net of tax 251,334 275,675 299,646 324,131 349,636 441,772 473,738
Delta working capital (153) (3,476) (7,233) (5,878) (10,537) (20,777) (37,696)
Cash from operations 251,487 279,151 306,879 330,010 360,173 462,549 511,434
Capex 150,000 144,000 144,000 144,000 144,000 144,000 144,000
Dividend distribution tax 630 630 630 630 1,261 2,522 5,046
FCFF 100,857 134,521 162,249 185,379 214,912 316,027 362,388
Discounted FCFF 88,365 103,262 109,120 109,235 110,952 142,946 143,614
Sum of Disounted FCFF 1,308,776
PV of Terminal value 816,270
Firm value 2,125,046
Less : Net Financial obligations 602,554
Equity Value 1,522,492
No. of shares O/S 3,798
Intrinsic value/share 401 Source: Bloomberg, Edelweiss research
Telecom
18 Edelweiss Securities Limited
Sum-of-the-parts value at INR 399 per share
So far, we have refrained from valuing Bharti based on sum-of-the-parts methodology of its
various businesses as we believe apart from towers, the company is unlikely to divest any
other business. But, given the stock’s underperformance, we attempt to use certain market
benchmarks and apply a significant discount to carrying value of some assets to value its
various businesses.
We have conservatively assigned 6x (the lowest band it has ever traded at historically)
EV/EBITDA valuation to Bharti’s FY14E mobile business EBITDA. We have assigned 8x to
Bharti Infratel’s FY14E EBITDA, which is at a significant discount to global peers who trade at
16-18x. For its DTH business, we have taken 50% discount to Dish TV’s current EV of INR
67.4bn (v/s target EV of our analyst is INR 85.4bn in FY14), although Bharti has over 7mn
DTH customers compared to Dish TV’s 10mn. We are valuing Bharti’s Africa business at 4x
FY14E EBITDA, a 10% discount to African peers. We are assigning 50% discount to the
carrying value of Bharti’s enterprise and Telemedia business in its balance sheet. We believe
Bharti will eventually monetise its tower assets in Africa. In December 2011, MTN shifted
1,000 towers in Uganda into a JV with American Towers valuing it at USD 175mn (i.e. USD
175,000 per tower). We are assigning ~50% discount to Bharti’s Africa towers. The sum of
the value of these various businesses will be INR399 per share at FY14E end.
Table 20: Bharti's sum of the value of various businesses
INR mn Comments
Bharti FY14 mobile EBITDA 180,810
Bharti EV/EBITDA (x) 6.0 Nearly the lowest band it has traded at historically.
Mobile EV 1,084,862
Bharti Infratel FY14 EBITDA 45,806
Infratel EV/EBITDA (x) 8.0 A 50% discount to American towers and other independent towercos.
Infratel EV 366,449
Dish TV EV 67,392
Bharti DTH EV @50% discount 33,696 A 50% discount to Dish TV's current EV. Bharti has 7.2mn subscribers compared to
9.4mn for Dish.
Bharti Africa EBITDA 81,989
Africa EV/EBITDA (x) at a discount to peers 4.0 A marginal discount of about 10% to operators l ike MTN and about 30% to Vodacom.
Bharti Africa EV 327,956
Bharti Telemedia and Enterprise business 85,689 at a 50% discount to the carrying value in the balance sheet
No. of towers in Africa 14,831
Value per tower 5.7 at a 50% discount to deals happened on the street in the past six months
EV of Africa towers 84,590
Total EV 1,983,242
Debt in FY14 467,308
Total market cap 1,515,934
Total no. of shares 3,798
Fair value per share (INR) 399 Source: Edelweiss research
Bharti Airtel
19 Edelweiss Securities Limited
Good level to stock up
We believe the current price level offers a great opportunity for investors to stock up Bharti
and play the upside as regulatory uncertainty clears away in the next few months and focus
will be back on operations. With entry barriers increasing and staying power of weaker
operators becoming difficult due to high prices of spectrum, we believe, tariff hikes are
more sustainable and market share shifts towards stronger operators like Bharti would
reduce the possibility of further disappointment. Bharti is expected to generate FCF of over
USD 2bn p.a. FY14E onwards and based on our DCF, adjusting for the policy impact, we set
our target price on Bharti at INR 380 per share, offering an upside of 27% over the next 12
months. We reiterate BUY/Sector Outperformer rating on the stock.
Telecom
20 Edelweiss Securities Limited
Table 21: Key Assumptions in our current model
Year to March FY12 FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E
India mobile business
Total subscribers (mn) 181 202 216 224 228 230 232 233 234
growth 11.8 11.3 7.1 3.9 1.6 1.1 0.5 0.5 0.5
MOU 424 431 439 448 457 466 476 485 495
RPM (INR) 0.436 0.431 0.436 0.444 0.452 0.460 0.466 0.470 0.473
growth (1.4) (1.0) 1.0 1.9 1.9 1.8 1.3 0.8 0.5
EBITDA margin 33.9 35.3 36.0 36.5 37.0 37.5 38.0 38.5 39.0
Africa business
Total subscribers 53 63 70 76 82 88 94 100 106
growth 20.2 18.1 11.5 8.6 7.9 7.3 6.8 6.4 6.0
ARPU (USD) 7.0 6.4 6.2 6.3 6.5 6.8 7.1 7.4 7.7
growth (7.7) (3.0) 0.9 3.0 5.1 4.0 4.0 4.0
EBITDA margin 26.4 29.5 33.0 34.0 34.0 36.0 37.0 38.0 38.0 Source: Edelweiss research
Table 22: Assumptions for current DCF
WACC Calculation
Rf (%) 8.0
ERP (%) 6.0
Beta (x) 1.1
COE (%) 14.6
Cost of Debt (%) 4.7
WACC (%) 14.1
Growth assumptions Years
Explicit forecast period 7
Second stage growth (FY20-24) (%) 8.0
Terminal growth (%) 0.0
Table 23: Current DCF calculation (INR mn) Particulars FY14E FY15E FY16E FY17E FY18E FY19E FY20E
EBITDA 324,872 362,083 401,406 437,556 475,492 513,068 551,228
Tax on operating income 54,621 62,477 70,275 76,997 84,301 (4,372) (9,051)
Operating income net of tax 270,252 299,606 331,131 360,558 391,191 517,440 560,279
Delta working capital (6,871) (6,274) (10,700) (10,047) (14,720) (24,166) (41,013)
Cash from operations 277,123 305,879 341,831 370,605 405,911 541,606 601,292
Capex 150,000 144,000 144,000 144,000 144,000 192,000 192,000
Dividend distribution tax 630 630 630 630 1,261 2,522 5,046
FCFF 126,493 161,250 197,201 225,975 260,650 347,084 404,246
Discounted FCFF 110,826 123,779 132,627 133,155 134,565 156,994 160,202
Sum of Disounted FCFF 1,511,332
PV of Terminal value 910,554
Firm Value 2,421,886
Less : Net Financial obligations 598,726
Equity Value 1,823,160
No. of shares O/S 3,798
Intrinsic value/share 480 Source: Bloomberg, Edelweiss research
Bharti Airtel
21 Edelweiss Securities Limited
Company Description
Bharti is India’s largest integrated telecom operator providing mobile, broadband &
telephone (B&T) and enterprise services. It is India’s largest wireless operator with a pan-
India mobility network spanning all 22 telecom circles. It had a wireless subscriber base of
~181 mn in Q4FY12, implying wireless subscriber market share of ~20%. The enterprise
services division provides carrier (long distance services) and other services to corporates.
Bharti offers 2G and 3G services as the fifth mobile operator in Sri Lanka. It recently
launched 4G services in Kolkata and Bangalore.
Investment Theme
The telecom sector is going through uncertain times as there are pressures on all counts
regulatory, operationally and financially. The TRAI recommendations on spectrum pricing
would lead to severe stress on the balance sheets of operators. On the operational front,
due to high competitive intensity, the yields are under pressure and distributor commissions
are rising. Given the loans related to 3G spectrum funding and further requirements to pay
for 2G spectrum, the sector is going through financial challenges. Bharti has retaliated
impressively to regain lost market share. We expect Bharti’s cash flows to improve from
FY14 as capex moderates and growth picks up. Since it has the best cash flows to tide over
the crisis created by the TRAI with its recent spectrum pricing recommendations, Bharti
remains our top pick in the sector.
Key Risks
If the government accepts the Telecom commission’s recommendation of charging for
entire spectrum upfront in FY13 instead of at the time of renewal then Bharti would see a
significant cash outflow of INR 555b. Also, if the INR continues to depreciate further then
Bharti would incur forex losses leading to earnings cut.
+
22 Edelweiss Securities Limited
Telecom
Financial Statements
Income statement (INR mn)
Year to March FY10 FY11 FY12E FY13E FY14E
Gross revenues 486,904 667,592 794,266 897,755 983,744
Inter segment 68,432 72,644 79,758 86,156 93,456
Net revenue 418,472 594,948 714,508 811,599 890,289
Direct costs 175,712 254,421 316,058 352,528 380,236
Employee costs 19,028 32,784 35,159 35,474 38,282
Other Expenses 56,099 107,747 126,718 138,079 146,898
Total operating expenses 250,839 394,952 477,935 526,081 565,416
EBITDA 167,633 199,996 236,573 285,518 324,872
Depreciation & Amortization 62,832 102,066 133,681 146,088 159,668
EBIT 104,801 97,930 102,892 139,430 165,204
Other income 4,498 2,939 3,053 2,404 1,892
Interest expenses 4,208 23,751 40,784 33,164 33,273
Profit before tax 105,091 77,118 65,161 108,671 133,823
Provision for tax 13,453 17,790 22,602 32,601 44,162
Core profit 91,638 59,328 42,559 76,070 89,662
Profit After Tax 91,638 59,328 42,559 76,070 89,662
Minority interest 1,870 (1,475) (13) 84 84
Profit after minority interest 89,768 60,803 42,572 75,986 89,578
Basic shares outstanding (mn) 3,798 3,798 3,798 3,798 3,798
Basic EPS (INR) 23.6 16.0 11.2 20.0 23.6
Diluted equity shares (mn) 3,798 3,798 3,798 3,798 3,798
Diluted EPS (INR) 23.6 16.0 11.2 20.0 23.6
CEPS (INR) 40.2 42.9 46.4 58.5 65.6
Dividend per share (INR) 1.0 1.0 1.0 1.0 1.0
Dividend payout (%) 4.8 7.5 10.4 5.8 4.9
Common size metrics - as % of net revenues
Year to March FY10 FY11 FY12E FY13E FY14E
Operating expenses 59.9 66.4 66.9 64.8 63.5
Depreciation 15.0 17.2 18.7 18.0 17.9
Interest expenditure 1.0 4.0 5.7 4.1 3.7
EBITDA margins 40.1 33.6 33.1 35.2 36.5
Net profit margins 21.9 10.0 6.0 9.4 10.1
Growth ratios (%)
Year to March FY10 FY11 FY12E FY13E FY14E
Revenues 13.2 42.2 20.1 13.6 9.7
EBITDA 10.5 19.3 18.3 20.7 13.8
PBT 12.9 (26.6) (15.5) 66.8 23.1
Net profit 6.0 (32.3) (30.0) 78.5 17.9
EPS 6.0 (32.3) (30.0) 78.5 17.9
23 Edelweiss Securities Limited
Bharti Airtel
Balance sheet (INR mn)
As on 31st March FY10 FY11 FY12E FY13E FY14E
Equity capital 18,988 18,988 18,988 18,988 18,988
Reserves & surplus 402,952 468,680 487,124 558,666 643,806
Shareholders funds 421,940 487,668 506,112 577,654 662,794
Minority interest (BS) 25,285 28,563 27,695 27,779 27,863
Secured loans 81,474 532,338 497,154 422,581 359,194
Unsecured loans 20,424 84,370 193,078 173,770 147,705
Borrowings 101,898 616,708 690,232 596,351 506,898
Sources of funds 549,123 1,132,938 1,224,039 1,201,784 1,197,556
Gross block 678,122 931,873 1,065,748 1,215,748 1,365,748
Accumulated depreciation 195,493 280,447 390,817 513,594 649,122
Net block 482,629 651,426 674,932 702,155 716,626
Total fixed assets 482,629 651,426 674,932 702,155 716,626
Goodwill 59,890 637,317 660,889 637,578 613,438
Investments 52,419 6,224 18,132 9,066 9,066
Inventories 484 2,138 1,308 1,444 1,559
Sundry debtors 35,711 54,929 63,735 71,154 73,174
Cash and equivalents 25,323 9,575 20,300 13,838 26,860
Other current assets 41,995 58,393 80,043 79,391 78,550
Total current assets 103,513 125,035 165,386 165,827 180,143
Sundry creditors and others 153,427 312,373 320,119 307,857 305,178
Provisions 4,243 6,085 7,240 37,044 48,599
Total current liabilities & provisions 157,670 318,458 327,359 344,901 353,777
Net current assets (54,157) (193,423) (161,973) (179,075) (173,634)
Net Deferred tax 8,342 31,394 32,060 32,060 32,060
Uses of funds 549,123 1,132,938 1,224,039 1,201,784 1,197,556
Book value per share (INR) 111.1 128.4 133.3 152.1 174.5
Free cash flow (INR mn)
Year to March FY10 FY11 FY12E FY13E FY14E
Net profit 91,638 59,328 42,559 76,070 89,662
Depreciation 62,832 102,066 133,681 146,088 159,668
Others 16,236 18,577 (11,908) 9,066 -
Gross cash flow 170,706 179,971 164,332 231,224 249,330
Less: Changes in WC 12,227 9,577 8,816 (1,572) (7,583)
Operating cash flow 158,479 170,394 155,517 232,796 256,913
Less: Capex 128,312 831,178 133,875 150,000 150,000
Free cash flow 30,167 (660,784) 21,641 82,796 106,913
Cash flow metrics
Year to March FY10 FY11 FY12E FY13E FY14E
Operating cash flow 158,479 170,394 155,517 232,796 256,913
Investing cash flow (124,405) (651,085) (133,875) (150,000) (150,000)
Financing cash flow (5,498) 418,748 69,081 (98,324) (93,890)
Net cash flow 28,576 (61,943) 90,722 (15,529) 13,023
Capex (121,787) (109,169) (133,875) (150,000) (150,000)
Dividends paid (4,442) (4,428) (4,443) (4,443) (4,438)
24 Edelweiss Securities Limited
Telecom
Profitability & efficiency ratios
Year to March FY10 FY11 FY12E FY13E FY14E
ROAE (%) 24.7 13.4 8.6 14.0 14.4
ROACE (%) 23.5 12.1 8.8 11.6 13.9
Debtors days 24 28 30 30 30
Current ratio 0.7 0.4 0.5 0.5 0.5
Debt/EBITDA 0.6 3.1 2.9 2.1 1.6
Average working capital turnover (7.6) (4.8) (4.0) (4.8) (5.0)
Debt/Equity 0.2 1.3 1.4 1.0 0.8
Adjusted debt/equity 0.2 1.3 1.4 1.0 0.8
Operating ratios
Year to March FY10 FY11 FY12E FY13E FY14E
Total asset turnover 0.9 0.7 0.6 0.7 0.7
Fixed asset turnover 0.9 1.0 1.1 1.2 1.3
Equity turnover 1.2 1.3 1.4 1.5 1.4
Du pont analysis
Year to March FY10 FY11 FY12E FY13E FY14E
NP margin (%) 21.5 10.2 6.0 9.4 10.1
Total assets turnover 0.9 0.7 0.6 0.7 0.7
Leverage multiplier 1.4 1.8 2.4 2.2 1.9
ROAE (%) 24.7 13.4 8.6 14.0 14.4
Valuation parameters
Year to March FY10 FY11 FY12E FY13E FY14E
Diluted EPS (INR) 23.6 16.0 11.2 20.0 23.6
Y-o-Y growth (%) 6.0 (32.3) (30.0) 78.5 17.9
CEPS (INR) 40.2 42.9 46.4 58.5 65.6
Diluted PE (x) 12.8 18.8 26.9 15.1 12.8
Price/BV (x) 2.7 2.3 2.3 2.0 1.7
EV/Sales (x) 2.8 3.0 2.6 2.1 1.8
EV/EBITDA (x) 7.1 8.9 7.7 6.1 5.1
Dividend yield (%) 0.3 0.3 0.3 0.3 0.3
25 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
Bharti Airtel BUY SO L Idea Cellular BUY SP M
Mahanagar Telephone Nigam Ltd HOLD SU M Reliance Communication HOLD SU H
Tulip Telecom HOLD SU H
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
26 Edelweiss Securities Limited
Telecom
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Co-Head Institutional Equities & Head, Research [email protected] +91 22 4063 5476
Nirav Sheth Head Sales [email protected] +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Telecom
Bharti Airtel, Idea Cellular, Mahanagar Telephone Nigam Ltd , Reliance Communication, Tulip Telecom
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 104 60 18 183
* 1 stocks under review
Market Cap (INR) 114 58 11
Date Company Title Price (INR) Recos
Recent Research
29-May-12 RComm. Poor operating metrics;
Result Update
67 Hold
22-May-12 Vodafone
Group
Profitable growth;
Global Pulse
16-May-12 Tulip
Telecom
Stretched on all counts;
Result Update
79 Hold
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12-month period
Hold appreciate up to 15% over a 12-month period
Reduce depreciate more than 5% over a 12-month period
Rating Expected to
27 Edelweiss Securities Limited
Bharti Airtel
Access the entire repository of Edelweiss Research on www.edelresearch.com
DISCLAIMER General Disclaimer:
This document has been prepared by Edelweiss Securities Limited (Edelweiss). Edelweiss, its holding company and associate companies are a full service, integrated
investment banking, portfolio management and brokerage group. Our research analysts and sales persons provide important input into our investment banking
activities. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or
complete and it should not be relied on as such. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that
may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to
be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this
document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to
in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment
discussed or views expressed may not be suitable for all investors. We and our affiliates, group companies, officers, directors, and employees may: (a) from time to
time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving
such securities and earn brokerage or other compensation or act as advisor or lender/borrower to such company (ies) or have other potential conflict of interest
with respect to any recommendation and related information and opinions. This information is strictly confidential and is being furnished to you solely for your
information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in
whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located
in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would
subject Edelweiss and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain
jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions.
The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this
information. This information is subject to change without any prior notice. Edelweiss reserves the right to make modifications and alterations to this statement as
may be required from time to time. However, Edelweiss is under no obligation to update or keep the information current. Nevertheless, Edelweiss is committed to
providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither
Edelweiss nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special
or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a
guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not
be treated as endorsement of the views expressed in the report. Edelweiss Securities Limited generally prohibits its analysts, persons reporting to analysts and their
dependents from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information provided in this document
remains, unless otherwise stated, the copyright of Edelweiss. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property
and copyright Edelweiss and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright
holders.
Analyst Certification:
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies
and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in
this report.
Analyst holding in the stock: No.
Additional Disclaimer for U.S. Persons
This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The
research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer
and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of
FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances
and trading securities held by a research analyst account.
This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and
Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient
of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report
may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain
business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities
Inc. ("Marco Polo").
Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.
Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved