braveheart series - bharti airtel ppt

BHARTI AIRTEL

Take the Forbidden Call

June 2012

Ganesh Duvvuri

+91 22 4040 7586

[email protected]

Key investment thesis

• Most negatives discounted: Regulatory costs, especially, spectrum related charges as recommended

by TRAI and accepted by Telecom Commission, have been in public domain for about two years and,

hence, in our view, discounted in the current price.

• Tariff hikes in the offing: The current price of spectrum and prevalent tariffs make the business

unviable for new as well as smaller operators. There is a strong likelihood of tariff hikes across the

board after the ensuing auctions are completed in August 2012. Some operators, including Vodafone

and RCOM, have recently hiked postpaid tariffs.

• Market share benefits: The incremental market share of top 3 operators has increased to 69% in

March 2012 from 40% in January 2012 as smaller operators have started focusing on cash

conservation and margin improvement than chasing subscriber market share. Bharti’s market share in

net addition of subscribers has risen to 31% in April 2012 from 10% in December 2011.net addition of subscribers has risen to 31% in April 2012 from 10% in December 2011.

• Strong cash flow generation: Investments for spectrum being upfront are currently under focus. But,

cash flow generation will be over a period of time and, hence, viewed skeptically. We expect Bharti to

generate FCF of INR335bn over FY13-15E, sufficient to take care of spectrum payments.

• Trading at historically low valuations: Bharti is trading at 6.1x FY13E EV/EBITDA, which is close to the

lowest band it has ever traded at historically. This indicates that the stock is discounting most

negatives and there is very little to lose hereon.

• Value of sum-of-the-parts at INR399: Using conservative comparable metrics, the value of Bharti’s

various businesses including mobile, tower, DTH, enterprise and broadband comes to INR399 /share.

• Target price of INR380: Our current DCF value is INR480 and adjusting for the impact of policy changes

(incl. spectrum policy), we set a target price of INR380, an upside of 27% from current levels over the

next 12 months. Reiterate ‘BUY/Sector Outperformer’ rating on the stock.

2

2

Most negatives seem to be priced inMost negatives seem to be priced in

Key negatives from policy changes in the price

• Various regulatory changes will lead to a net negative impact of INR100 per share on Bharti. In our

view, this seems to have been discounted in the price.

• Excess spectrum charges: As Bharti holds 8-10 MHz of spectrum in most key circles, it will have

to pay about INR66bn (INR17 per share) as excess spectrum charges when auctions are

completed.

• Payment for entire spectrum on licence expiry: As per TRAI proposal, Bharti will have to pay for

the entire spectrum (2G) in its possession on licence expiry. The current value of cash outflow on

account of this is INR305bn (INR80 per share) between FY15 and FY25.

• Removal of termination charges: TRAI has proposed lowering of termination charge from the

current INR0.2 per minute. We have assumed complete elimination of these charges. As Bharti is

a net receiver of these charges, we estimate reduction in cash flow of INR46bn (INR12 per share).a net receiver of these charges, we estimate reduction in cash flow of INR46bn (INR12 per share).

• Towercos to pass on licence fees to operators: The government plans to bring towercos under

licensing regime which implies that towercos will have to pay licence fees of 8% of revenue. But

they will enjoy tax exemption benefits under Sec. 80IA. We assume that towercos will pass on

these costs to operators. The net negative impact of this on Bharti is INR51bn (INR13 per share).

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 l icense 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

Summary of the impact of proposed policy changes and spectrum charges

Source: TRAI, Media reports, Edelweiss research4

Excess spectrum charges to be paid in FY13

• DoT will impose charges on spectrum held beyond the contracted amount (>6.2MHz). 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. Thus,

the impact on Bharti is INR66bn (INR17 per share).

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 -

Spectrum prices as per DoT panel (INR per MHz)

900 Mhz 1800Mhz

Alotted Spectrum

Computation of impact of excess spectrum charges

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

Source: TRAI, Media reports, Edelweiss research 5

PV of payments on licence renewal is INR80/ share

• The government intends to re-auction spectrum in the 900Mhz band. In our view, since this spectrum is

priced at twice the rate of 1800Mhz spectrum, few operators have the financial power to bid for it. We

are assuming that Bharti will have to pay for the entire spectrum it has on licence expiry (which happens

between 2014 and 2025 in various circles). The PV of future payments for spectrum is INR304bn (INR80

per share).

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

Spectrum prices as per DoT panelAlotted spectrum

(INR per MHz)

Computation of impact of spectrum charges on license renewal

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

Source: TRAI, Media reports, Edelweiss research 6

Inter-connection charges to be reduced

• TRAI revised the inter-connection rate down to INR0.2 per minute in 2009. It had sought industry views

on reducing the rate including the option of entirely withdrawing it in 2011. Bharti, due to its market

share of about 30%, is a net receiver of inter-connection charges. In our calculation, we are assuming

that the government will withdraw these charges and Bharti will take a hit of INR46bn (INR12 per share)

on its DCF.

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

Computation of impact of withdrawal of inter-connection charges (INR mn)

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 calls (%) 42.0 42.0 42.0 42.0 42.0 42.0 42.0

Assumed on-net calls 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

7

Towercos to pay licence fees

• The government has brought all tower operators under the purview of the licensing regime. Thus,

towercos will have to pay 8% (at par with operators) of their revenue as licence fee. They will, however,

enjoy tax exemption benefits under Sec. 80IA. They currently pay corporate tax rate of about 35%. We

believe towercos will pass on these costs to operators. The NPV of this impact is INR51bn (INR13 per

share).


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


Computation of impact of towercos passing on license fees to Bharti (INR mn)


NPV 50,852

No. of shares 3,798

NPV per share (INR) 13


8

Bharti has lost market share….

• Bharti’s revenue market share dipped from ~34% in Q1FY10 to 30% in Q3FY12. In FY12, it reported

10% YoY growth in revenue compared to 20% by Vodafone and 25% by Idea. We believe, Bharti’s

dominant position in a few circles like Karnataka, where it has over 50% market share, will be

challenged; hence, it will continue to lose market share.

30.0

32.0

34.0

36.0

(%)

Bharti has been constantly losing revenue market share

26.0

28.0

30.0

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 (%)


9

…but course correction in the past two months

• Bharti has taken steps to arrest this decline and has managed to increase incremental subscriber

market share. It added 2.5mn subscribers in March 2012 and 2mn in April 2012, highest in the

industry. Its incremental market share in the industry has surged from 10% in December 2011 to 31%

in March 2012. The management assured the Street that it is focused on defending market share.

40%

60%

80%

100%

Bharti has gained incremental market share in the past couple of months

0%

20%

40%

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12

Market share of net subscriber additions

Idea Vodafone Bharti


10

Positives being overlookedPositives being overlooked

Policy offers some savings too

• The government has proposed to charge a uniform licence fee of 8% of revenue instead of the earlier

10% for metros and A circles, 8% for B circles and 6% for C circles. It has also proposed to charge

uniform spectrum fee of 3% of revenue instead of the current slab structure of 3% for 4.4MHz

spectrum, 4% for 6.2MHz, 5% for 8MHz and 6% for 10Mhz. Bharti currently pays 8.6% of revenues as

license fees and 5.5% of revenues as spectrum fees. With the reduction in rates, it would pay 11% of

revenues towards license and spectrum fees instead of the current rate of 14.1%. This reduction in

fees will lead to a saving of INR86bn (INR23 per share) for Bharti.


Bharti India mobile revenues 479,864 525,791 561,523 590,534 614,903 635,512 655,097

Computation of benefit from lower revenue share of license and spectrum fees (INR mn)

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 license and spectrum fee charge (%) 11.0 11.0 11.0 11.0 11.0 11.0 11.0

Proposed license 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


NPV 86,276

No. of shares 3,798

NPV per share 23


12

New operators need to earn higher RPM

• In the current environment, due to intense competition, realisations of new operators and the cost

they have to incur to win spectrum makes the business unviable. Uninor is the most successful

amongst all new operators with 40mn customers and having generated revenue of INR30bn in FY12.

However, with RPM of INR0.27 and operating cost of INR0.45 per minute, it incurred EBITDA loss of

INR25bn. Even if Uninor were to become as efficient as Bharti, which is the lowest-cost service

provider globally at INR0.3 per minute, it will still incur an operating loss.

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)

Uninor will not make profits even if its cost reduces to Bharti’s level

Source: Companies, Edelweiss research

• Existing operators like Aircel and Tata Teleservices are stretched on the balance sheet and have little

ability to maneuver spectrum payments.

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: Companies, Edelweiss research

Source: Annual reports, Edelweiss research

Key financial parameters indicate poor health of smaller operators (INR mn)

13

At current RPM a new operator will lose money

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

Key assumptions for computing the NPV for a new operator

NPV of a Greenfield mobile business is negative due to high spectrum costs and lower tariffs

• At the current price of INR47bn per MHz pan-India spectrum , as suggested by the DoT panel, and

voice RPM of INR0.37, the NPV over a 20-year period is negative for any new telecom operator.

Source: Edelweiss research

NPV of a Greenfield mobile business is negative due to high spectrum costs and lower tariffs

14

(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)

Hence, tariff hikes are imminent

• The operating metrics of a new operator, as successful as Uninor, suggest that the business is unviable

without increase in RPM. Also, the high spectrum costs will lead to negative NPV over the licence

period for a new operator.

• Some operators like Vodafone and RCOM have raised postpaid tariffs in the past five months.

• The government has asked TRAI to assess the impact of spectrum costs on tariffs, indicating that it is

aware of possible tariff hikes if high spectrum charges are imposed on operators.

• While analysts are not factoring in any increase in RPM in their estimates, we believe tariff hikes are in

the offing as even existing operators will have to recover at least part of the cash outflows towards

spectrum payment.

• An INR0.01 per minute increase in tariff will lead to rise in NPV of INR19bn (INR5 per share) for Bharti.• An INR0.01 per minute increase in tariff will lead to rise in NPV of INR19bn (INR5 per share) for Bharti.

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

Bharti’s cash flow sensitivity to RPM increase

15

Short-term pain, but long-term gain

• The Street is focused on the near-term cash outflows for spectrum payments, but ignoring the fact

that the investment is for a period of 20 years and cash flow generation will be strong after the

investment phase. Bharti invested ~INR216bn (34% of its investment in India and SA mobile business)

to offer 3G and BWA services, which is yielding minimal revenues currently. Even after assuming the

payouts by Bharti for spectrum, including an expected buyout of the Qualcomm broadband licence, it

would still breakeven in terms of cash flows during FY14-16. But, the FCF generation FY17 onwards

would be over USD5bn p.a. Thus, the Street is factoring in these investments but ignoring the long-

term cash flow accretion.

As of March 2012

Cumulative investments in India and SA mobile business (INR mn) 643,292

3G and BWA investments are upfront, cash inflows in future

Total investment in 3G and BWA including spectrum cost (INR mn) 216,098

as % of total investments 33.6

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 license 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

Matrix of yearly cash flows for Bharti (INR mn)

Source: Company, DoT, Edelweiss research

16

Outlook and valuations: Strong cash flow storyOutlook and valuations: Strong cash flow story

Bharti has missed Street estimates

• The high expectations set due to the upgrade cycle during FY06-08 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 forecast made 12 months earlier, due

to lower margins and forex losses.

• However, the miss on EBITDA forecast has been minimal. In our view, even if the company meets

analysts’ estimates, the stock will out perform. The market is looking for certainty in earnings and cash

flows. We believe, completion of auctions in August 2012 will be provide much needed clarity to the

Street.

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,

Bharti has missed street estimates in the last three years (INR bn)

18

Trading at close to low end of valuation band

• Bharti was a favourite of many investors until 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 currently trading

at 6.1x FY13E EV/EBITDA, close to the lowest level it has ever traded at.

14.4

18.0

Bharti trading at close to the bottom end of valuation (EV/EBITDA) level

0.0

3.6

7.2

10.8

Ma

y-0

6

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

19

Worst case assumptions in the price…

• At current price, the market is assuming that tariff wars in the domestic market will continue and RPM

will decline 5% from the current level in the next two years and margins will remain stable. Even in

Africa, the Street is assuming no margin improvement.

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

Key Assumptions in the worst case scenario

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


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


20

…indicates no downside in the stock

• Such a pessimistic scenario brings the DCF price down to INR401 per share and adjusting for the

INR100 per share impact of policy changes, the worst case price is INR301 per share. Thus, there is no

downside in the stock.

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

Assumptions for worst case DCF


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

Worst case DCF calculation (INR mn)

21

Sum-of-the-parts value at INR399/share

• Using conservative comparative valuation metrics, the sum of various businesses of Bharti throws up a

value of INR399 per share. We, however, use DCF model to set our target price.

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's sum of the value of various businesses

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 research22

Limited downside to current assumptions…

• In our current forecast for the domestic business, we are assuming that voice RPM will decline 1% QoQ

in Q1FY13 and then remain stable till perpetuity. We are assuming that EBITDA margin will improve

200bps over the next two years and by 50bps thereafter.

• For the Africa business, we assume that ARPU will decline in the next two years, driven by lower RPMs

and lower MOU. But, based on the company’s track record in FY12, during which it improved EBITDA

margin 100bps QoQ every quarter and the management’s assurance of improving profitability, we are

assuming 50bps QoQ improvement in margin in the next two years.

Year to March FY12 FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E

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


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


23

…fair value of INR380 after adjusting for policy impact

• Our DCF price is INR480 per share for Bharti, and adjusting for the negative impact of INR100 per share

due to policy changes we set our target price at INR380 per share. The upside risk to our target price

exists from lower spectrum price and tariff hikes.

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


Assumptions for current DCF

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

Current DCF calculation (INR mn)

24

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 revenues 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 and amortisation 62,832 102,066 133,681 146,088 159,668

EBIT 104,801 97,930 102,892 139,430 165,204

Interest expenses 4,208 23,751 40,784 33,164 33,273

Other income 4,498 2,939 3,053 2,404 1,892

Profit before tax 105,091 77,118 65,161 108,671 133,823

Financial Statement

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

Equity shares outstanding (mn) 3,798 3,798 3,798 3,798 3,798

EPS (INR) basic 23.6 16.0 11.2 20.0 23.6

Diluted shares (mn) 3,798 3,798 3,798 3,798 3,798

EPS (INR) fully diluted 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 1.0 1.0 1.0 1.0 1.0

Dividend payout % 4.8 7.5 10.4 5.8 4.9

25

Financial Statement (Contd.)

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 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 & Intangibles 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 CL & 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 (BV) (INR) 111 128 133 152 175

26

Financial Statement (Contd.)

Profitability & liquidity ratios


ROAE (%) 24.7 13.4 8.6 14.0 14.4

ROACE (%) 23.5 12.1 8.8 11.6 13.9

Current ratio 0.7 0.4 0.5 0.5 0.5

Free cash flow (INR mn)


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 0

Gross cash flow 170,706 179,971 164,332 231,224 249,330

Less: Changes in W. C. 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

Current ratio 0.7 0.4 0.5 0.5 0.5

Debtors (days) 24 28 30 30 30

Fixed assets t/o (x) 0.9 1.0 1.1 1.2 1.3

Average working capital t/o (x) (7.6) (4.8) (4.0) (4.8) (5.0)

Debt/Equity 0.2 1.3 1.4 1.0 0.8

Debt/EBITDA 0.6 3.1 2.9 2.1 1.6

Adjusted debt/Equity 0.2 1.3 1.4 1.0 0.8

Valuation parameters


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 P/E (x) 12.7 18.8 26.8 15.0 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 0.0 27

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