Bahrti- Airtel Article

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Bharti Airtel B H A R T I I N
TE L E C O M S | I N D I A

From Neutral
NOMURA SINGAPORE LIMITED

Sachin Gupta, CFA +65 6433 6968 Neeraja Natarajan (Associate)

sachin.gupta@nomura.com

BUY

A N C H O R

R E P O R T

Rumble in the jungle
We have reviewed Bharti’s operations in the 15 African countries in which it operates. Apart from learning that Madagascar makes half of the world’s vanilla beans and 4/5 of African gorillas live in Gabon, we observe that Bharti is well positioned to regain share and return to an earnings growth trajectory. We don't underestimate the challenges as Bharti competes with 30 different operators in Africa; rather than the 40% margin by 2013F targeted by management, 32% is our projection. But nor do we expect capex blow-ups, as existing networks can be exploited further to drive usage up. A comparison of network utilisation and costs in Africa versus India shows room for further operational efficiencies. Recent price cuts of 30-40% are also matched by 20-30% termination rate cuts, and this may continue. A somewhat stagnant share price around INR330 doesn't appear to ascribe much value to an African turnaround. We find that domestic business alone, at a 7.5% EPS CAGR scenario over FY10-13F at 14x P/E, implies a INR417 share price – Zain remains earnings and NPV dilutive until then, we estimate. We upgrade Bharti to BUY (from Neutral), with a INR400 PT. While the stock may be volatile on MNP/regulatory newsflow near term, we believe overall domestic trends should be resilient over the coming 12 months. An FY13F P/E of 12.9x is another draw, in our view. In this report, we provide an overview on Bharti’s African businesses, including economic prospects, political trends, and the competitive landscape in each country.

Analysts
Sachin Gupta, CFA +65 6433 6968 sachin.gupta@nomura.com Neeraja Natarajan (Associate)

Closing price on 7 Feb Price target Upside/downside Difference from consensus FY12F net profit (Rsmn) Difference from consensus Source: Nomura

Rs333.9

Rs400.0
(from Rs 332. 0)

19.8% 12.0% 74,302 -11.4%

Nomura vs consensus
We are relatively more cautious on margin trends in India and Africa.

 Key observations from Africa  Why upgrade now?
Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 133 to 136. Nomura 9 February 2011

Bharti Airtel B H A R T I I N
TE L E C O M S | I N D I A

From Neutral
NOMURA SINGAPORE LIMITED

Sachin Gupta, CFA +65 6433 6968 Neeraja Natarajan (Associate)

sachin.gupta@nomura.com

BUY
Closing price on 7 Feb Price target Upside/downside Difference from consensus FY12F net profit (Rsmn) Difference from consensus Source: Nomura

 Action
After being cautious on Bharti since mid-2009, we now think the risk-reward is skewed to the upside. We upgrade to BUY with a INR400 PT. Post Africa reviews: 1) we think capex risks could be moderate and cut our capex forecasts from 25% to 20% of sales; 2) solid scope for operational turnaround, although management’s 40% margin target by 2013 seems a stretch (we forecast 32%); and 3) the current price doesn’t appear to ascribe much value to Africa, providing a free option on turnaround. Recent results show broad stabilisation domestically. Data could surprise positively for the next 12 months. We see low risk of very adverse regulations and an inexpensive valuation at 12.9x FY13F PE.

Rs333.9

Rs400.0
(from Rs 332. 0)

19.8% 12.0% 74,302 -11.4%

Nomura vs consensus
We are relatively more cautious on margin trends in India and Africa.

 Catalysts
Improvements in Africa, progress on 3G/data, and price wars are some catalysts. Anchor themes Domestic trends are stabilising; Africa turnaround could be a challenge/opportunity....
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