BUY

Bharti Airtel (BHARTI)

Telecom

FEBRUARY 06, 2015

RESULT
Coverage view: Cautious

India business saves 3QFY15 but cant prevent forecast cuts. A disappointing
3QFY15 and subdued prognosis on Africa drive a 3-4% cut in consolidated EBITDA and
8-16% in consolidated EPS forecasts for FY2016/17E. Our India business estimates are
broadly unchanged. We roll over our SOTP to Dec 2016E from Mar 2016E; upside from
rollover is lost to EBITDA cuts and we cut our TP on the stock to `420 (from `430). BUY
stays primarily on the back of inexpensive valuations even as Idea remains our preferred
idea in the sector.
C o mpan y d ata an d valuatio n summary
Bharti Airtel
Stock data
52-week range (Rs) (high,low)
420-282
Market Cap. (Rs bn)
1,457.9
Shareholding pattern (%)
Promoters
65.4
FIIs
17.2
MFs
2.5
Price performance (%)
1M
3M
12M
Absolute
2.2
(5.2) 16.0
Rel. to BSE-30
(1.4)
(8.2) (18.5)

Forecasts/Valuations
EPS (Rs)
EPS growth (%)
P/E (X)
Sales (Rs bn)
Net profits (Rs bn)
EBITDA (Rs bn)
EV/EBITDA (X)
ROE (%)
Div. Yield (%)

Price (`): 365

Target price (`): 420
BSE-30: 28,851

2015
2016E
2017E
15.0
15.6
17.9
79.6
4.4
14.3
24.4
23.3
20.4
926.5 1,012.7 1,093.3
59.8
62.5
71.4
310.6
344.3
382.3
7.6
6.7
5.9
9.6
9.3
10.1
0.5
0.9
1.2

Cut EBITDA forecasts by 3-4% and EPS by 8-16% for FY2016/17E

Exhibit 1 depicts the key changes to our earnings model. EBITDA cuts of 3-4% for FY2016/17E
primarily reflect lowered Africa business forecasts following the sharp 3QFY15 disappointment.
Our prognosis on Africa remains subdued despite managements sustained bullish stance. As
highlighted in some of our earlier notes, Africa performance continues to be weak with
constant misses on progressively lower expectations. We do not know if the Bloomberg report
on Orange entertaining thoughts of buying some of Bhartis assets is just speculation or not;
however, we believe it makes sense for Bharti to look at trimming its Africa operations and
starting afresh.
With customary disappointment on Africa displayed, we discuss the key changes to our
earnings model below
We have revised our revenue estimates for FY2015-17E down by 1-4% while also reducing
our consolidated EBITDA margin estimates marginally. Our revised EBITDA estimates for
FY2015E, 16E and 17E stand at `311 bn, `344 bn and `382 bn respectively a cut of 2-4%.
Even as our FY2015E EPS estimates go up 3.5% to `15 on the back of below-EBITDA
surprises on depreciation, net finance costs and ETR (in 3QFY15), we have cut our FY2016E
and FY2017E EPS estimates by 8% and 16% to `15.6 and `17.9 respectively.
We note that our EPS forecasts for FY2016E and FY2017E are optically high (marginally) on
account of us not baking in the Africa tower sale impact on EBITDA, debt and interest line
items while the positive impact of lower depreciation on this count are baked in given the
IFRS accounting treatment on depreciation pertaining to assets held for sale.

Rohit Chordia
rohit.chordia@kotak.com
Mumbai: +91-22-4336-0885

Abhas Gupta

Rollover to Dec 2016E valuation aids target price, which still gets cut to `420 (from `430)

abhas.gupta@kotak.com
Mumbai: +91-22-4336-0881

We have cut our SOTP-based end-Dec 2016E target price on the stock to `420 (from `430
earlier). Our SOTP bakes in `75/share value destruction at the equity level from Africa.

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Telecom

Bharti Airtel

Exhibit 1: Key changes to Bharti earnings model, March fiscal year-ends, 2015-17E

C o n s o lid ated
Revenues (Rs mn)
EBITDA (Rs mn)
EBIT (Rs mn)
Recurring EPS (Rs/share)
EBITDA margin (%)
In d ia/SA wireles s
Revenues (Rs mn)
EBITDA margin (%)
EBITDA (Rs mn)
In d ia wireles s metric s
Subs (mn)
Volumes (bn min)
RPM (paise/min)
ARPU (Rs/sub/month)
MO U (min/sub/month)
Capex (Rs mn)
O f which
Network capex
Spectrum capex
Afric a wireles s
Revenues (US$ mn)
EBITDA (US$ mn)
EBITDA margin (%)
Capex (US$ mn)

20 15 E

Revis ed
20 16 E

20 17E

20 15 E

Earlier
20 16 E

20 17E

926,544
310,637
153,666
15.0

1,012,740
344,329
164,855
15.6

1,093,264
382,350
184,751
17.9

939,598
316,301
155,751
14.4

1,041,726
356,332
175,235
17.1

1,143,572
400,107
201,179
21.1

33.5

34.0

35.0

33.7

34.2

35.0

539,019
35.8
193,045

598,412
36.2
216,835

656,537
37.0
243,207

541,721
35.7
193,341

603,397
36.1
217,652

666,023
36.9
245,595

222
1,078
47.94
202
421
302,732

237
1,118
51.44
209
406
105,167

251
1,151
54.79
215
393
94,654

217
1,078
48.09
204
425
173,888

227
1,118
51.78
217
419
138,035

236
1,151
55.50
230
414
128,363

82,732
220,000

105,167
-

94,654
-

67,379
106,509

98,035
40,000

88,363
40,000

4,483
1,024
22.9
852

4,593
1,054
23.0
781

4,762
1,138
23.9
738

4,637
1,117
24.1
788

5,037
1,251
24.8
781

5,462
1,398
25.6
792

20 15 E

C h an g e (%)
20 16 E

(1.4)
(1.8)
(1.3)
3.5
-14 bps

(2.8)
(3.4)
(5.9)
(8.4)

20 17E
(4.4)
(4.4)
(8.2)
(15.5)

-21 bps

-2 bps

(0.5)
12 bps
(0.2)

(0.8)
16 bps
(0.4)

(1.4)
16 bps
(1.0)

2.1
(0.3)
(1.4)
(1.1)
74.1

4.3
(0.7)
(3.8)
(3.1)
(23.8)

6.4
(1.3)
(6.3)
(5.1)
(26.3)

7.3

7.1

(8.8)
(15.8)
-190 bps
0.0

(12.8)
(18.6)
-170 bps
(6.8)

22.8
106.6

(3.3)
(8.3)
-125 bps
8.1

Source: Company, Kotak Institutional Equities

Key takeaways from the earnings call

The company indicated that it has now signed sale agreements for a total of 12,500
towers in Africa (across 13 countries). It continues to explore options to sell the remaining
3,000-3,500 towers. None of the transactions are closed yet and hence reported
financials do not reflect the EBITDA (negative) or interest (positive) impact of these
transactions.
The company expects FY2015E capex in Africa to be only marginally higher (if at all) than
its earlier guidance of US$800 mn; we note that the company has already spent US$709
mn in 9MFY15.
We found the companys reasoning to not offer bundled services clubbing its wireline,
wireless and DTH offerings a bit surprising. The company indicated that the reason to not
offer bundled services is the disparate IT systems of the three businesses. This surprised us,
coming from the leading telecom company in India. If the market is ready for bundled
services, such system aspects cannot be a reason to not pursue it aggressively. There is a
new large player on the horizon who intends to pursue bundled offerings aggressively, if
the media reports are to be believed. The new player starts with fresh IT systems and we
do believe that Bharti would not want to risk losing business on account of inferior IT
systems. We may be stretching our argument here a bit but as we said earlier, Bhartis
(honest, we appreciate) response surprised us.
The company, while avoiding any meaningful discussion on the upcoming auctions, did
indicate that it expects the auctions to be rational. Definition of rationality is the real
unknown here and we maintain that the outcome of upcoming auctions is tricky to call.

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Bharti Airtel

Telecom

In contrast to Africa, the management seemed upbeat on India wireless, especially the
data opportunity.
Defending its slower-than-Idea volume and revenue growth in India, Bharti management
essentially indicated that the two companies are pursuing different strategies and the
company is internally extremely satisfied with the performance of the India wireless
business. We agree that Bhartis performance on the India wireless side has been solid in
the past few quarters in its own right; however, volume growth differential (on voice and
especially data) versus Idea is too glaring to dismiss, in our view.
Bhartis management, like Ideas, reiterated that it does not foresee a need for
meaningful fresh 3G/4G cell sites for the next few years. This is in line with our view that
3G/4G cell site additions would be primarily in the form of loading.
Bharti invested US$285 mn equity into the Africa business through the Mauritian
subsidiary. India cashflows continue to get ploughed into Africa.
Bharti has three licenses in Africa coming up for renewal in FY2016E Nigeria,
Madagascar and Kenya. Even as the management indicated that it does not expect these
renewals to cost a meaningful sum, we would closely watch out for developments on this
front. Spectrum renewals do throw up surprises, as we have seen in India.
The company indicated that business in South Asia, especially Bangladesh, is now stable
after the company-initiated clean-up in 2QFY15 impacted performance in the past two
quarters.
Exhibit 2: Bharti valuation - sum of the parts
Dec-2016
India business valuation
Core business (ex-towers, ex-Africa)
Enterprise value (Rs mn) - end-March
EBITDA (ex-Bharti Infratel) (Rs mn)
EV/EBITDA (X)
Bharti Infratel valuation
Equity value based on KIE target price (Rs mn)
Bharti's shareholding (%)
Infratel net debt
EV (Rs mn)
India EV (Rs mn)
Net debt (Rs mn)
Equity value - India business (Rs mn)
Equity value - India business (Rs/share)

585,590
74.9
(52,798)
491,171
2,188,098
218,324
1,969,773
493

Africa business valuation

Enterprise value (Rs mn) - end-March
EBITDA (Rs mn)
EV/EBITDA (X)
Net debt - (including acquisition debt) (Rs mn)
Equity value - Africa (Rs mn)
Equity value - Africa (Rs/share)
Total core equity value = a + b (Rs/share)

284,159
59,823
4.75
582,000
(297,841)
(75)
418

Africa tower sale upside

One-time excess charge
Target price (Rs/share)

1,696,927
271,508
6.25

15
(13)
420

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Telecom

Bharti Airtel

Exhibit 3: Bharti - key assumptions driving our model, IFRS, March fiscal year-ends (Rs mn)
2012
India wireless
End-period subs ('000)
Total traffic (bn min)
RPM (Rs/min)
ARPU (Rs/sub/month)
MOU (Rs/sub/month)
EBITDA margin (%)
Africa wireless
End-period subs ('000)
ARPU (US$/sub/month)
MOU (min/sub/month)
RPM (US$ cents/min)
EBITDA margin (%)

2013

2014

2015E

2016E

2017E

181,279
888
0.436
188
431
33.9

188,220
968
0.431
186
436
32.6

205,519
1,030
0.445
194
436
34.4

221,719
1,078
0.479
202
421
37.4

237,019
1,118
0.514
209
406
37.6

251,419
1,151
0.548
215
393
38.4

53,140
7.1
123
5.8
26.5

63,718
6.3
132
4.8
26.2

69,443
5.6
138
4.1
26.1

77,243
5.1
134
3.8
22.9

84,443
4.7
133
3.6
23.0

91,043
4.5
134
3.4
23.9

Source: Kotak Institutional Equities estimates

Exhibit 4: Africa performance trajectory

Revenues
EBITDA (A)
EBITDA margin (%)
Capex (B)
Cash taxes (C)
Net interest cost (D)
Cash funding gap = A - B - C - D

Jun-12
1,066
275
25.8
(119)
(42)
(169)
(55)

Sep-12
1,097
298
27.2
(210)
(38)
(170)
(120)

Dec-12
1,133
300
26.5
(160)
(52)
(145)
(57)

Mar-13
1,120
285
25.4
(235)
(45)
(153)
(148)

Jun-13
1,062
283
26.6
(165)
(74)
(59)
(15)

Sep-13
1,119
301
26.9
(154)
(60)
(65)
22

Dec-13
1,165
300
25.8
(140)
(78)
(117)
(35)

Mar-14
1,145
290
25.3
(176)
(71)
(122)
(79)

Jun-14
1,164
283
24.3
(160)
(67)
(124)
(68)

Sep-14
1,140
270
23.7
(265)
(56)
(132)
(183)

Dec-14
1,103
241
21.9
(284)
(20)
(167)
(230)

Notes:
(a) We have computed interest as EBIT less PBT; this includes some non-operating cash expenses charges below EBITDA.
(b) We have not included changes in working capital in the above computations for lack of data.

Source: Company, Kotak Institutional Equities

Exhibit 5: Bharti - condensed financials, IFRS, March fiscal year-ends (Rs mn)
2012
Profit and loss statement
Revenues
EBITDA
EBIT
PBT
Recurring PAT
Recurring EPS (Rs/share)
Balance sheet
Total Equity
Borrowings
Other liabilities
Total equity and liabilities
Net fixed assets
Net intangibles
Cash and equivalents
Other assets
Total assets
Cash flow statement
Operating cash flow
Capex
Free cash flow
Acquisitions
Borrowings
Others
Total change in cash & equivalents

2013

2014

2015E

2016E

2017E

714,587
237,122
103,441
65,256
42,593
11.2

803,254
248,704
93,740
49,896
22,757
6.0

857,461
277,770
121,274
72,894
33,292
8.3

926,544
310,637
153,666
112,778
59,807
15.0

1,012,740
344,329
164,855
115,497
62,457
15.6

1,093,264
382,350
184,751
123,319
71,417
17.9

533,808
690,232
346,576
1,570,616
674,932
660,889
39,234
195,561
1,570,616

544,103
729,608
399,521
1,673,232
688,430
680,808
89,094
214,900
1,673,232

639,662
758,958
433,152
1,831,772
596,429
809,716
156,541
269,086
1,831,772

692,974
954,055
464,823
2,111,851
625,426
1,128,798
66,595
291,031
2,111,851

734,953
904,055
482,806
2,121,814
651,521
1,103,241
55,689
311,363
2,121,814

778,190
854,055
496,487
2,128,732
662,665
1,062,444
69,744
333,879
2,128,732

192,345
(135,386)
56,959
(45,373)
73,524
(62,419)
22,691

268,393
(135,364)
133,029
(53,017)
39,376
(69,528)
49,860

249,471
(292,200)
(42,729)

(34,229)
144,405
67,447

235,255
(380,050)
(144,795)
20,000
210,000
(175,151)
(89,946)

283,078
(190,011)
93,067

(50,000)
(53,973)
(10,906)

314,322
(167,947)
146,375

(50,000)
(82,321)
14,055

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Bharti Airtel

Telecom

Exhibit 6: Bharti - segmental financials, IFRS, March fiscal year-ends (Rs mn)
Revenues
Wireless - India and South Asia
Telemedia services
Enterprise
Passive Infra
Others
Wireless - Africa
Gross revenues
Intersegment eliminations
Net revenues
EBITDA
Wireless - India and South Asia
Telemedia services
Enterprise
Passive Infra
Others
Wireless - Africa
Intersegment eliminations
Total EBITDA
EBITDA margin (%)
Wireless - India and South Asia
Telemedia services
Enterprise
Passive Infra
Others
Wireless - Africa
Total EBITDA margin

2012

2013

2014

2015E

2016E

2017E

403,091
37,272
44,542
95,109
15,990
198,267
794,271
(79,684)
714,587

440,235
38,158
53,202
103,154
19,735
240,439
894,923
(91,669)
803,254

484,231
39,352
63,361
51,086
23,872
272,512
934,414
(76,953)
857,461

539,019
44,424
66,529
54,519
27,930
273,597
1,006,019
(79,476)
926,544

598,412
49,293
69,523
60,606
32,398
289,376
1,099,609
(86,869)
1,012,740

656,537
54,015
72,304
67,563
36,610
300,011
1,187,040
(93,776)
1,093,264

136,690
15,813
8,313
35,943
(9,215)
52,790
(3,212)
237,122

135,137
16,204
9,361
38,561
(10,011)
63,146
(3,694)
248,704

158,600
14,771
13,807
22,850
1,177
71,279
(4,714)
277,770

193,045
17,326
14,570
25,466
4,469
62,517
(6,755)
310,637

216,835
19,471
15,226
28,337
5,346
66,412
(7,297)
344,329

243,207
21,336
15,835
31,830
6,224
71,703
(7,783)
382,350

33.9
42.4
18.7
37.8
(57.6)
26.6
33.2

30.7
42.5
17.6
37.4
(50.7)
26.3
31.0

32.8
37.5
21.8
44.7
4.9
26.2
32.4

35.8
39.0
21.9
46.7
16.0
22.9
33.5

36.2
39.5
21.9
46.8
16.5
23.0
34.0

37.0
39.5
21.9
47.1
17.0
23.9
35.0

Notes:
(a) Indus accounting has been changed to equity accounting from proportionate JV consolidation from FY2014.

Source: Company, Kotak Institutional Equities estimates

Exhibit 7: Key operating metrics

India mobile
Customer Base ('000s)
VLR (%)
Net Additions ('000s)
Pre-Paid (as % of total base)
Monthly Churn (%)
ARPU (Rs/month)
MOU (min/month)
RPM (Rs/min)
Voice
Minutes on network (mn mins)
Voice ARPU (Rs/month)
Voice RPM (Rs/min)
Voice as % of total
Non-voice
Non-voice as % of total
SMS & VAS
Data
Others
Data
Data subs ('000s)
- 3G subs
Total MBs on the network (mn MBs)
Data ARPU
Data Usage per customer (MB/month)
Data Realization per MB (Rs/MB)
Network
No. of cell sites
- 3G sites
Revenue per cell site per month (Rs)

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

190,948
95.2
2,728
95.61
3.2
200
455
0.440

193,457
95.1
2,508
95.41
3.2
192
437
0.440

198,513
95.3
5,057
95.26
2.7
195
434
0.448

205,519
96.0
7,006
95.10
2.4
196
437
0.449

209,411
95.0
3,892
94.95
2.7
202
435
0.465

211,752
95.8
2,341
94.68
3.1
198
418
0.472

217,215
96.1
5,463
94.63
2.7
202
416
0.486

258,380
166
0.366
83.1

251,322
161
0.368
83.6

255,030
162
0.372
83.0

264,843
162
0.372
82.6

270,827
166
0.381
81.8

263,905
158
0.377
79.8

267,485
157
0.377
77.4

16.9
8.3
8.2
0.4

16.4
6.7
9.4
0.3

17.0
6.1
10.6
0.3

17.4
5.6
11.5
0.3

18.2
5.5
12.4
0.3

20.2
5.4
14.5
0.4

22.6
6.0
16.2
0.4

25,875
6,238
28,403
128
392
0.327

28,039
7,438
34,624
129
429
0.300

31,898
8,806
39,932
137
450
0.304

35,605
10,255
47,655
133
464
0.286

39,320
12,535
55,610
139
495
0.280

40,108
15,445
67,668
150
563
0.267

42,249
16,940
77,281
170
622
0.274

134,736
25,604
282,406

135,412
26,616
272,979

137,069
28,179
279,871

138,755
31,301
287,897

139,894
34,564
301,594

141,290
38,055
295,645

142,898
41,850
305,283

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Telecom

Bharti Airtel

Exhibit 8: Key India data business performance indicators shared by Bharti

Data (2G & 3G) KPIs

Subs ('000s)
As % of total subs
Total volumes (mn MB)
qoq growth (%)
Usage per customer (MB)
Realization per MB (paise)
qoq growth (%)
ARPU (Rs/sub/month)
Implied data revenue (Rs mn)
qoq growth (%)
yoy growth (%)
As % of India wireless revenues
3G KPIs
Active 3G subs ('000s)
As % of total data subs

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

3QFY15

28,039
14.5
34,624
21.9
429
30.0
(8.2)
129
10,384
11.9
102.0
9.4

31,898
16.1
39,932
15.3
450
30.4
1.3
137
12,131
16.8
109.2
10.6

35,605
17.3
47,655
19.3
464
28.6
(5.8)
133
13,639
12.4
94.7
11.5

39,320
18.8
55,610
16.7
495
28.0
(2.0)
139
15,593
14.3
68.1
12.4

40,108
18.9
67,668
21.7
563
26.7
(4.9)
150
18,047
15.7
73.8
14.5

42,249
19.5
77,281
14.2
622
27.4
2.6
170
21,144
17.2
74.3
16.2

7,438
26.5

8,806
27.6

10,255
28.8

12,535
31.9

15,445
38.5

16,940
40.1

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"I, Rohit Chordia, hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional Equities,
within the specified category.

70%
60%

Percentage of companies within each category for which Kotak

Institutional Equities and or its affiliates has provided investment
banking services within the previous 12 months.

50%
40.0%

40%
30%

23.2%
20%

19.4%

17.4%

10%
2.6%

3.2%

BUY

ADD

1.3%

1.3%

REDUCE

SELL

0%

* The above categories are defined as follows: Buy = We expect

this stock to deliver more than 15% returns over the next 12
months; Add = We expect this stock to deliver 5-15% returns
over the next 12 months; Reduce = We expect this stock to
deliver -5-+5% returns over the next 12 months; Sell = We
expect this stock to deliver less than -5% returns over the next 12
months. Our target prices are also on a 12-month horizon basis.
These ratings are used illustratively to comply with applicable
regulations. As of 31/12/2014 Kotak Institutional Equities
Investment Research had investment ratings on 155 equity
securities.

Source: Kotak Institutional Equities

As of December 31, 2014

Ratings and other definitions/identifiers

Definitions of rating
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.

Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Corporate Office

Overseas Offices

Kotak Securities Ltd.

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Tel: +44-20-7977-6900

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Copyright 2015 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
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