icicidirect_bhartiairtel_companyupdate

July 12, 2012 ICICI Securities Ltd | Retail Equity Research Company Update WHAT’S CHANGED… PRICE TARGET .................................................................................................... Unchanged EPS (FY13E) ........................................................................................................ Unchanged EPS (FY14E) ........................................................................................................ Unchanged RATING............................................................................. Changed from Buy to Strong Buy Case for a Strong Buy… Bharti Airtel is the market leader with ~30.1% revenue market share and strongest fundamentals in the industry. Falling capex intensity, repayment of debt and reduced interest expense thereon, margin expansion in the African business and high quality subscribers (first takers of 3G) led uptake in 3G services would drive EPS to almost double by FY14E. Spectrum pricing and other regulatory overhang may remain in the near term but it seems to be already priced in. Bharti with strongest fundamentals in the industry would be the last man standing after the outcome of ongoing regulatory proceedings. With a favourable risk- reward ratio, we rate the stock as STRONG BUY with a target price of | 420 per share. Strong fundamentals; EPS to nearly double by FY14… Bharti is a dominant market leader in the industry with revenue market share of 30.1% in the industry and a subscriber market share of 19.8% (24.3% on VLR basis) indicating strong quality of subscribers. Total 91.4% of subscribers are active as per the visitor location register (VLR) data as against 74.6% of the industry. Also, the African business has started showing meaningful improvement in EBITDA margins. We expect revenues to grow at a CAGR of 12.3% in FY12-14E on the back of an increase in traffic in both domestic as well as African business. The company is past its peak capex cycle and on a consolidated level would be generating free cash flow in excess of | 10000 crore each year, which would be used to repay the debt. Led by an improving operational performance and reduction in interest outgo on account of debt repayment, we expect EPS to grow 1.9x to | 21.4 by FY14E from the FY12 EPS of | 11.2. Valuation Using the DCF methodology for valuing Bharti and assuming a revenue CAGR of 7.9% in FY12-20E and a terminal growth of 3.0% thereon, we have arrived at a target price of | 420. The risk reward seems to be favourable at this point. We rate the stock as STRONG BUY . Exhibit 1: Key Financials (Year-end March) FY10 FY11 FY12 FY13E FY14E Net Sales (| crore) 39,615.0 59,467.2 71,450.8 81,268.0 90,104.4 EBITDA (| crore) 16,026.6 19,960.8 23,657.3 26,931.7 30,690.3 Net Profit (| crore) 9,102.5 6,046.8 4,259.4 5,609.6 8,106.4 EPS (|) 24.0 15.9 11.2 14.8 21.4 P/E (x) 12.8 19.2 27.3 20.7 14.3 Price / Book (x) 2.8 2.4 2.3 2.1 1.8 EV/EBITDA (x) 7.2 8.8 7.7 6.6 5.4 RoCE (%) 19.7 8.6 8.4 10.1 12.3 RoE (%) 22.0 12.4 8.4 10.1 12.8 Source: Company, ICICIdirect.com Research Bharti Airtel (BHATE) | 306 Rating matrix Rating : Strong Buy Target : | 420 Target Period : 12 months Potential Upside : 37% Key Financials | Crore FY11 FY12 FY13E FY14E Net Sales 59,467 71,450.8 81,268.0 90,104.4 EBITDA 19,960.8 23,657.3 26,931.7 30,690.3 Net Profit 6,046.8 4,259.4 5,609.6 8,106.4 EPS (|) 15.9 11.2 14.8 21.4 Valuation summary FY11 FY12 FY13E FY14E P/E 19.2 27.3 20.7 14.3 Target P/E 26.4 37.5 28.4 19.7 EV / EBITDA 8.8 7.7 6.6 5.4 P/BV 2.4 2.3 2.1 1.8 RoNW (%) 12.4 8.4 10.1 12.8 RoCE (%) 8.6 8.4 10.1 12.3 Stock data Market Capitalization (| Crore) 116,286.2 Total Debt (FY12) (| Crore) 69,023.2 Cash and Investments (FY12) ( | Crore) 3,843.2 EV (| Crore) 181,466.2 52 week H/L 441 / 282 Equity capital | 1898.2 Crore Face value | 5 MF Holding (%) 8.2 FII Holding (%) 16.9 Price movement 50 100 150 200 250 300 350 400 450 500 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 Pr ic e (R .H .S ) Ni ft y (L .H .S ) Analyst’s name Karan Mittal [email protected] Anil Shenoy [email protected]

icicidirect_bhartiairtel_companyupdate

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