BHARTI AIRTEL

Take the Forbidden Call

Ganesh Duvvuri
+91 22 4040 7586
ganesh.duvvuri@edelcap.com

June 2012

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. Bhartis market share in
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 Bhartis
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.

Most 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).

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).

Summary of the impact of proposed policy changes and spectrum charges

One-time excess spectrum to be paid in FY13
PV of cost of spectrum to be paid on license renewal between 2014-2025
PV of benefit from reduction in revenue share of license and spectrum fees
PV of impact of removing termination charge
PV of impact on imposing Licence fee of 8% on towerco revenues
Net impact
Source: TRAI, Media reports, Edelweiss research

INR mn
65,797
304,548
(86,276)
45,966
50,852
380,887

INR per share

17
80
(23)
12
13
100

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).
Computation of impact of excess spectrum charges
Circle
A. P.
Assam
Bihar
Delhi
Gujarat
Haryana
H. P.
J&K
Karnataka
Kerala
Kolkata
M. P.
Maharashtra
Mumbai
Orissa
Punjab
Tamil Nadu
U. P. (E)
U. P. (W)
West Bengal
North East
Rajasthan
Total

Alotted Spectrum
(900 MHz) (1800 MHz)
7.8
4.4
6.2
8.0

6.2
6.2
7.8
6.2

6.2
7.8
6.2
6.2
6.2
4.4
4.4
6.2
100.40

2.2
1.8
3.0
2.0
6.2
6.2
2.2
6.2
1.8
8.0
8.2
9.2
1.8
3.0
1.0
1.8
1.8
2.0
68.40

Source: TRAI, Media reports, Edelweiss research

Spectrum prices as per DoT panel (INR per MHz)

900 Mhz
1800Mhz
Upto 8Mhz
Over 8Mhz
Upto 8Mhz
Over 8Mhz
6,689
8,695
3,344
4,348
202
263
101
131
991
1,288
495
644
16,157
21,004
8,078
10,502
5,242
6,814
2,621
3,407
1,084
1,410
542
705
181
236
91
118
148
192
74
96
7,696
10,005
3,848
5,002
1,522
1,979
761
989
2,651
3,446
1,326
1,723
1,259
1,636
629
818
6,127
7,965
3,063
3,982
15,816
20,561
7,908
10,281
473
614
236
307
1,568
2,039
784
1,020
7,136
9,277
3,568
4,638
1,776
2,308
888
1,154
2,504
3,255
1,252
1,628
602
783
301
392
206
268
103
134
1,564
2,033
782
1,016
81,593
106,071
40,797
53,036

Pro-rata excess
Spectrum
Charges (INR mn)
7,559
1,307
17,530
8,903
835
755
4,085
17,716
334
945
4,495
697
636
65,797

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).
Computation of impact of spectrum charges on license renewal
Circle
A. P.
Assam
Bihar
Delhi
Gujarat
Haryana
H. P.
J&K
Karnataka
Kerala
Kolkata
M. P.
Maharashtra
Mumbai
Orissa
Punjab
Tamil Nadu
U. P. (E)
U. P. (W)
West Bengal
North East
Rajasthan
Total

Alotted spectrum
(900 MHz)
(1800 MHz)
7.8
4.4
6.2
8.0

6.2
6.2
7.8
6.2

6.2
7.8
6.2
6.2
6.2
4.4
4.4
6.2
100.40

2.2
1.8
3.0
2.0
6.2
6.2
2.2
6.2
1.8
8.0
8.2
9.2
1.8
3.0
1.0
1.8
1.8
2.0
68.40

Source: TRAI, Media reports, Edelweiss research

License Spectrum prices as per DoT panel

(INR per MHz)
Date
900 Mhz
1800Mhz
12-Dec-95
6,689
3,344
8-Jul-04
202
101
10-Feb-04
991
495
29-Nov-94
16,157
8,078
28-Sep-01
5,242
2,621
28-Sep-01
1,084
542
12-Dec-95
181
91
10-Feb-04
148
74
15-Feb-96
7,696
3,848
28-Sep-01
1,522
761
29-Nov-94
2,651
1,326
28-Sep-01
1,259
629
28-Sep-01
6,127
3,063
28-Sep-01
15,816
7,908
10-Feb-04
473
236
12-Dec-95
1,568
784
29-Nov-95
7,136
3,568
10-Feb-04
1,776
888
28-Sep-01
2,504
1,252
11-Feb-04
602
301
12-Dec-05
206
103
22-Apr-96
1,564
782
81,593
40,797

PV (INR mn) of Spectrum

charges to be paid
at the time of renewal
38,782
219
1,687
108,463
4,789
991
709
198
43,593
1,391
13,587
1,484
7,404
22,284
725
7,711
35,604
2,571
4,576
690
186
6,796
304,439

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.
Computation of impact of withdrawal of inter-connection charges (INR mn)
Total minutes (mn)
Existing MTC per minute (INR)
All India incoming ratio (%)
Assumed incoming ratio (%)
Assumed outgoing ratio (%)
Assumed incoming minutes
Assumed outgoing minutes
All India on-net calls (%)
Assumed on-net calls for Bharti (%)
Assumed MTC received
Assumed MTC paid
Net MTC received
PV
Terminal value
NPV
No. of shares
NPV per share (INR)

FY14E
1,101,283
0.2
51.0
53.0
47.0
583,680
517,603
42.0
46.0
63,037
55,901
4,781
4,781
19,586
45,966
3,798
12

FY15E
1,184,616
0.2
51.0
53.0
47.0
627,846
556,769
42.0
46.0
67,807
60,131
5,143
4,512

FY16E
1,241,220
0.2
51.0
53.0
47.0
657,847
583,374
42.0
46.0
71,047
63,004
5,389
4,147

FY17E
1,282,830
0.2
51.0
53.0
47.0
679,900
602,930
42.0
46.0
73,429
65,116
5,570
3,759

FY18E
1,318,759
0.2
51.0
53.0
47.0
698,942
619,817
42.0
46.0
75,486
66,940
5,726
3,390

FY19E
1,352,119
0.2
51.0
53.0
47.0
716,623
635,496
42.0
46.0
77,395
68,634
5,870
3,049

FY20E
1,386,287
0.2
51.0
53.0
47.0
734,732
651,555
42.0
46.0
79,351
70,368
6,019
2,742

Source: TRAI, Edelweiss research

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).
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 license 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 lost market share.

Bhartis 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, Bhartis
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.
Bharti has been constantly losing revenue market share
36.0
34.0

(%)

32.0
30.0
28.0

Q3FY12

Q2FY12

Q1FY12

Q4FY11

Q3FY11

Q2FY11

Q1FY11

Q4FY10

Q3FY10

Q2FY10

26.0

Q1FY10

Bharti Revenue market share (%)

Source: TRAI, Edelweiss research

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.
Bharti has gained incremental market share in the past couple of months
100%
80%
60%
40%
20%
0%
Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

Market share of net subscriber additions

Idea

Vodafone

Bharti

Source: TRAI, Edelweiss research

10

Positives 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.

Computation of benefit from lower revenue share of license and spectrum fees (INR mn)
Bharti India mobile revenues
Current license and spectrum fees
as % of revenues (%)
Proposed license and spectrum fee charge (%)
Proposed license and spectrum fees
Savings
PV
Terminal value
NPV
No. of shares
NPV per share
Source: TRAI, Edelweiss research

FY14E
479,864
65,406
13.6
11.0
52,785
8,456
8,456
37,565
86,276
3,798
23

FY15E
525,791
71,666
13.6
11.0
57,837
9,265
8,127

FY16E
561,523
76,536
13.6
11.0
61,768
9,895
7,614

FY17E
590,534
80,490
13.6
11.0
64,959
10,406
7,024

FY18E
614,903
83,811
13.6
11.0
67,639
10,835
6,415

FY19E
635,512
86,620
13.6
11.0
69,906
11,198
5,816

FY20E
655,097
89,290
13.6
11.0
72,061
11,544
5,259

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.
Uninor will not make profits even if its cost reduces to Bhartis level

Bharti
Idea
Uninor

Voice RPM
0.375
0.362
0.272

Per minute (INR)

Operating cost
0.301
0.338
0.449

EBITDA
0.155
0.097
(0.171)

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

Net debt
Networth
Gross fixed assets incl. WIP
Interest payment
EBITDA
Net loss
Accumulated losses

Source: Annual reports, Edelweiss research

Aircel
CY10
172,466
39,142
169,133
12,454
(8,859)
(15,688)
(22,058)

Tata Teleservices
FY11
174,758
174,643
362,022
11,861
(2,992)
(35,088)
(90,432)

13

At current RPM a new operator will lose money

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.
Key assumptions for computing the NPV for a new operator
Cost of 4MHz spectrum in the 1800MHz band (INR mn)
No of cell sites
No. of subscribers (mn)
RPM (INR/minute)
MOU (minutes per month)
License fees and spectrum charges as % of revenues
Access and interconnect (INR/minute)
Employee cost as % of revenues
SG&A expenses per subscriber (INR p.a.)
Tower rental (INR per month per cell site)

144,000
40,000
65
0.37
300
9%
0.05
6%
250
30,000

NPV of a Greenfield mobile business is negative due to high spectrum costs and lower tariffs
(INR mn)
FY14E
Subscribers
3.3
Revenues
4,329
Network operating cost
3,600
Employee cost
260
license fees
390
Access charges
293
SG&A
813
EBITDA
(1,025)
Interest cost
3,601
Tax
Net profit
(4,626)
Spectrum cost
144,000
Capex
20,000
Cashflow
(173,772)
PV
(173,772)
NPV
(61,038)
Source: Edelweiss research

FY15E
8.1
10,823
7,200
649
974
731
2,031
(763)
5,182

FY16E
16.3
21,645
14,400
1,299
1,948
1,463
4,063
(1,527)
6,230

FY17E
32.5
43,290
14,400
2,597
3,896
2,925
8,125
11,347
7,278

FY18E
65.0
86,580
14,400
5,195
7,792
5,850
16,250
37,093
7,278

FY19E
66.0
87,912
14,400
5,275
7,912
5,940
16,500
37,885
5,095

FY20E
67.0
89,244
14,400
5,355
8,032
6,030
16,750
38,677
3,566
35,111

FY25E
72.0
95,904
14,400
5,754
8,631
6,480
18,000
42,638
599
14,071
27,968

FY33E
80.0
106,560
14,400
6,394
9,590
7,200
20,000
48,976
35
16,162
32,779

(5,946)

(7,757)

4,068

29,815

32,791

20,000
(30,577)
(27,797)

10,000
(21,873)
(18,077)

10,000
(9,534)
(7,163)

10,000
16,213
11,074

2,198
28,071
17,430

2,231
31,115
17,564

2,398
25,274
8,858

2,664
30,098
4,921

14

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.
Bhartis cash flow sensitivity to RPM increase
Particulars
Total minutes in India (bn)
Outgoing/Incoming ratio
Outgoing minutes (bn)
Assumed increase in tariff (INR/minute)
Revenues (INR mn)
EBITDA margin
EBITDA (INR mn)
Post-tax profit (INR mn)
WACC
PV (INR mn)
PV of Terminal value (INR mn)
NPV (INR mn)
NPV per share (INR)
Source: Company, Edelweiss research

FY13E
1,006
53%
533
0.01
5,334
60%
3,200
2,144
14%

FY14E
1,101
53%
584
0.01
5,837
60%
3,502
2,346
14%
2,058

FY15E
1,185
52%
616
0.01
6,160
60%
3,696
2,476
14%
1,905

FY16E
1,241
52%
645
0.01
6,454
60%
3,873
2,595
14%
1,751

FY17E
1,283
50%
641
0.01
6,414
60%
3,848
2,578
14%
1,527

FY18E
1,319
50%
659
0.01
6,594
60%
3,956
2,651
14%
1,377

FY19E
1,352
50%
676
0.01
6,761
60%
4,056
2,718
14%
1,238

FY20E
1,386
50%
693
0.01
6,931
60%
4,159
2,786
14%
1,114

7,954
18,924
5.0

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 longterm cash flow accretion.
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

Matrix of yearly cash flows for Bharti

FCF from operations after capex
One-time excess spectrum fees
Payment to Qualcomm for its BWA spectrum
Spectrum price to be paid on license renewal
Benefit from license and spectrum fee reduction
Impact of removing termination and roaming charges
Imposing license fees of 8% on towercos
Net free cash generation
Source: Media reports, Edelweiss research

(INR mn)
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
85,296 106,281 141,999 180,098 216,773 261,664 263,306 321,927
(65,797)
(9,075) (44,200)
(169,083) (201,925) (11,306)
8,456
8,127
7,614
7,024
6,415
5,816
5,259
(4,781)
(4,512)
(4,147)
(3,759)
(3,390)
(3,049)
(2,742)
(3,925)
(3,677)
(3,475)
(3,272)
(3,071)
(2,874)
(2,683)
10,423
61,830
(27,145) (21,835) 205,459 261,618 263,200 321,761

16

Outlook 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. Bhartis 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.

Bharti has missed street estimates in the last three years

Sales
EBITDA
EBIT
Net Income

FY10
Estimate
Actual Variation (%)
445
418
(6.0)
177
168
(5.4)
120
105
(12.6)
99
90
(9.0)

FY11
Estimate
Actual Variation (%)
534
595
11.5
197
200
1.4
106
98
(7.7)
76
61
(19.5)

(INR bn)
FY12
Estimate Actual
707
715
250
237
130
103
83
43

Variation (%)
1.1
(5.2)
(20.9)
(49.0)

Source: Company, Bloomberg , Edelweiss research,

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.

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

18.0
14.4
10.8

(x)
7.2
3.6

May-12

Nov-11

May-11

Nov-10

May-10

Nov-09

May-09

Nov-08

May-08

Nov-07

May-07

Nov-06

0.0

May-06

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.

Key Assumptions in the worst case scenario

Year to March
India mobile business
Total subscribers
growth
MOU
RPM (INR)
growth
EBITDA margin
Africa business
Total subscribers
growth
ARPU (USD)
growth
EBITDA margin

FY12E

FY13E

FY14E

FY15E

FY15E

FY15E

FY15E

FY15E

FY15E

181
11.8
424
0.436
(1.4)
33.9

202
11.3
424
0.432
(0.8)
34.0

216
7.1
424
0.423
(2.1)
34.0

224
3.9
424
0.433
2.3
34.0

228
1.6
424
0.444
2.5
34.0

230
1.1
424
0.454
2.4
34.0

232
0.5
424
0.463
1.9
34.0

233
0.5
424
0.469
1.4
34.0

234
0.5
424
0.475
1.1
34.0

53
20.2
7.0

60
13.5
6.5
(7.2)
28.0

68
11.9
6.3
(3.0)
28.0

74
8.9
6.3
0.9
28.0

78
6.5
6.5
3.0
28.0

83
6.1
6.9
5.1
28.0

88
5.8
7.1
4.0
28.0

93
5.5
7.4
4.0
28.0

96
3.9
7.7
4.0
28.0

26.4

Source: Edelweiss research

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.
Assumptions for worst case DCF
WACC Calculation
Rf (%)
ERP (%)
Beta (x)
COE (%)
Cost of Debt (%)
WACC (%)
Growth assumptions
Explicit forecast period
Second stage growth (FY20-24) (%)
Terminal growth (%)

8.0
6.0
1.1
14.6
4.7
14.1
Years
7
8.0
0.0

Worst case DCF calculation

Particulars
EBITDA
Tax on operating income
Operating income net of tax
Delta working capital
Cash from operations
Capex
Dividend distribution tax
FCFF
Discounted FCFF
Sum of Disounted FCFF
PV of Terminal value
Firm value
Less : Net Financial obligations
Equity Value
No. of shares O/S
Intrinsic value/share

Source: Bloomberg, Edelweiss research

(INR mn)
FY14E
296,640
45,307
251,334
(153)
251,487
150,000
630
100,857
88,365
1,308,776
816,270
2,125,046
602,554
1,522,492
3,798
401

FY15E
326,377
50,702
275,675
(3,476)
279,151
144,000
630
134,521
103,262

FY16E
354,435
54,789
299,646
(7,233)
306,879
144,000
630
162,249
109,120

FY17E
383,218
59,087
324,131
(5,878)
330,010
144,000
630
185,379
109,235

FY18E
413,511
63,875
349,636
(10,537)
360,173
144,000
1,261
214,912
110,952

FY19E
440,749
(1,024)
441,772
(20,777)
462,549
144,000
2,522
316,027
142,946

FY20E
468,292
(5,446)
473,738
(37,696)
511,434
144,000
5,046
362,388
143,614

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.
Bharti's sum of the value of various businesses
Bharti FY14 mobile EBITDA
Bharti EV/EBITDA (x)
Mobile EV

INR mn
180,810
6.0
1,084,862

Bharti Infratel FY14 EBITDA

Infratel EV/EBITDA (x)
Infratel EV

45,806
8.0
366,449

Dish TV EV
Bharti DTH EV @50% discount

67,392
33,696

Comments
Nearly the lowest band it has traded at historically.

A 50% discount to American towers and other independent towercos.

A 50% discount to Dish TV's current EV. Bharti has 7.2mn subscribers compared to
9.4mn for Dish.

Bharti Africa EBITDA

Africa EV/EBITDA (x) at a discount to peers
Bharti Africa EV

81,989
4.0
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

Value per tower
EV of Africa towers

14,831
5.7
84,590

at a 50% discount to deals happened on the street in the past six months

Total EV
Debt in FY14
Total market cap
Total no. of shares
Fair value per share (INR)

Source: Edelweiss research

A marginal discount of about 10% to operators like MTN and about 30% to Vodacom.

1,983,242
467,308
1,515,934
3,798
399

22

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 companys track record in FY12, during which it improved EBITDA
margin 100bps QoQ every quarter and the managements assurance of improving profitability, we are
assuming 50bps QoQ improvement in margin in the next two years.

Key Assumptions in our current model

Year to March
India mobile business
Total subscribers (mn)
growth
MOU
RPM (INR)
growth
EBITDA margin
Africa business
Total subscribers
growth
ARPU (USD)
growth
EBITDA margin

FY12

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

181
11.8
424
0.436
(1.4)
33.9

202
11.3
431
0.431
(1.0)
35.3

216
7.1
439
0.436
1.0
36.0

224
3.9
448
0.444
1.9
36.5

228
1.6
457
0.452
1.9
37.0

230
1.1
466
0.460
1.8
37.5

232
0.5
476
0.466
1.3
38.0

233
0.5
485
0.470
0.8
38.5

234
0.5
495
0.473
0.5
39.0

53
20.2
7.0

63
18.1
6.4
(7.7)
29.5

76
8.6
6.3
0.9
34.0

82
7.9
6.5
3.0
34.0

88
7.3
6.8
5.1
36.0

94
6.8
7.1
4.0
37.0

100
6.4
7.4
4.0
38.0

106
6.0
7.7
4.0
38.0

26.4

70
11.5
6.2
(3.0)
33.0

Source: Edelweiss research

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.
Assumptions for current DCF
WACC Calculation
Rf (%)
ERP (%)
Beta (x)
COE (%)
Cost of Debt (%)
WACC (%)
Growth assumptions
Explicit forecast period
Second stage growth (FY20-24) (%)
Terminal growth (%)

8.0
6.0
1.1
14.6
4.7
14.1
Years
7
8.0
0.0

Current DCF calculation

Particulars
EBITDA
Tax on operating income
Operating income net of tax
Delta working capital
Cash from operations
Capex
Dividend distribution tax
FCFF
Discounted FCFF
Sum of Disounted FCFF
PV of Terminal value
Firm Value
Less : Net Financial obligations
Equity Value
No. of shares O/S
Intrinsic value/share

Source: Bloomberg, Edelweiss research

(INR mn)
FY14E
324,872
54,621
270,252
(6,871)
277,123
150,000
630
126,493
110,826
1,511,332
910,554
2,421,886
598,726
1,823,160
3,798
480

FY15E
362,083
62,477
299,606
(6,274)
305,879
144,000
630
161,250
123,779

FY16E
401,406
70,275
331,131
(10,700)
341,831
144,000
630
197,201
132,627

FY17E
437,556
76,997
360,558
(10,047)
370,605
144,000
630
225,975
133,155

FY18E
475,492
84,301
391,191
(14,720)
405,911
144,000
1,261
260,650
134,565

FY19E
513,068
(4,372)
517,440
(24,166)
541,606
192,000
2,522
347,084
156,994

FY20E
551,228
(9,051)
560,279
(41,013)
601,292
192,000
5,046
404,246
160,202

24

Financial Statement
Income statement
Year to March
Gross revenues
Inter segment
Net revenues
Direct costs
Employee costs
Other expenses
Total operating expenses
EBITDA
Depreciation and amortisation
EBIT
Interest expenses
Other income
Profit before tax
Provision for tax
Core profit
Profit after tax
Minority interest
Profit after minority interest
Equity shares outstanding (mn)
EPS (INR) basic
Diluted shares (mn)
EPS (INR) fully diluted
CEPS (INR)
Dividend per share
Dividend payout %

FY10
486,904
68,432
418,472
175,712
19,028
56,099
250,839
167,633
62,832
104,801
4,208
4,498
105,091
13,453
91,638
91,638
1,870
89,768
3,798
23.6
3,798
23.6
40.2
1.0
4.8

FY11
667,592
72,644
594,948
254,421
32,784
107,747
394,952
199,996
102,066
97,930
23,751
2,939
77,118
17,790
59,328
59,328
(1,475)
60,803
3,798
16.0
3,798
16.0
42.9
1.0
7.5

FY12E
794,266
79,758
714,508
316,058
35,159
126,718
477,935
236,573
133,681
102,892
40,784
3,053
65,161
22,602
42,559
42,559
(13)
42,572
3,798
11.2
3,798
11.2
46.4
1.0
10.4

FY13E
897,755
86,156
811,599
352,528
35,474
138,079
526,081
285,518
146,088
139,430
33,164
2,404
108,671
32,601
76,070
76,070
84
75,986
3,798
20.0
3,798
20.0
58.5
1.0
5.8

(INR mn)
FY14E
983,744
93,456
890,289
380,236
38,282
146,898
565,416
324,872
159,668
165,204
33,273
1,892
133,823
44,162
89,662
89,662
84
89,578
3,798
23.6
3,798
23.6
65.6
1.0
4.9

25

Financial Statement (Contd.)

Balance sheet
As on 31st March
Equity capital
Reserves & surplus
Shareholders funds
Minority Interest
Secured loans
Unsecured loans
Borrowings
Sources of funds
Gross block
Accumulated depreciation
Net block
Total fixed assets
Goodwill & Intangibles
Investments
Inventories
Sundry debtors
Cash and equivalents
Other current assets
Total current assets
Sundry creditors and others
Provisions
Total CL & provisions
Net current assets
Net deferred tax
Uses of funds
Book value per share (BV) (INR)

FY10
18,988
402,952
421,940
25,285
81,474
20,424
101,898
549,123
678,122
195,493
482,629
482,629
59,890
52,419
484
35,711
25,323
41,995
103,513
153,427
4,243
157,670
(54,157)
8,342
549,123
111

FY11
18,988
468,680
487,668
28,563
532,338
84,370
616,708
1,132,938
931,873
280,447
651,426
651,426
637,317
6,224
2,138
54,929
9,575
58,393
125,035
312,373
6,085
318,458
(193,423)
31,394
1,132,938
128

FY12E
18,988
487,124
506,112
27,695
497,154
193,078
690,232
1,224,039
1,065,748
390,817
674,932
674,932
660,889
18,132
1,308
63,735
20,300
80,043
165,386
320,119
7,240
327,359
(161,973)
32,060
1,224,039
133

FY13E
18,988
558,666
577,654
27,779
422,581
173,770
596,351
1,201,784
1,215,748
513,594
702,155
702,155
637,578
9,066
1,444
71,154
13,838
79,391
165,827
307,857
37,044
344,901
(179,075)
32,060
1,201,784
152

(INR mn)
FY14E
18,988
643,806
662,794
27,863
359,194
147,705
506,898
1,197,556
1,365,748
649,122
716,626
716,626
613,438
9,066
1,559
73,174
26,860
78,550
180,143
305,178
48,599
353,777
(173,634)
32,060
1,197,556
175

26

Financial Statement (Contd.)

Free cash flow
Year to March
Net profit
Depreciation
Others
Gross cash flow
Less: Changes in W. C.
Operating cash flow
Less: Capex
Free cash flow

FY10
91,638
62,832
16,236
170,706
12,227
158,479
128,312
30,167

FY11
59,328
102,066
18,577
179,971
9,577
170,394
831,178
(660,784)

FY12E
42,559
133,681
(11,908)
164,332
8,816
155,517
133,875
21,641

FY13E
76,070
146,088
9,066
231,224
(1,572)
232,796
150,000
82,796

(INR mn)
FY14E
89,662
159,668
0
249,330
(7,583)
256,913
150,000
106,913

Profitability & liquidity ratios

Year to March
ROAE (%)
ROACE (%)
Current ratio
Debtors (days)
Fixed assets t/o (x)
Average working capital t/o (x)
Debt/Equity
Debt/EBITDA
Adjusted debt/Equity

FY10
24.7
23.5
0.7
24
0.9
(7.6)
0.2
0.6
0.2

FY11
13.4
12.1
0.4
28
1.0
(4.8)
1.3
3.1
1.3

FY12E
8.6
8.8
0.5
30
1.1
(4.0)
1.4
2.9
1.4

FY13E
14.0
11.6
0.5
30
1.2
(4.8)
1.0
2.1
1.0

FY14E
14.4
13.9
0.5
30
1.3
(5.0)
0.8
1.6
0.8

Valuation parameters
Year to March
Diluted EPS (INR)
Y-o-Y growth
CEPS (INR)
Diluted P/E (x)
Price/BV(x)
EV/Sales (x)
EV/EBITDA (x)
Dividend yield (%)

FY10
23.6
6.0
40.2
12.7
2.7
2.8
7.1
0.3

FY11
16.0
(32.3)
42.9
18.8
2.3
3.0
8.9
0.3

FY12E
11.2
(30.0)
46.4
26.8
2.3
2.6
7.7
0.3

FY13E
20.0
78.5
58.5
15.0
2.0
2.1
6.1
0.3

FY14E
23.6
17.9
65.6
12.8
1.7
1.8
5.1
0.0

27

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