bharti airtelimages.moneycontrol.com/static-mcnews/2020/10/bharti... · 2020. 10. 19. · subs (mn)...

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Extreme optimism to extreme pessimism – Unwarranted! Bharti’s share price has declined sharply (~30%) since the AGR verdict on 1st Sep, 2020. We believe this is on account of news flow of fund-raise by VIL, Jio postpaid plus plan launch and most importantly lack of good news on tariff increase. This is in contrast to expectations of immediate announcement of price hike post the AGR case closure. Our calculation implies that from an ARPU growth, market is now implying a de-growth. However, we still maintain that 15-20% ARPU CAGR is likely and essential for survival of industry.

Business trajectory on strong footing Contrary to stock reaction, business trajectory of Bharti remains healthy and positive especially in 4G smartphone subscriber additions viz. at par / ahead of Jio. MNP request from postpaid subscribers for transition to Jiopostpaid is limited. We appreciate Bharti’s in-market execution and the clarity on thoughts and strategy to drive the market share and growth. A few months’ delay in tariff increase doesn’t alter the strong long-term industry potentials and consecutive positive bias of ours.

Bharti well-positioned – two-player market or Rs 250 ARPU Continuity of VIL may be challenged in absence of meaningful tariff increase and fund infusion and improvement in execution (all inevitable). Shutdown of VIL would imply value erosion for Bharti in tower business but would be more than off-set in wireless business. One of two scenarios viz. two-player market or Rs 250 ARPU is likely.

That said even in absence of tariff increase and/or fund raise, VIL may be able to manage its cash flows and sail through upto end of FY22-23. In our view, this could be led by receipt of additional funds from Vodafone Plc (Rs 68bn) for its share of AGR liabilities, stake sale in Indus (Rs 40bn), cost rationalization (~Rs 40bn) and lower capex. Bulk of the VIL’s annual payment is towards spectrum auction (Rs 157bn p.a. from FY23) and AGR liabilities (~Rs 80bn p.a. from FY22). It seems to us, that the continued likelihood of VIL surviving the next couple of years and the delay in tariff increase is playing as a bigger overhang on stock performance vs. the structural positives that we maintain our belief in.

Reiterate BUY; Tariff increase key trigger We reiterate BUY on Bharti with TP of Rs 605 @ 10/7x Sep22E EV/EBITDA for India Wireless / Africa. Bharti’s TP sensitivity to ARPU is significantly higher viz. ~Rs 40/sh for every Rs 10 change in ARPU @ 10x EV/EBITDA. FINANCIALS (Rs Mn) Particulars FY19A FY20A FY21E FY22E FY23E

Revenue 810,683 875,390 980,589 1,064,182 1,192,159

Growth(%) (1.9) 8.0 12.0 8.5 12.0

EBITDA 258,189 366,181 437,814 514,278 591,779

OPM(%) 31.8 41.8 44.6 48.3 49.6

PAT 4,095 (24,097) 8,930 83,866 154,840

Growth(%) (62.7) (688.5) (137.1) 839.2 84.6

EPS(Rs.) 0.8 (4.4) 1.6 15.4 28.4

Growth(%) (62.7) (688.5) (137.1) 839.2 84.6

PER(x) 534.5 (90.8) 245.1 26.1 14.1

ROANW(%) 0.6 (43.3) (20.8) 12.6 19.7

ROACE(%) 3.7 8.8 4.4 8.3 10.1

CMP Rs 402

Target / Upside Rs 605 / 51%

NIFTY 11,763

Scrip Details

Equity / FV Rs 27,249mn / Rs 5

Market Cap Rs 2,189bn

USD 30bn

52-week High/Low Rs 612/ 326

Avg. Volume (no) 24,338,800

Bloom Code BHARTI IN

Price Performance 1M 3M 12M

Absolute (%) (19) (29) 5

Rel to NIFTY (%) (22) (37) 3

Shareholding Pattern

Dec'19 Mar'20 Jun'20

Promoters 62.7 59.0 56.2

MF/Banks/FIs 14.0 15.8 18.4

FIIs 21.2 20.3 20.2

Public / Others 2.1 4.9 5.2

Bharti Airtel relative to Sensex

VP - Research: Himanshu Shah Tel: +91 22 4096 9737

E-mail: [email protected]

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BHARTI SENSEX

Bharti Airtel

Buy

October 19, 2020

October 19, 2020 2 Bharti Airtel

Exhibit 1: India Wireless Business implied ARPU at Bharti’s CMP

Description FY21E FY22E FY23E Remarks

CMP (Rs) 400 400 400

O/s shares (Bn) 5.45 5.45 5.45

Mcap (Rs Bn) 2,180 2,180 2,180

Net Debt (Rs Bn) 1,531 1,337 1,106

EV (Rs Bn) 3,711 3,517 3,286

(-) Non India Wireless EV (Rs Bn) 1,540 1,626 1,728 Refer table below

Implied India Wireless EV (Rs Bn) 2,170 1,891 1,558

EV/EBITDA Multiple (X) 10 9 8

Implied EBITDA (Rs Bn) 217 210 195

EBITDA Margin (%) 45% 45% 45% A higher margin on account of IUC abolition from Q4FY21

Implied Revenue (Rs Bn) 482 467 433

No of Subs (Mn) 285 285 285

Implied Consumer ARPU (Rs)* 141 137 127 Bharti’s CMP is implying effectively a 10-12% lower ARPU in FY23 from current level (34% lower than our estimate) and vs. our expectation of ~32% growth (15% CAGR).

Our estimate of ARPU (Rs) 144 166 190

% discount 2% 18% 34%

Source: DART, Company

To summarize, we believe the increase in ARPU led by tariff hike in inevitable to reverse the current negative sentiment. In absence of same, Bharti may witness a further time and / or price correction. That said, fundamental thesis remain intact. Exhibit 2: Bharti’s Enterprise Value Excluding India Wireless

EBITDA (Rs Bn) Target EV/E (X)

EV (Rs Bn)

FY21E FY22E FY23E FY21E FY22E FY23E

Home Broadband 14 14 15 7 97 100 107

Digital 21 24 27 10 213 239 265

Enterprise 54 57 61 7 376 400 424

Passive Infra 36 36 38 6 218 215 226

Wireless - Africa 115 123 130 6 692 736 782

(-) Corp costs (8) (9) (11) 7 (55) (66) (80)

Total 233 245 259 1,540 1,625 1,724

Source: Company, DART


Exhibit 3: Key Model Assumptions Particulars FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

India Wireless Subs (Mn) 206 226 251 274 304 278 284 286 295 304 Net Adds (Mn) 17.3 20.5 25.2 22.4 30.5 (25.8) 5.3 2.8 8.8 8.8 Implied ARPU (Rs)* 198 201 196 180 133 119 136 154 166 190 Like-to-Like Consumer ARPU (Rs) 167 170 164 148 111 97 122 144 166 190

Revenue (Rs Bn) 467 520 561 566 463 416 460 525 581 685 Inc. Rev (Rs Bn) 36 53 41 5 (103) (47) 44 66 55 104 EBITDA (Rs Bn) 158 195 219 228 151 94 170 224 288 351 Inc. EBITDA (Rs Bn) 28 37 25 8 (77) (57) 75 54 65 63 EBITDA Margin (%) 33.8 37.5 39.1 40.3 32.6 22.7 36.9 42.5 49.7 51.2 Africa Subs (Mn) 69 76 75 80 89 99 111 116 121 127 Net Adds (Mn) 6 7 (2) 5 9 10 12 5 6 6 Implied ARPU (Rs) 341 308 278 236 196 198 193 193 199 205 Revenue (Rs Bn) 273 269 251 220 199 223 242 262 283 306 Incremental Rev (Rs Bn) 32 (3) (18) (32) (20) 24 19 20 21 23 EBITDA (Rs Bn) 71 61 47 50 66 84 107 115 123 130 Inc. EBITDA (Rs Bn) 8 (10) (14) 4 16 18 24 8 7 8 EBITDA Margin (%) 26.2 22.7 18.7 23.0 33.2 37.4 44.3 43.9 43.3 42.6 Revenue (Rs bn) India Wireless 467 520 561 566 463 416 460 525 581 685 Home Broadband 39 44 25 28 25 22 22 24 25 26 Digital 21 25 29 34 38 41 29 31 35 38 Enterprise 63 67 97 109 114 125 132 144 152 161 Passive Infra 51 54 56 61 66 68 67 67 68 66 Others 3 3 3 4 3 1 0 0 0 0 India Business 645 713 771 801 708 673 711 792 860 977 South Asia 17 16 16 12 4 4 5 4 5 5 Wireless - Africa 273 269 251 220 199 223 242 262 283 306 Gross revenues 934 998 1,039 1,033 912 900 958 1,059 1,148 1,288 (-) Intersegment (58) (62) (57) (66) (73) (80) (78) -77 -84 -95 Net revenues 876 936 982 966 839 821 880 982 1,064 1,192 Intersegment % 6.2 6.2 5.5 6.4 8.0 8.9 8.1 7.3 7.3 7.4 EBITDA (Rs bn) India Wireless 158 195 219 228 151 94 170 224 288 351 Home Broadband 15 18 11 13 12 11 11 14 14 15 Digital 3 7 10 12 14 16 20 21 24 27 Enterprise 14 14 30 34 42 41 43 54 57 61 Passive Infra 23 26 26 29 33 32 37 36 36 38 Others (2) (6) (7) (12) (14) (15) (17) -19 -19 -19 India Business 210 253 289 304 238 179 263 330 400 472 South Asia 0 -0 -1 0 0 0 0 0 1 1 Wireless - Africa 71 61 47 50 66 84 107 115 123 130 Gross EBITDA 281 314 336 354 304 263 371 446 523 603 (-) Intersegment (4) (2) 4 (1) (3) (5) (5) -8 -9 -11 Net EBITDA 278 312 340 353 301 258 366 438 514 592 Intersegment % 1.3 0.8 (1.3) 0.3 1.1 1.8 1.3 1.8 1.8 1.8 EBITDA Margin % India Wireless 33.8 37.5 39.1 40.3 32.6 22.7 36.9 42.5 49.8 51.5 Home Broadband 37.5 40.7 42.5 47.2 46.7 48.3 50.4 58.4 57.8 57.8 Enterprise 16.1 27.3 34.2 35.6 37.9 38.3 68.3 68.4 69.2 69.2 Passive Infra 21.8 20.9 31.3 31.0 37.4 32.6 32.2 37.3 37.6 37.5 DTH 44.7 47.4 47.1 48.0 49.1 47.6 55.1 53.9 52.4 57.2 India Business 32.6 35.5 37.5 37.9 33.6 26.7 37.0 41.7 46.7 48.6 Wireless - Africa 26.2 22.7 18.7 23.0 33.2 37.4 44.3 43.9 43.3 42.6 Net EBITDA 31.7 33.3 34.6 36.6 35.9 31.5 41.6 44.6 48.5 50.0

Source: Company, DART * Implied ARPU is inclusive of IUC revenue collected by Bharti from other operators. Due to change in IUC termination rate

(20paise/minute before Mar-15, 14paise from Mar15-Oct17, 6paise Oct17-Dec20 and nil thereafter), the implied ARPU is not comparable to that extent.


Exhibit 4: Valuation Summary - SOTP

Segments Sep-22E EBITDA

(Rs Bn) Sep-22E EBITDA/

Share (Rs) Multiple (X)

Enterprise Value (Rs Bn)

Value Per Share (Rs)

India Wireless 319.6 58.6 10.0 3,196 586

Telemedia services 14.8 2.7 7.0 103 19

Enterprise 58.8 10.8 7.0 412 76

DTH 25.2 4.6 8.0 202 37

Others* (28.6) (5.3) 7.0 (200) (37)

IndAS 116 impact (50.3) (9.2) 10.0 (503) (92)

Sub-total 339.4 62.3 9.5 3,209 589 (-) Net Debt excl IndAS 116 and Africa (700) (128)

Passive Infra** 198 36

India business value 2,206 497

Africa Plc** 201 37

Base case Value Per Share (Rs) 2,407 534 Incremental upside from positive industry developments* 71

Target Price Share (Rs) 605

CMP (Rs) 405

Upside/(Downside) % 49.3%

Source: DART, Company * Others include South Asia, Corporate costs etc; ** Passive Infra is basis BHIN TP of Rs 247 for Bharti’s 55% holding; *** Africa valuation is as under. We haven’t valued Africa as per the listed entity Mcap as it trades at ~4x EV/EBITDA

Exhibit 5: Valuation Summary - Consolidated Remarks

Sep-22E EBITDA (Rs bn) 553

Multiple (x) 8.0

Enterprise Value (Rs bn) 4,424

Net debt (Rs bn) 1,172

Equity Value Value (Rs bn) 3,253

O/s shares (bn) 5.4

Value per share (Rs) 597

Incremental upside from positive industry developments 71

Target Price Share (Rs) 668

CMP 405

Upside/(Downside) % 64.9


Exhibit 6: Valuation Summary - Africa Remarks

Africa EBITDA (Rs Bn) 122.7

IndAS 116 impact (Rs Bn) 13.4

Africa EBITDA net of IndAS impact (Rs Bn) 109.3

Target multiple (x) 7.0

Africa EV (Rs Bn) 764.8

(-) Net debt (Rs Bn) 242.5

Equity Value (Rs Bn) 522.4

Bharti holding (%) 55.00

Equity Value for Bharti (Rs Bn) 287.3

Hold Co discount (%) 30%

Africa Equity Value for Bharti (Rs Bn) 201.1

Value per share (Rs) 37



Exhibit 7: Potential upside/downside from scenarios that may pan out Scenarios Impact/sh (Rs) Probability (%) Impact/sh (Rs)

Assuming Voda-Idea shut-down

Upside from Idea subs (viz. 40% or ~100mn) 198 20% 40

Value loss in BHIN (50) 20% (10) Higher than expected ARPU by Rs 20 in FY23 viz. Rs 220 104 40% 42

Incremental impact 252 71



Profit and Loss Account

(Rs Mn) FY20A FY21E FY22E FY23E

Revenue 875,390 980,589 1,064,182 1,192,159

Total Expense 509,209 542,775 549,903 600,381

COGS 107,395 101,969 70,961 77,139

Employees Cost 38,072 46,574 49,432 52,635

Other expenses 363,742 394,232 429,510 470,606

EBIDTA 366,181 437,814 514,278 591,779

Depreciation 276,896 286,715 266,412 251,302

EBIT 89,285 151,099 247,866 340,477

Interest 123,820 118,361 96,667 75,907

Other Income 1,890 14,933 14,188 14,142

Exc. / E.O. items (402,344) (117,457) 0 0

EBT (434,989) (69,786) 165,387 278,711

Tax (121,823) 55,376 59,217 98,554

RPAT (321,832) (145,015) 83,866 154,840

Minority Interest 15,190 25,048 26,108 28,189

Profit/Loss share of associates 6,524 5,195 3,805 2,871

APAT (24,097) 8,930 83,866 154,840

Balance Sheet


Sources of Funds

Equity Capital 27,249 27,249 27,249 27,249

Minority Interest 249,847 266,174 292,282 320,471

Reserves & Surplus 744,199 596,968 680,834 835,674

Net Worth 771,448 624,217 708,083 862,923

Total Debt 1,482,281 1,391,296 1,309,678 1,232,848

Net Deferred Tax Liability 117,149 144,082 164,533 188,517

Total Capital Employed 2,620,725 2,425,769 2,474,576 2,604,758

Applications of Funds

Net Block 2,335,378 2,242,961 2,188,102 2,148,470

CWIP 0 0 0 0

Investments 505,980 484,009 507,886 533,838

Current Assets, Loans & Advances 766,432 778,947 907,506 1,058,917

Inventories 0 0 0 0

Receivables 46,058 57,492 65,375 72,760

Cash and Bank Balances 296,606 338,492 461,384 604,555

Loans and Advances 0 0 0 0

Other Current Assets 423,768 382,964 380,748 381,602

Less: Current Liabilities & Provisions 987,065 1,080,149 1,128,919 1,136,466

Payables 250,199 256,448 277,588 256,038

Other Current Liabilities 736,866 823,700 851,331 880,428

sub total

Net Current Assets (220,633) (301,201) (221,413) (77,550)

Total Assets 2,620,725 2,425,769 2,474,576 2,604,758

E – Estimates


Important Ratios

Particulars FY20A FY21E FY22E FY23E

(A) Margins (%)

Gross Profit Margin 87.7 89.6 93.3 93.5

EBIDTA Margin 41.8 44.6 48.3 49.6

EBIT Margin 10.2 15.4 23.3 28.6

Tax rate 28.0 (79.4) 35.8 35.4

Net Profit Margin (36.8) (14.8) 7.9 13.0

(B) As Percentage of Net Sales (%)

COGS 12.3 10.4 6.7 6.5

Employee 4.3 4.7 4.6 4.4

Other 41.6 40.2 40.4 39.5

(C) Measure of Financial Status

Gross Debt / Equity 1.9 2.2 1.8 1.4

Interest Coverage 0.7 1.3 2.6 4.5

Inventory days 0 0 0 0

Debtors days 19 21 22 22

Average Cost of Debt 9.0 8.2 7.2 6.0

Payable days 104 95 95 78

Working Capital days (92) (112) (76) (24)

FA T/O 0.4 0.4 0.5 0.6

(D) Measures of Investment

AEPS (Rs) (4.4) 1.6 15.4 28.4

CEPS (Rs) 46.4 54.2 64.3 74.5

DPS (Rs) 2.0 0.0 0.0 0.0

Dividend Payout (%) (45.2) 0.0 0.0 0.0

BVPS (Rs) 141.6 114.5 129.9 158.3

RoANW (%) (43.3) (20.8) 12.6 19.7

RoACE (%) 8.8 4.4 8.3 10.1

RoAIC (%) 4.1 6.9 12.1 17.0

(E) Valuation Ratios

CMP (Rs) 402 402 402 402

P/E (90.8) 245.1 26.1 14.1

Mcap (Rs Mn) 2,188,896 2,188,896 2,188,896 2,188,896

MCap/ Sales 2.5 2.2 2.1 1.8

EV 3,374,571 3,241,701 3,037,190 2,817,189

EV/Sales 3.9 3.3 2.9 2.4

EV/EBITDA 9.2 7.4 5.9 4.8

P/BV 2.8 3.5 3.1 2.5

Dividend Yield (%) 0.5 0.0 0.0 0.0

(F) Growth Rate (%)

Revenue 8.0 12.0 8.5 12.0

EBITDA 41.8 19.6 17.5 15.1

EBIT 99.7 69.2 64.0 37.4

PBT 1983.9 (84.0) (337.0) 68.5

APAT (688.5) (137.1) 839.2 84.6

EPS (688.5) (137.1) 839.2 84.6

Cash Flow


CFO 264,363 407,563 516,158 509,545

CFI (677,679) (145,395) (214,980) (213,637)

CFF 582,634 (220,282) (178,286) (152,737)

FCFF (243,254) 213,265 304,604 297,875

Opening Cash 127,287 296,606 338,492 461,384

Closing Cash 296,605 338,492 461,384 604,555

E – Estimates

DART RATING MATRIX

Total Return Expectation (12 Months)

Buy > 20%

Accumulate 10 to 20%

Reduce 0 to 10%

Sell < 0%

Rating and Target Price History

Month Rating TP (Rs.) Price (Rs.)

Nov-19 Reduce 408 409

Dec-19 Buy 525 455

Feb-20 Accumulate 602 547

May-20 Reduce 615 599

Jun-20 Buy 660 579

Jul-20 Buy 660 553

*Price as on recommendation date

DART Team

Purvag Shah Managing Director [email protected] +9122 4096 9747

Amit Khurana, CFA Head of Equities [email protected] +9122 4096 9745

CONTACT DETAILS

Equity Sales Designation E-mail Direct Lines

Dinesh Bajaj VP - Equity Sales [email protected] +9122 4096 9709

Kapil Yadav VP - Equity Sales [email protected] +9122 4096 9735

Yomika Agarwal VP - Equity Sales [email protected] +9122 4096 9772

Jubbin Shah VP - Derivatives Sales [email protected] +9122 4096 9779

Ashwani Kandoi AVP - Equity Sales [email protected] +9122 4096 9725

Lekha Nahar AVP - Equity Sales [email protected] +9122 4096 9740

Equity Trading Designation E-mail

P. Sridhar SVP and Head of Sales Trading [email protected] +9122 4096 9728

Chandrakant Ware VP - Sales Trading [email protected] +9122 4096 9707

Shirish Thakkar VP - Head Domestic Derivatives Sales Trading [email protected] +9122 4096 9702

Kartik Mehta Asia Head Derivatives [email protected] +9122 4096 9715

Dinesh Mehta Co- Head Asia Derivatives [email protected] +9122 4096 9765

Bhavin Mehta VP - Derivatives Strategist [email protected] +9122 4096 9705

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(Rs) BHARTI Target Price

Dolat Capital Market Private Limited. Sunshine Tower, 28th Floor, Senapati Bapat Marg, Dadar (West), Mumbai 400013

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