Bharti Airtel: This is a year of consolidation

_____________________________________________________________

  • Date: 19 August 2012
  • Large Cap – Mkt Cap Rs 99,115 crores
  • CMP: Rs 261
  • Advice:  Accumulate in FY13 through SIP
  • Target:  Mar ’14 target of 421

Summary

  • We have seen a fall of share prices by 39% this year. There’s no doubt that Bharti Airtel has lost its status as a safe long-term investment and Blue Chip for investors. The reasons are obvious to mobile users – low consumer prices, intense competition, poor telecom governance, and the 2G scam. Also Airtel invested in Africa, and paid heavily for 3G & 4G licenses. 
  • But Airtel remains the market share leader in Indian telecom and #5 by consumers worldwide.
  • Launch of 3G, 4G and mCommerce (Airtel Money) means it has comprehensive service offerings.
  • Businesses like Digital TV, fixed line, broadband, Enterprise telecom services and Passive Infra services all have synergies with the telecom core and also leadership in their niches.
  • The investments in 3G, 4G and Africa operations will in time propel Airtel into a profitable global telecom business as a low cost leader with a factory approach to call volumes. 

What to do now: The period FY2013 will be a year of consolidation.

  • The near term positive triggers include listing (IPO) of BhartiInfratel, exits by 4-5 competitors, auction of 2G licenses and refarming/ sale of spectrum. Airtel will see a return of Pricing power. 
  • Share price fall to current levels is a market excess, and offers investors an attractive entry point.
  • Long-term investors with a medium risk appetite can accumulate Airtel this year for a price target of 421 by August 2014.

Bharti Airtel – Description and Profile

  • Airtel is the market leader in the Indian telecom sector. Incorporated in 1995, it is a global telecom operator ranked #5 today in terms of customers.
  • Consolidated revenues are 71,505 crores (FY’12), and mkt cap is 99,115 cr. ranks it #13 in India.  Operations are spread over 20 countries and Airtel has an aggregate of 26.1 cr. customers. Of these, 20 cr. are in India itself.
  • Businesses are classified as B2C – consumer and B2B – Business. The B2C are Mobile, Telemedia (IPTV, broadband and fixed line), Digital TV (DTH) and MCommerce. Africa is essentially a mobile market, and is B2C.
Airtel - Business Segments, JainMatrix Investments

Fig 1 – Airtel – Business Segments, JainMatrix Investments

  • Market shares are 19% by subscribers and 29% by revenue, indicating a superior ARPU profile.
  • B2B services are Airtel Business (end to end telecom services) and Passive Infrastructure Services (towers)
  • Shareholding pattern is: Promoters Indian 45.7% and Foreign 22.8%; FIIs 16.9%; DII 8.1%; Bodies Corporate 4.6 %; Individuals – retail & HNI 1.5 and Other non institutions 0.4%.

Industry Note

  • The 2004-09 period with 2G and only 5-7 competitors looks like a happy phase from the distant past.
    • The controversial 2008 Telecom licenses brought in new players, intense competition and over Rs 50k crores of fresh investment into Indian Telecom.
    • The auction of 3G in May 2010 saw major players spend $13b (Rs 67,000 cr.). In retrospect they may have overpaid for this, as 3G adoptions has been slow after the launch.
    • Compared to this, the 4G licenses auction in 2010 raised $7.5b (Rs 38,000 cr.).
  • The governance for Telecom involves TRAI, DoT, Ministry of Comm./IT and TDSAT for disputes.
  • Per minute call tariff rates are among the lowest in the world. And the network expansion and 3G/4G rollouts are an ongoing capital-intensive requirement for many players.
Telecom Market shares in March 2012, JainMatrix Investments

Fig 2 – Telecom Market shares in Mar’12, JainMatrix Investments (Click to enlarge)

  • There are 15 operators in India – see Fig 2 for Subscriber Market Shares. Revenue market shares for Mar ’12 are Airtel 29%, Vodaphone 23% and Idea 15%.
  • Most operators are not able to make operating profits. And the market is reaching a subscriber saturation point. Reports are that consolidation has started, as of these, three (Etisalat, Videocon, STel) may exit fully, and Uninor and SSTL may exit partially (Fitch).
  • The total number of Indian subscribers of telecom services– wireless & wire line – is 95.1 cr. The tele-density is 78.5%. Broadband penetration is low at 1.1% (1.38 cr.).
  • In Feb’12, 122 telecom licenses issued by govt. in 2008 were cancelled by the Supreme Court. Many of the players, especially newer ones, are hit as their future is uncertain, and an expensive public auction process may be used to reissue the licenses.  Airtel however is not affected directly.
  • In the Mar’12 quarter, the total wireless subscriber base grew 2.83% to 91.9 cr. In terms of net additions, Idea led with 63.4 lakh followed by Uninor, Airtel and Vodafone with 61.3L, 55.8L and 27.4L respectively.
  • Nearly 18 months after launch of 3G, there are merely 1.5-2 cr. subscribers, less than 2% of the GSM subscriber base of 91.9 cr. Of these Airtel has 80 lakh and Idea 26 lakh. 3G ARPU may be 90-100 Rs/ month.

Key Challenges and Strategic Responses:

1) Intense competition in Indian market due to 15 players.

  • The Airtel strategic direction has changed from profitability to defending market share. This will help maintain overall revenue and growth, but signals lower profitability for a few quarters.
  • Marketing & Sales activities include aggressive brand building, sports sponsorships and marketing campaigns in media.
  • Bundling of Airtel’s consumer services is an opportunity. Currently this is being tapped through single payment mechanism with Airtel Money. If other synergies are tapped, this can improve product stickiness

2) Regulatory uncertainty in Telecom due to cancellation of 2008 licenses, separation of spectrum and licenses and non sharing of 3G customers among operators and a host of such issues

  • Many ground rules are changing in this industry due to the initiatives by troika of Indian Govt., TRAI and DoT. This includes higher service charges, potential new charges like spectrum and license fees, excess spectrum charge, refarming of spectrum, non-sharing of 3G services among operators and restrictions in voice and internet ‘combi packs’ by TRAI.
  • Airtel has joined other telecom players to vigorously defend its stance at TDSAT /Indian Courts.
  • In a perverse situation, consolidation in Indian telecom is being accelerated by the licenses cancellation.

3) Heavy Investments: Airtel won a number of 3G licenses (2010) and in important circles, but at a high price. It also won 4G licenses, which it launched in 2012.

  • 3G services have not initially taken off in the market as expected. Having spent large sums in the 3G auctions, Airtel is leading the push in 3G services with investments in m-Heath, m-Education, m-Commerce, e-governance, etc. and generating trials among current subscribers.
  • Airtel has already launched 4G services (essentially for data) in Bangalore and Kolkata. It will launch soon in Delhi, Mumbai and Kerala.

4) Airtel acquired the African telecom assets of Zain in 2010, for USD $9 billion (Rs 49,500 cr.) in cash.

  • This purchase provided entry into a high potential market and allows Airtel to start a second phase of corporate growth. (As per Airtel estimates), Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion.
  • By leveraging their balance sheet and with sound financial engineering, Airtel was able to service this loan for only $200 m (Rs 1100cr.) per year in ‘10. The ‘13 revenue target for Africa is $5 billion (27.5k crores).
  • However this market requires a couple of years of investments in markets for regulatory approvals, 3G rollout, network investments and marketing & sales to raise the profile of Airtel.

5) High debt due to purchase of Zain Africa, 3G and 4G, and network upgradation and expansion in all regions

  • Airtel continues to be an outsourcing leader with partners for networks, IT, and support services.
  • Airtel is planning on an IPO for its telecom tower unit BhartiInfratel Ltd. (BIL). This independent firm manages towers for any operator and listing this asset will help pare down debt.

6) Mobile Number Portability was perceived as a threat for Airtel. However, the first year of experience of this facility shows that Airtel is the second highest beneficiary of MNP.

Stock Valuation, Performance and Returns

  • CMP is 261. In the last 8 years, the market price has appreciated at 12% per annum CAGR.  However, the share has fallen from a high of 565 in Oct ‘07 by 54%, and within last 1 year by 39% to today’s CMP. See Fig 3.
  • Particularly worrying is the share price fall in August 2012, where after the Q1FY13 results on Aug 8th, the share fell by 14% in 3 days.
  • The maiden dividend of 20% declared in FY09 has been kept steady at this rate for next two years.
Price 5 year Trend, JainMatrix Investments

Fig 3 – Price 5 year Trend, JainMatrix Investments

Quarterly Sales and Margins

Fig 4 – Quarterly Sales and Margins

  • The quarterly sales and margins data, Fig 4, for the last 5 years is revealing:
    • The growth in Revenues is 31.1% and EBITDA too is up 25.7% CAGR over this period.
    • However Net Profit is flat, and the Profit margin has fallen in last 2 years from over 20% to 5% range.
  • The EPS, Cash flow and Investments Chart – Fig 5 – shows that Cash Flow has increased 21.6% CAGR over the last 5 years. But the investments required by the business has consumed a lot of this cash.
  • EPS peaked in 2010, and has fallen sharply thereafter.
EPS, Cash Flow and Capital Investments

Fig 5 – EPS, Cash Flow and Capital Investments

  • RoCE has fallen from 25% levels to 8.9% – a poor statistic; RoNW is 4.4%; Price/Book is 1.96.
  • Debt / Equity is 1.36 for the consolidated entity, indicating fair leverage.
Airtel - Price and PE chart, TTM

Fig 6 – Airtel – Price and PE chart, TTM

  • The Price and PE Chart – Fig 6 – show that the average PE over last 5 years is 22.5.
  • Current PE at 25.4 is in the Upper Quartile, at high levels, in spite of recent price fall.
Price and EPS Chart TTM, JainMatrix Investments

Fig 7 – Price and EPS Chart TTM, JainMatrix Investments

  • The Price and EPS chart – Fig 7 – clearly shows the EPS drop post April 2010.
  • The key question is, when will this fall in EPS be arrested and resume its growth path?

Benchmarking and Financial Projections

In a benchmarking exercise, we compare Airtel with 3 other firms, Table 8.

Benchmarking Analysis, JainMatrix Investments

Table 8 – Benchmarking Analysis, JainMatrix Investments

  • Airtel has healthy Sales growth, while Asset Turnover and EBITDA margins are excellent.
  • The ROCE is low, and profit erosion and price fall are signs of weakness for Airtel.
  • D/E is high but within the 2.0 times comfort zone
  • The Airtel consolidated Financials are projected till FY 2015, Table 9.
Financial Projections, JainMatrix Investments

Table 9 – Financial Projections, JainMatrix Investments

Risks:

  • Indian Telecom Regulatory and legal overhang.
  • Revenue pressures from the Indian government. The govt. is looking to bridge deficits with larger revenues from Telecom industry.
  • The current expectation is that M&As and exits will reduce competitive intensity in the sector. If this does not happen, it will affect profitability and margins.
  • The interest rates have risen in India, increasing debt-servicing costs. Our expectations are that rates have peaked in India, and should fall going forward. Any change in this affects financial projections.

Opinion, Outlook and Recommendation

  • The Telecom sector in India has achieved deep penetration, and voice services have been a language independent enabler of productivity, efficiency and knowledge. The success of Apple’s iPhone is an indication of future data services consumption, assuming the Indian market follows the developed markets trends.
  • In future the sector revenues will be driven by volume and price increases, value added services, 3G adoption, internet and application usage, 4G and incremental penetration. With maturity, the telecom sector revenues will be a Consumer play, reflecting personal income growth and habits.
  • Airtel is a volume leader in India, and is perceived as a technology leader with cutting edge offerings and the best network.  In Africa, the brand is slowly getting established.
  • The current financial performance is a trough due to a combination of Indian telecom governance challenges, intense competition, high interest rates and investments in Indian 3G/ 4G networks and African operations.
  • But FY2013 will see Airtel consolidating its leadership position in India & many African countries. In India about 6-7 players will exit or merge with other players due to investment/ profit pressures. After this, mobile call prices will rise, due to a return of pricing power. In FY14, the financial recovery will be swift & comprehensive.
  • The June 2010 bottom for the Airtel share was Rs 255, has held firm so far till August 2012. There may be more consolidation at these levels in rest of FY13.
  • The Mar 2014 target for Airtel is 421 based on a P/E target of 25 times and projections of financials. This is a 61% appreciation from current price levels. 

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The author can be contacted over email at punit.jain@jainmatrix.com or on www.jainmatrix.com

JainMatrix Knowledge Base:

Other reports on Telecom

  • Telecom: Auctions speak louder than words – Article
  • Indian Telecom at Cross-Roads – Article
  • Indian Equity – Winds of Change – Article

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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Bharti Airtel – Take the call

  • Date: November12, 2011
  • CMP: Rs 396; Large Cap
  • Advice: Safe long term investment
  • Target: 18 month – 800

There is an update on this report called Bharti Airtel – This is a year of consolidation (Aug 2012) available for readers. 

Bharti Airtel is a large telecom player. The market leading India business is seeing high competition, but going forward the profitability will stabilize and improve. The next growth engines are Indian 3G and the 16 country African acquisition.  Invest for the long term in this Indian – going – MNC Blue Chip.

Bharti Airtel – Description and Profile

  • Bharti Airtel is the market leader in the Indian telecom sector. Incorporated as recently as 1995, it is a global telecom operator ranked #5 today in terms of customers.
  • Standalone turnover is Rs 38,000 crores (FY’11), and the Market Cap at Rs 1,50,000 crores ranks it #7 in India.  Consolidated revenues in Q2FY12 was Rs 17,200 crore (annualized Rs 61,000 crore)
  • Other than India, Operations are spread over 18+ countries including Bangladesh, Sri Lanka and the African continent. Airtel has an aggregate of 237 million customers as of September 2011.

Businesses are classified as B2C and B2B

  • B2C operations include Mobile, Telemedia (broadband, IPTV and fixed line), and Digital TV (DTH)
  • B2B operations are Enterprise services (end to end telecom services) and Passive Infrastructure Services (Telecom towers)
  • Africa for Airtel is essentially a market for mobile services and Passive Infrastructure Services (Telecom towers)
Bharti Airtel, JainMatrix Investments

Fig 1 – The revenue proportions from business segments (click graphic to enlarge)

  • Strategic Partner – Singapore Telecom is a key Partner and investor in Bharti Airtel.
  • Equipment and Technology Partners – excellence from specialists
  1. For network and telecom equipment, the partners are Ericsson, Nokia Siemens Networks (NSN), Huawei, Alcatel Lucent, ECI, Tejas Networks and Cisco
  2. IBM is the partner for all business and enterprise IT systems, across geographies
  3. The Call Center expertise is from partners like IBM Daksh, Mphasis, Firstsource, Aegis, Tech Mahindra Teleperformance, and HGSL
  • Shareholding pattern is: Promoters 45.5%, Foreign Strategic Partner 22.8%;  FIIs 17.1%;  DII 8.7%; Bodies Corporate 4.1 %; Individuals – retail and Other 1.8%

Industry Snapshot

  • The total number of Indian subscribers of telecom services– wireless & wire line – is 88.6 crores. The tele-density is 73.97% (on 30/06/11), an increase of 4.69% over the previous quarter
  • Gross Revenue during the quarter was 46,891 crores, an increase of 3.03% over the previous quarter
  • The policy environment for Telecom is driven by TRAI, DoT and the Ministry of Communication & IT
  • There are 15 players in the telecom operator space, including PSUs. Here is a comparison of the larger players

Company

Subscribers

millions

ARPU

Rs/ month

MoU

minutes

ARPM

Rs/minute

Market Share %

3G licenses won

3G Bid

Rs Billion

Bharti Airtel

172.51

192

454

0.42

19.91

13 circles

122.95

RCom

144.51

105.8

240

0.44

16.77

13 circles

85.85

Idea

95.11

165.2

413

0.40

11.12

11 circles

57.68

Industry

885.99

93.44

329

100

7 private firms have won 71 circles among them

506

Above telecom data is from April and June 2011 quarters, from TRAI and public reports

Key challenges for Bharti Airtel and strategies being followed:

Bharti Airtel, JainMatrix Investements

  • Focus on network improvements, customer support and new service launches, so Airtel is seen as a stable, technically superior and quality service provider

2.       The draft National Telecom Policy 2011 attempts to ease conditions for M&A in the telecom sector, promote the ‘One Nation-One License’, and possibly infrastructure status for the industry

  • These policies are seen as boosts for the sector, particularly the larger players like Airtel
  • It will hasten the end of the intense competition phase and, through alliances and M&A, lower the number of players to 6-8. This can permit profitable telecom operations for most players.

3.       Airtel won a number of 3G licenses in important circles, but at a high price

  • 3G is the next big thing for Indian telecom players. Driven by a growth in smartphone sales, enabled by the telecom operators, a whole new ecosystem of content, services and functionality is being set up. This includes internet browsing, entertainment services, application stores, video calling, enterprise services, m-Heath, m-Education, m-Commerce, e-governance, etc.  These will drive usage, 3G penetration, subscriptions and ARPU, and help monetize the 3G license assets.

4.       Regulatory uncertainties on issues like Excess spectrum charge, license renewal fees, formation of 3G roaming alliances

  • By working with the industry bodies such as COAI, Bharti Airtel is defending its position on these issues. Many of these new conditions impose additional costs on the Telecom operators, which are unplanned for.

5.       Airtel acquired the African telecom assets of Zain in 2010, for USD $9 billion in cash.

  • This purchase is of a high growth franchise. As per Airtel estimates, Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion. By leveraging the balance sheet and sound financial engineering, Airtel was able to service this loan for only $200m per year in 2010.

6.       Mobile Number Portability was perceived as a threat for Airtel. However, the first year of experience of this consumer facility shows that it has not materially reduced market shares.

Stock valuation, performance and returns

  • CMP is 395. In the last 7 years, the market price has appreciated at 21% per annum CAGR.  It is below the all time high of 565 in Oct 2007. See Fig 3.
  • However, prices are on an uptrend in the last year or so. PE at 21.5 is still well below the 7 year range of 27.5

Bharti Airtel, JainMatrix Investements

  • EPS growth in the last 7 years has been 35% CAGR. Even so, we can see the trends – EPS had a rapid expansion from 2005 to 2009, but has fallen off in the last 2 years.
  • The Good News? Expectations now are that the period of falling consumer prices in telecom are over. The hyper competition phase has played out, and EPS will stabilize and start their climb once again for Airtel.
Bharti Airtel, JainMatrix Investments

Fig 4 – Price and EPS Trends

  • Sales have grown steadily at 23.4% over the past 7 years. Net profits have also appreciated at 21.3%. We can see however, that profits which were rising rapidly till 2009, have tapered down recently. This is due to industry hyper competition.
Bharti Airtel, JainMatrix Investments

Fig 5 – Sales and Profits Trends (click to enlarge)

  • Telecom is a very resource intensive business. Airtel has managed this well, and has grown the Cash generated from operations at 28% CAGR over the last 7 years. EPS growth has been higher at 35%.
Bharti Airtel, JainMatrix Investments

Fig 6 – Cash Flow and EPS Trends

  • RoCE is at 16% – healthy statistic; RoNW is 17.6%; Price/Book is 3.42
  • Debt / Equity is 0.7 for the consolidated entity. This is a comfortable level for a telecom player.
  • PEG is at 0.61 – indicates it is underpriced, and a good investment opportunity, especially given it’s Blue Chip status

Risks:

  • Poor regulatory conditions in India. The telecom sector continues to be buffeted by ad-hoc ism in policy matters, and overlapping jurisdictions of TRAI, DoT and the Ministry. The revenue short government may exert additional pressure to raise receipts, sacrificing industry growth.
  • The current policy directive is to allow M&As and reduce competition intensity in the sector. If this is not implemented, or even reversed in some way, the hyper competition environment may continue to haunt this sector, affecting profitability and margins.
  • The interest rate has risen in India. This increases debt servicing costs. Expectations are that rates have peaked in India, and should fall going forward.
  • Revenue and capital leakage into unrelated diversifications of Bharti group like Retail, Insurance, foods, etc. However this risk is fading as Bharti Airtel corporate governance standards are high, and investments are being made independently by the holding company, Bharti Enterprises.

Opinion, Outlook and Recommendation

  • Airtel essentially has two large businesses, India (mature asset) and Africa (growth).
  1. In India, the major investments have been made; the revenues are large and growing, and the high competition is expected to ease up. Over the next few quarters, all metrics will point up – Cash flow, operating margins and net profits, in addition to revenues which has held up well.
  2. In Africa, we will see Airtel slowly establish itself, move from #3, 4 or 5 in the market to #1 or 2. In country after country, it is engaging with the government, trade and consumers, to roll out its ‘minutes factory’, ‘network infrastructure sharing’ and ‘partner with the best vendors’ approach.  The 2013 target for Airtel Africa is $5 billion of revenues.
  • The recent bottom of the Airtel share was Rs 255 in June 2010. The share has been moving up thereafter and has appreciated 55% to today’s 396. The stock will continue its upward march, as it continues to deliver on stated corporate goals.
  • At current levels, Airtel share is above 20, 50 and 200 DMA levels. See Fig 7. This indicates the share is likely to continue to move up.
Bharti Airtel, JainMatrix Investments

Fig 7 – Airtel stock is above 20, 50 and 200 DMAs

  • I recommended the Airtel stock in my report in December 2010. See Link.
  • I reiterate my recommendation to Buy.  My 18 month target for this stock is 800.

……………………………………..

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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/