Bharti stock has been down c5% over the last couple of days since the company suggested that it plans to spend Rs 60 bn/$9 bn over the next three years to upgrade networks capacities and coverage. The company suggested that its network transformation programme “Project Leap” aims to improve network quality and add bandwidth across the country. Over the next three years Bharti plans to deploy more than 0.16m base stations, doubling its presence from the present on ground network coverage and capacity. We note that at present Bharti has total 2G base stations at 0.15m, 3G base stations at 0.62m and 4G base stations are estimated at 0.25m.
Our forecasts already assume $9 bn capex over the next three years
Bharti’s capex guidance for current FY16e stands at $3.2 bn, suggesting that over the next two years it intends to spend at a similar rate. Given the significant investments being made by 4G new entrants and the pick up in smartphone penetration, we expected Bharti to continue with increased capex spends for another couple of years at least. Despite increased capex investments we expect Bharti’s balance sheet to improve and see its net debt/Ebitda improving from present 2.5x to 1.7x by end-FY18e. Our assumption is based on FY15-18e Ebitda CAGR (compound annual growth rate) of c11% at the consolidated level and India wireless Ebitda growing at CAGR of c13% during the same period. We note data margins are higher than voice as Indian telcos are able to add data capacities at significantly lower opex (operational expense) and we expect this phenomenon to continue for another 12-18 months, driving our positive view. Nonetheless we assume a c18% decline in tariff over the next six quarters given potential launches by 4G entrants and significant increases in data capacities.
Data is driving consolidation
Data, unlike voice, requires significant investments in networks and marginal players/GSM new entrants (holding c20% revenue market share) already seem to be finding it tough to compete in data opportunity given stretched balance sheets. The ability to invest in data allows Bharti to drive consolidation and improve revenue market share in our view. Increases in capex (capital expenditure) investments are in line with our estimates and we expect this to be positive for the company.
Buy with DCF based target price of Rs 450
Our positive view on Bharti is driven by its relatively better data spectrum holding versus completion and its ability to invest in data capacities. The key downside risk is a higher than estimated cut in data tariffs.
We continue to value Bharti Airtel on a DCF-based sum-of-the-parts approach. For our India DCF valuation, we use a cost of equity of 13.0%, a cost of debt of 11%, and a WACC (weighted average cost of capital) of 11.7%, arriving at a fair value of R483 per share for the India operations adjusted for regulatory levies. We value the international operations at negative R33 per share based on DCF methodology, assuming a WACC of 11.7% (a cost of equity of 13.0% and a cost of debt of 11%). We have a fair value target price of R450 and with upside of c40%, we maintain our Buy rating on Bharti Airtel.
Key downside risks include a sharper-than-estimated decline in voice tariffs in FY17e, faster-than-estimated progress on voice-over-LTE (VoLTE), and a disruptive 4G launch by new entrants.
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