Bharti Airtel - Stars finally align for the sector leader - Ambit

Bharti reported strong 1QFY14 results, with a 4% increase voice realizations and 131bps QoQ improvement in EBTIDA margins. Whilst Bharti's 1QFY14 performance in the India business exceeded our and consensus expectations, its Africa business continued to disappoint despite promises of a seasonal turnaround. Our buy stance on Bharti is underpinned by:

a) Passive consolidation in Indian Telecom over the last three quarters has helped increase voice realizations (up 4% QoQ in 1QFY14) and reduce selling and distribution costs from lower churn (down 500bps YoY). This is likely to sustain over FY14/15 further driving better unit economics and hence EBITDA margin strength.

b) We expect Bharti to gain from rapid growth in data consumption and penetration driven by rationalization of 2G/3G data tariffs and greater availability of inexpensive smartphones at sub $100 price points.

c) Improving regulatory outlook in India from lower spectrum pricing and a more industry friendly stance from the current regular. We also expect Bharti to gain competitiveness in Africa from falling interconnect rates and improve margins from reduced churn.

Overall, our estimates factor in revenue CAGR of 13% and EBITDA CAGR of 19% over FY13-15. Our relative-based TP values the Indian business (excluding Indus EBITDA) at 7.0x one-year forward EV/EBITDA, the African business at 5.0x and Bharti Infratel at 7.0x. Our TP implies an FY14 EV/EBITDA of 7.2x. Bharti currently trades at an FY14 EV/EBITDA of 6.3x at a discount to its historical average of 7.5x and Idea (7.2x FY14).

Source : Equity Bulls

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