Reduce Bharti Airtel - Elara Capital

• Rating : Reduce
Target Price : INR292
Downside : 3%
CMP : INR302 (as on 14 July 2010)

African safari begins amid execution risks

Attractive market with 20% tele-density, low minutes of usage

Today, Bharti held a conference disclosing additional details about the Zain acquisition and its initial impression about it. First of all, with a net (excluding double SIMs) tele-density of 20% in countries of operation and low minutes of usage (at 60 compared to the global average of 300 minutes), Bharti management feels confident that the acquisition would be hugely value accretive in the long-term. Secondly, the competitive landscape (3 to 5 operators) and the leading position in 14 out of 15 countries of operation support their optimistic view. Thirdly, the GDP growth rate (5-7%) in these countries and the demographic dividend (median age of 17) substantiate the argument. Lastly, the management is confident of increasing the minutes of usage because of the price elasticity experienced in trial projects, proving the portability of the Minute Factory model of Bharti into the African continent.

Strategic focus on enhancing market share, revenue

Bharti plans to replicate the Minutes Factory model with an emphasis on increasing the network utilization and gaining market share while reducing running costs in network, IT and call centre operations. The company is planning to launch 'Bharti Airtel' brand in Africa in October through an aggressive marketing pitch. Meanwhile the management wants its network ready to support the campaign and for which it estimates a capex of USD800mn for FY11E. The company has already initiated the process for establishing partnerships and vendor relationships for the three operations mentioned above. It is also looking for establishing partnerships with other service providers for sharing the infrastructure - towers and optical fibre networks.

Financing: Balance sheet seems stretched but within limits

Bharti has funded the entire Zain Africa acquisition through debt from a consortium of 11 banks. The average maturity of the debt is 4.75 years with the first principal tranche due in 2.5 years. The funds have been raised at Libor+195bps (current rate is 248bps) and the estimated interest outgo for Zain acquisition would be approximately USD200mn each year. Post the 3G and BWA auctions, and the Zain acquisition, the consolidated net debt of Bharti is currently at USD12bn and the consolidated EBITDA at USD4.7bn, resulting in a net debt to EBITDA ratio of 2.6x.

Our view

Given the management's excellent track record, we believe the acquisition would be value accretive but only in the long-term. In the short-term, we think the execution risk of increasing market share as well as profitability in tandem while needing collaboration from its competitors to share the infrastructure. Lastly, we believe, there is a risk that company could take a one-time write-off from this acquisition. We maintain our target price of INR292 and accordingly, change our recommendation.

Source : Equity Bulls

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