Buy Bharti Airtel for target of Rs 430 - Motilal Oswal

BHARTI AIRTEL: Out of turbulence; Buy with a target price of Rs430

- US$10b free cash by FY14: Bharti (BHARTI IN; Mkt Cap US$29b, CMP Rs358, Buy) has been impacted by competitive pressures in the domestic market and uncertainty on Africa acquisition and 3G spectrum payouts. However, with peak coverage capex and 3G payments through, Bharti's India business is poised to generate substantial free cash. While the acquired Africa business would remain in an investment mode, we expect it to be self-sustaining. Bharti is set to enter a period of sustained high FCF - we expect >US$10b cumulative free cash generation by FY14 and estimate FCF of Rs28/share in FY12 and Rs37/share in FY13 from India and South Asia.

- Domestic business bouncing back: While Bharti has been impacted by high competition, it has been able to defend domestic revenue market share as well as win back subscribers. While risk of another price war remains, we expect pricing pressure to be relatively benign. Bharti would be soon launching 3G services; incremental 3G revenue is likely to contribute ~5% to mobile segment by FY13. We estimate mobile revenue CAGR of 14% over FY10-12 v/s 7% growth in FY10.

- Turnaround in Africa business would be key: Bharti would soon launch Airtel brand, finalize outsourcing arrangements (IT outsourcing deal signed with IBM recently) and complete the integration process for Africa business. While there is low risk of negative surprises, the extent of improvement in cost structure and market elasticity will determine the achievement of US$5b revenue/US$2b EBITDA target set out for FY13 (we model US$4.4b revenue/US$1.6b EBITDA).

- Regulatory uncertainty, MNP, high gearing/forex exposure pose challenges: The final policy on government levies and 2G spectrum allocation is awaited and remains an overhang. While competitive intensity has declined, there could be aggressive marketing by new GSM entrants post MNP implementation (in 3QFY11). Bharti's relatively high gearing at net debt/equity of 1.4x and net debt/annualized EBITDA of 3.4x makes it vulnerable to potential interest rate increases and forex fluctuations. Assuming ~US$10b forex exposure, Bharti gets impacted by Rs2.6/share for every Re1 depreciation in INR v/s USD.

- Raising price target to Rs430; maintain Buy: We upgrade our SOTP-based target price to Rs430 - Rs488/share for India & SA business (8.7x FY12E EBITDA; 15% discount to average 5-year EV/EBITDA of 10.2x) plus Rs84/share for Africa business (7x proportionate FY12E EBITDA) less Rs141/share FY12E net debt of Rs533b. Our valuation implies a negative value of Rs55/share for the Africa business. Bharti trades at an EV of ~9.4x FY11E and ~7.3x FY12E proportionate EBITDA. Maintain Buy.

Source : Equity Bulls

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