BSE SENSEX
28,893
S&P CNX
8,940
Bharti Airtel
CMP: INR366
TP: INR410(+12%)
Buy
Telenor deal holds strategic value
Attractive at 5x EV/EBITDA and 20% RoCE
Bharti and Telenor have announced a merger. Telenor’s press release
indicates that Bharti would only acquire outstanding spectrum
payments and other operational contracts including tower lease, which
would mean an investment of just ~INR20b for Bharti.
The deal would give Bharti additional spectrum in the 1800MHz band
in seven key circles, which is otherwise unavailable. Also, it would gain
incremental annual revenue of INR25b-30b and EBITDA of INR6b-7b.
We believe Bharti’s strategy to remain ahead of the curve in data-rich
spectrum investments should bolster its defense against RJio and hold
it in good stead. We reiterate our Buy recommendation.
What will Bharti get out of this deal?
1800MHz spectrum in seven circles, otherwise unavailable
Telenor holds 5-7MHz spectrum in the lucrative 1800MHz band in seven key
circles – Maharashtra, Gujarat, Andhra Pradesh (AP), Uttar Pradesh (UP)
East and West, Bihar, and Assam. Bharti currently holds about 5MHz
liberalized spectrum in each of these circles, except in AP, where it holds
10MHz spectrum. A 5MHz block is fairly good to offer seamless 4G network.
However, we believe the acquisition holds strategic value, given that
1800MHz is otherwise unavailable and offers two key benefits: (a) 4G
network rollout on 1800MHz remains the most efficient due to its well-
developed ecosystem, and (b) capacity addition on existing 1800MHz band
v/s fresh spectrum band (2500MHz or 700MHz) should lead to cost
advantage coming from network design and equipment deployment.
Incremental annual revenue of INR25b-30b and EBITDA of INR6b-7b
Telenor earns revenue of ~INR11b and EBITDA of ~INR1b per quarter.
Assuming its revenue base dilutes by 35-40%, given the high share of second
sim cards, it should still manage annual revenue of INR25b-30b on stable
state basis. Telenor’s EBITDA could improve to INR6b-7b, assuming 25-27%
margin compared to Bharti’s 38% India wireless margin. With Bharti’s
investment likely to be just ~INR20b, the deal would be RoCE-accretive,
yielding ~20% RoCE.
Deal value appears attractive at 5x EV/EBITDA and 20% RoCE
Bharti purchased Videocon’s six circles at INR44.3b, 75% higher than the
latest auction value for the proportionate life of the spectrum. Accordingly,
we had expected the size of the Telenor deal to be INR70b-80b. At a
potential investment of ~INR20b for Bharti, the deal appears attractive, with
possible EV/EBITDA of 5-6x on current EBITDA run-rate. With an operating
cash flow of INR320b and net debt of INR1,020b, the investment would add
hardly 2% to net debt, which would be offset by the EBITDA contribution
from the merger.
23 February 2017
Update
| Sector:
Telecom
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
2016 2017E
Y/E Mar
965.3 975.1
Net Sales
340.1 358.5
EBITDA
47.5
49.6
PAT
11.9
12.4
EPS (INR)
-14.9
4.4
Gr. (%)
164.2 174.4
BV/Sh (INR)
7.4
7.3
RoE (%)
5.9
5.8
RoCE (%)
26.2
25.1
P/E (x)
1.9
1.8
P/BV (x)
BHARTI IN
3,997
401/284
8/2/-9
1,463.2
21.9
1,212.9
32.9
2018E
1,010.0
366.2
37.7
9.4
-24.0
182.2
5.3
5.0
33.1
1.7
Shareholding pattern (%)
As On
Dec-16 Sep-16 Dec-15
Promoter
67.1
67.1
65.6
DII
11.3
15.8
7.6
FII
15.1
15.7
17.9
Others
6.4
1.4
8.9
FII Includes depository receipts
Stock Performance (1-year)
Bharti Airtel
Sensex - Rebased
400
370
340
310
280
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Aliasgar Shakir
(Aliasgar.Shakir@motilaloswal.com); +91 022 3982 5423
Jay Gandhi
(Jay.Gandhi@MotilalOswal.com); +91 22 6129 1546

Bharti Airtel
What justifies such low valuation:
Post the recently-concluded auction,
there were limited takers for incremental spectrum in the market. Given the
impending Vodafone-Idea merger, RJio-RCom spectrum sharing terms, and
no sizeable operator willing to take its spectrum, Telenor India had limited
options. This may have led to the low valuation.
Bolsters defense against RJio; continue to prefer Bharti
While the incremental spectrum may not be presently required, given the
large scale data traffic on RJio’s network, holding high quantum of spectrum
would allow Bharti to compete with RJio in a fixed-cost-driven market. We
believe Bharti’s strategy to remain ahead of the curve in data-rich spectrum
investments should hold it in good stead.
Consolidated - Quarterly Earning Model
Y/E March
1Q
Gross Revenue
236,709
YoY Change (%)
3.1
Total Expenditure
154,466
EBITDA
82,243
Margins (%)
34.7
Depreciation
40,404
Interest
19,206
Other Income
2,419
PBT before EO expense
25,051
Extra-Ord expense
-21,384
PBT
46,435
Tax
21,827
Rate (%)
47.0
Minority Interest & Profit/Loss of Asso. Cos.
3,478
Reported PAT
21,130
Mobile ARPU (INR/month)
198.2
QoQ Growth (%)
-0.1
Mobile MOU/sub/month
345.0
QoQ Growth (%)
-1.7
Mobile Traffic (B Min)
9,097
QoQ Growth (%)
4.4
Mobile RPM (INR)
0.57
QoQ Growth (%)
1.7
FY16
FY17
FY16
FY17E
2Q
3Q
4Q
1Q
2Q
3Q
4QE
238,357 240,659 249,596 255,465 246,515 233,357 226,921 965,321 962,258
4.3
3.7
8.4
7.9
3.4
-3.0
-9.1
325.4
NA
156,014 156,522 158,474 159,985 152,113 148,542 148,706 625,259 609,346
82,343 84,137 91,122 95,480 94,402 84,815 78,215 340,062 352,912
34.5
35.0
36.5
37.4
38.3
36.3
34.5
35.2
36.7
42,390 43,541 48,163 50,402 49,560 48,350 50,204 174,498 198,516
18,752 14,167 17,010 19,399 19,057 19,356 16,385 68,865 74,197
1,929
3,037
3,129
2,787
1,568
3,487
3,504
9,501 11,346
23,129 29,465 29,078 28,466 27,353 20,596 15,130 106,200 91,545
-6,761
3,405
2,999
3,536
66
2,040
0 -14,505
5,642
29,890 26,060 26,079 24,930 27,287 18,556 15,130 120,705 85,903
13,394 13,523 10,789 10,089 11,136 11,841
6,203 59,368 39,269
44.8
51.9
41.4
40.5
40.8
63.8
41.0
49.2
45.7
1,133
1,457
2,095
222
1,544
1,678
1,053
6,495
4,497
15,363 11,080 13,195 14,619 14,607
5,037
7,873 54,842 42,137
192.6
192.0
194.2
195.7
187.9
172.0
156.7
192.9
177.9
-2.8
-0.3
1.1
0.8
-4.0
-8.4
-8.9
-2.6
-7.8
333.7
325.8
321.3
310.1
329.3
329.3
322.1
342.7
311.5
-3.3
-2.4
-1.4
-3.5
6.2
0.0
-2.2
-1.1
-9.1
9,480 10,066 10,102
9,427
8,819
8,819
8,850 38,746 35,914
4.2
6.2
0.4
-6.7
-6.4
0.0
0.4
8.2
-7.3
0.58
0.59
0.60
0.6
0.6
0.5
0.5
0.6
0.6
0.4
2.1
2.5
4.5
-9.6
-8.4
-6.9
-1.5
1.5
Exhibit 1: Telenor 1800mhz spectrum portfolio
Spectrum
holding (mhz)
Maha
Guj
AP
UP W
UP E
Bihar
Assam
Total
5
5
6.4
7.0
6.8
7.2
6
43.4
Price/block
Telenor’s Spectrum
(200khz) acquisition cost (INRm)
636
476
486
201
266
124
80
2,269
10,512
8,994
11,476
4,296
3,047
1,857
8,000
48,183
Spectrum Value
(INRm)
15,900
11,900
15,552
7,021
9,054
4,464
2,400
66,291
Source: Company, MOSL
23 February 2017
2

Bharti Airtel
Exhibit 2: Telenor proportionate 15-year spectrum value
Particulars
Spectrum Value
Proportionate 15 year value
INRm
66,291
49,718
Value/share (INR)
17
12
Source: Company, MOSL
Exhibit 3: Telenor proportionate 15-year spectrum value
Circles
Maha
Guj
AP
UP W
UP E
Bihar
Assam
Total
Subscribers Gross Revenues
(m)
(INRm)
8
2105.3
8
2055.9
5
1480.6
9
2086
13
2886.5
10
2023.2
-
24.9
53
12662.4
Subscriber Revenue Market
market Share
Share
9.7%
5.2%
13%
7%
7%
4%
16%
10%
15%
10%
12%
8%
0%
0%
5%
3%
Gross ARPU
(INRm)
86
82
90
80
76
69
80
Source: Company, MOSL
Exhibit 4: Telenor’s financials and operating metrics
Particulars (INR m)
Telenor Financial Metrics
Total revenues
growth
EBITDA before other income & expenses
EBITDA margin (%)
EBITDA
Dep and Amor
EBIT
Capex
Key Operating Metrics
Subscribers (000)
growth
ARPU (INR)
growth
Total Minutes (000)
growth
RPM (INR)
growth
MOU
growth
4QFY14
10,761
3.1%
(881)
(8.2)
(1,784)
(797)
(2,581)
1,182
36,665
7%
101
-3%
44,310
4%
0.24
-1%
416
-2%
1QFY15
11,050
2.7%
(430)
(3.9)
(401)
(867)
(1,269)
869
38,505
5%
98
-3%
47,328
7%
0.23
-4%
420
1%
2QFY15
11,165
1.0%
195
1.7
213
(899)
(741)
2,074
39,849
3%
95
-3%
48,708
3%
0.23
-2%
414
-1%
3QFY15
11,016
-1.3%
(452)
(4.1)
(631)
(1,831)
(2,916)
1,524
40,855
3%
91
-4%
48,145
-1%
0.23
0%
398
-4%
4QFY15
11,018
0.0%
317
2.9
(579)
(2,360)
(2,823)
3,756
42,619
4%
88
-3%
47,905
0%
0.23
1%
383
-4%
1QFY16
11,872
7.8%
275
2.3
(4,034)
(2,201)
(24,217)
3,192
44,144
4%
90
2%
52,098
9%
0.22
-2%
400
5%
2QFY16
12,423
4.6%
1,126
9.1
1,211
(470)
(1,057)
1,628
44,907
2%
93
3%
54,131
4%
0.23
2%
405
1%
3QFY16
12,369
-0.4%
1,054
8.5
1,300
(503)
(32,371)
1,489
44,722
0%
92
-1%
53,072
-2%
0.23
2%
395
-3%
4QFY16
11,316
-8.5%
1,012
8.9
1,392
(507)
(357)
955
44,033
-2%
85
-8%
51,150
-4%
0.22
-5%
384
-3%
Source: Company, MOSL
23 February 2017
3

Bharti Airtel
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2012
714,508
20.0
236,573
33.1
133,681
102,892
38,185
550
0
65,257
22,602
34.6
61
42,594
42,594
-31.5
2013
769,045
7.6
232,154
30.2
148,147
84,007
40,084
423
0
44,346
25,183
56.8
-88
19,251
19,251
-54.8
2014
857,461
11.5
276,596
32.3
156,496
120,100
48,381
6,385
538
78,642
48,449
61.6
2,467
27,726
27,519
43.0
2015
920,394
7.3
312,276
33.9
155,311
156,965
48,463
6,588
-7,960
107,130
54,047
50.4
1,248
51,835
55,779
102.7
2016
965,321
4.9
340,062
35.2
174,498
165,564
68,865
9,501
14,505
120,705
59,368
49.2
6,495
54,842
47,471
-14.9
2017E
975,076
1.0
358,464
36.8
203,577
154,888
74,527
10,280
-3,602
87,039
35,402
40.7
4,202
47,435
49,572
4.4
2018E
1,010,038
3.6
366,183
36.3
227,847
138,336
(INR Million)
2019E
1,112,910
10.2
414,669
37.3
249,679
164,990
80,930
11,733
0
69,139
28,148
40.7
3,336
37,655
37,655
-24.0
78,231
11,733
0
98,491
40,098
40.7
4,752
53,641
53,641
42.5
Y/E Mar
Share Capital
Reserves
Net Worth
Minority Interest
Debt
Deferred Tax
Total Capital Employed
Net Fixed Assets
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
Balance Sheet
2012
18,988
487,125
506,113
27,695
690,232
-39,656
1,184,384
1,335,821
18,355
165,163
1,308
63,735
20,300
79,820
334,955
326,425
8,530
-169,792
1,184,384
2013
18,988
484,229
503,217
40,886
667,363
-45,935
1,165,531
1,286,663
77,098
170,001
1,109
67,824
16,078
84,990
368,231
356,719
11,512
-198,230
1,165,531
2014
19,987
577,573
597,560
42,102
758,958
-45,777
1,352,843
1,406,145
155,308
207,692
1,422
62,441
49,808
94,021
416,302
404,533
11,769
-208,610
1,352,843
2015
19,987
599,577
619,564
48,525
806,839
-44,392
1,430,536
1,501,440
170,357
226,519
1,339
67,252
11,719
146,209
467,781
459,472
8,309
-241,262
1,430,535
2016
19,987
636,314
656,301
51,984
950,430
-32,382
1,626,333
1,817,263
114,498
270,173
1,692
73,106
37,087
158,289
575,601
565,925
9,676
-305,427
1,626,333
2017E
19,987
677,206
697,193
56,186
1,061,369
-32,382
1,782,366
1,957,339
114,498
223,230
1,370
71,152
17,097
133,611
512,701
504,210
8,491
-289,471
1,782,365
2018E
19,987
708,318
728,305
59,522
1,042,077
-32,382
1,797,522
(INR Million)
2019E
19,987
755,415
775,402
64,274
1,020,856
-32,382
1,828,151
1,930,708
114,498
297,822
1,802
67,210
66,515
162,296
545,507
535,180
10,327
-247,685
1,797,521
1,882,246
114,498
436,350
1,693
85,244
204,011
145,402
604,943
594,536
10,407
-168,593
1,828,150
23 February 2017
4

Bharti Airtel
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
10.7
44.1
126.6
0.9
10.4
0.0
0.0
0.0
0.0
0.3
8.6
5.9
6.0
0.6
33
1
167
1.3
2013
4.8
41.9
125.9
0.9
22.9
0.0
0.0
0.0
0.0
0.3
3.8
3.1
3.3
0.7
32
1
169
1.1
2014
6.9
46.0
149.5
1.8
30.2
0.0
0.0
0.0
0.0
0.6
5.0
3.8
4.2
0.6
27
1
172
0.9
2015
14.0
52.8
155.0
2.2
19.9
22.3
2.0
2.2
6.5
0.7
9.2
5.8
6.5
0.6
27
1
182
1.0
2016
11.9
55.5
164.2
1.4
11.9
26.2
1.9
2.2
6.3
0.4
7.4
5.9
6.2
0.6
28
1
214
1.2
2017E
12.4
63.3
174.4
1.4
13.8
25.1
1.8
2.3
6.4
0.4
7.3
5.8
5.9
0.5
27
1
189
1.3
2018E
9.4
66.4
182.2
1.4
17.4
33.1
1.7
2.2
6.1
0.4
5.3
5.0
5.0
0.6
24
1
193
1.2
2019E
13.4
75.9
194.0
1.4
12.2
23.2
1.6
1.9
5.0
0.4
7.1
5.9
6.3
0.6
28
1
195
0.9
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
236,573
3,119
15,050
-29,453
149
225,438
-150,283
75,155
-33,550
38
-183,795
0
-2,830
-32,352
-4,432
-39,614
2,029
6,008
8,037
2013
232,154
9,034
19,634
-31,294
-1,829
227,699
-130,063
97,636
-56,568
-130
-186,761
-579
-24,026
-34,339
11,665
-47,279
-6,341
7,652
1,311
2014
276,596
17,331
17,533
-35,039
-14,095
262,326
-174,659
87,667
-36,886
-38,188
-249,733
67,956
14,252
-37,620
-18,917
25,671
38,264
1,311
39,575
2015
312,276
23,417
-1,639
-46,111
-11,925
276,018
-209,786
66,232
-11,649
954
-220,481
0
-72,451
-33,887
9,811
-96,527
-40,990
39,575
-1,415
2016
340,062
40,183
-4,172
-46,836
-46,032
283,205
-270,967
12,238
68,060
56,871
-146,036
984
-117,833
-32,890
30,278
-119,461
17,708
-73
17,635
2017E
358,464
25,871
-35,946
-35,402
0
312,987
-343,652
-30,665
0
0
-343,652
0
110,938
-93,720
-6,543
10,675
-19,990
37,087
17,097
2018E
366,183
24,881
7,632
-28,148
0
370,548
-201,217
169,331
0
0
-201,217
0
-19,292
-94,078
-6,543
-119,914
49,418
17,097
66,515
(INR Million)
2019E
414,669
24,881
58,404
-40,098
0
457,856
-201,217
256,640
0
0
-201,217
0
-21,221
-91,379
-6,543
-119,144
137,496
66,515
204,011
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