The Bharti stock is down 16% over last three months and is trading at FY16 EV/Ebitda (enterprise value/ earnings before interest, taxes, depreciation and amortisation)) of 5.6x (vs historical average of 6.9x). The 16% decline over the last three months has, we believe, been driven by (i) confusion over availability of spectrum in upcoming auctions, (ii) the official devaluation in the Naira (impact should be limited to -80bps on consolidated revenues in FY16e), and (iii) negative news-flow around the pending dispute on excess 2G spectrum allocation facing Bharti’s chairman.
However, with release of incremental spectrum in the 2100 band and possibilities of simultaneous auctions of 2G and 3G spectrum, the recent correction is overdone. We do not believe the market is pricing in Bharti’s ability to benefit from data growth, the addition of more spectrum and an early 4G launch.
(i) Best placed to benefit from data growth: Bharti, with FD LTE spectrum in 13 circles and 2G voice network, is suitably placed to segment the data market with both 3G and 4G propositions and possibly have an early mover advantage in 4G. We expect Bharti to accelerate data rollout and estimate it to double its 3G BTS (base transceiver station) over the next 12 months. Furthermore, its presence in the enterprise segment allows it to have an early move advantage in small cell coverage as well.
(ii) Upcoming auctions an opportunity: Lower exposure in upcoming 900 MHz auctions (34% of revenues coming up for auction vs 72% of revenues in case of Idea and 47% for Vodafone allows Bharti to use the auctions as an opportunity to add data capacity spectrum (improve both data capacity and coverage). Separately, Africa remains a concern (and we assign a negative value to the business), but tower monetisation is a positive and allows Bharti to improve geographical coverage. Margin expansion in Africa business likely to take at least 12-18 months in our view.
Valuation: We stay OW (overweight) on Bharti as the company is better placed to monetise the spectrum auctions and scores better on spectrum holding and is best placed to respond to 4G new entrants (given its presence in top cities with FD LTE spectrum and support with TD LTE spectrum in few pockets as well). We continue to value Bharti using a DCF based SOTP (sum of the parts), with a TP (target price) of R481 and stay OW.