Credit Suisse
We assign an ?outperform? rating to Bharti Airtel as the company?s aggressive India mobile strategy, started in April 2012, is bearing fruit. Bharti has managed to bring about discipline in the industry on tariffs and costs, while on the other it has managed to reap rich marketshare dividends (60% share of incremental industry revenues in the first 9 months of the new strategy being implemented).
We assign a target price of R385 per share, by assigning R415 discounted cash flow (DCF) fair value for its core business, assuming a weighted average cost of capital (WACC) of 11.3%. Our DCF model builds in strong cash flow growth until FY3/15, an 8% medium-term growth (FY3/15 ? FY3/30) and 3% terminal growth. From this, we subtract our estimated present value impact from spectrum pricing and license
renewal (R30).
Even after accounting for regulatory payouts (at the last announced spectrum prices, expected to go down), Bharti?s stock is attractively priced for 6% and 8% free cash flow (FCF) yield for FY14 and FY15, respectively. In contrast, Idea Cellular?s stock price implies 3% and 1% FCF yield and seems richly valued. With an improving competitive environment and ever-reducing spectrum burden, Bharti appears well poised to generate significant cash flows over the next two years. At 6% and 8% FCF yield (FY14 and FY15) after taking care of worst-case spectrum payouts, we believe it offers a compelling investment opportunity at current levels. We prefer Bharti over Idea, which is trading at an all-time high premium to Bharti. We believe markets are currently overly focused on regulatory negatives, while ignoring the significant positives (falling spectrum prices, rising spectrum supply) and business (tariff improvements, market share shifts). We reiterate that the competitive threat from Reliance Industries with a ?VoLTE on 2,300 MHz? strategy is minimal. Over the next few months, we expect positive news flow on spectrum with a further reduction in spectrum prices, and more spectrum being put up for auction.