Bharti Airtel, Bharti Airtel stock rating, Airtel DTH business, DTH business, WACC, ARPU, Morgan Stanley
In FY2017, Airtel DTH reported revenue of Rs 34.3 bn and Ebitda of Rs 12.2 bn (35.6% margin). (PTI)

Warburg Pincus plans to acquire up to a 20% equity stake in Airtel’s DTH business for $350 mn (valuing it at $1.75 bn; 8x FY18e Ebitda), according to Airtel. Of this, 15% of the stake will be sold by Bharti Airtel and the balance by another Bharti entity. Airtel DTH had 13.5 mn subscribers as of September 2017 (21% subscriber market share among private DTH players).

Implications of stake sale

In FY2017, Airtel DTH reported revenue of Rs 34.3 bn and Ebitda of Rs 12.2 bn (35.6% margin). We expect revenue and Ebitda to grow 10% and 12% CAGR, respectively, over F17-20e. The transaction values the DTH business marginally ahead of our estimate ($1.65 bn) and the cash raised from the sale should enable Airtel to fund capex on the India wireless business (which was recently revised upwards).

Valuation

We use a probability-weighted DCF-based sum of the parts model – 70% base case, 25% bull case, 5% bear case to arrive at our price target of Rs 658/share. We assume a WACC of 11.6% and a terminal growth rate of 5% to arrive at each of the scenario values. Base case value—Rs 544/share; 70% weighting: In India wireless, we estimate that Airtel can add 22 million subscribers in FY18, and overall ARPU of Rs 146. We currently assume that revenue growth returns in FY19, and we expect 8% y-o-y over FY19/FY20. We expect growth momentum in Airtel’s Enterprise and Home services businesses to continue, driven by data growth and increased fixed broadband penetration, leading to respective 10% revenue CAGRs for FY17-20. We arrive at core EV of `575/share. We value Bharti Airtel’s 58% share in Bharti Infratel at Rs 113/share based on our DCF model for Bharti Infratel. We add the value of the South Asian business, at Rs  2/share, and the DTH business, at Rs 26/share. For the African business, performance is strong. We arrive at an EV of Rs  78/share.

Bull case value – Rs 1,048/share: Our bull case probability weighting is 25%, as we see risks subsiding with the reduction in promo benefits of Jio’s smartphone tariff plan. For Airtel’s Indian wireless business, we factor in ARPU increases of 10% in FY18 and FY19 vs. the base case, resulting in higher revenues, as well as Ebitda margin improvement of 250 bps in FY19 as well as stronger margin in the core business. Management has indicated that it intends to work towards profitability of African business via mergers with incumbents or sale of operations. Thus, we build in African business improvement and value it at 5x F19e EV/Ebitda. We value Bharti’s share in Bharti Infratel at 13.4x F19e EV/Ebitda.Bear case value—Rs 310/share (5% weighting): Our bear case probability weighting is lower as we see improvement in India wireless business as well as headwinds in Africa business have reduced significantly. Airtel’s 58% stake in Infratel we value at 8.5x F19e EV/Ebitda. ARPU decrease results in lower revenues, as well as Ebitda margin contraction of 150bps. We build in Ebitda margin contraction of 150bps in FY18 for the African business, as well, but we now value it at 3.5x F19e EV/Ebitda multiple. The bear case scenario value of Rs 310/share implies a 5.8x F19e EV/Ebitda multiple.