Event Update

February 16, 2010 Rating matrix

Rating Target Target Period Potential Upside : : : : Strong Buy Rs 388 12 months 36%

Bharti Airtel (BHATE)

Rs 285
WHATS CHANGED
PRICE TARGET .............................................................................................. Unchanged

Key Financials
(Rs Crore) Net Sales EBITDA Net Profit EPS FY08 27025.0 11371.5 6700.8 17.7 FY09 36961.5 15167.7 8469.9 22.3 FY10E 39410.4 16046.5 8967.1 23.6 FY11E 41262.0 16693.3 8688.6 22.9

EPS (FY10E) .................................................................................................. Unchanged EPS (FY11E) .................................................................................................. Unchanged RATING.......................................................................................................... Unchanged

Valuation summary
PE (x) Target PE (x) EV/EBITDA (x) P/BV (x) RoNW (%) RoCE (%) 16.1 22.0 9.9 5.0 30.9 24.3 12.8 17.4 7.6 3.6 27.9 24.6 12.1 16.4 6.9 2.8 23.0 20.6 12.5 17.0 6.3 2.3 18.4 18.1

Goes in for another acquisition...

After an unsuccessful attempt with MTN, Bharti Airtel has made another attempt to enter the African market. It has announced an acquisition of Zain groups 15 African assets (except Sudan and Morocco assets) for $10.7 billion. It is in exclusive talks with the Zain management till March 25, 2010. The deal is expected to be all cash and Bharti has to pay $10 billion till April, 2010. Zains African operations have a subscriber base slightly higher than 41 million. Zains performance
Rs 108199.7 Crore Rs 11880.1 Crore Rs 4916.6 Crore Rs 115163.1 Crore 518 / 270 Rs 1898.2 Crore Rs 5 3.5 18.4

Stock data
Market Capitalisation Debt-Cons. (FY09) Cash & Invst.-Cons. (FY09) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%)

Zains financial health in the near term has been weak as it has not performed well in 9MCY09 as compared to last year. The revenue for 9MCY09 stood at $2732.0 million, which declined by 10.9% YoY. EBITDA of $870 million declined 16% while the EBITDA margin stood at ~33.0%. It posted a net loss of US$112 million in 9MCY09 as compared to a net profit of US$169 million in the similar period 9MCY08. According to the Zain management, the losses were primarily due to currency fluctuation during CY09. Nevertheless, the average revenue per user (ARPU) stands higher at $7-8 as compared to $4-5 for Bharti Airtel. Also, Zain is the market leader in 10 out of the 15 countries in question and No. 2 in four other countries. African market The African markets where Zain has a presence have penetration below 40%. It is also characterised by higher proportion of prepaid subscribers, though at a higher ARPU than India.

Price movement (Stock vs. Nifty)

6,000 5,000 4,000 3,000 2,000 1,000 0 Feb-09 May-09 Aug-09 Nov-09 Nifty (L.H.S) Price (R.H.S) 600 500 400 300 200 100 0 Feb-10

Valuation
The valuation looks expensive on the face of it. Bharti valuing the African assets for $10.7 billion implies CY09E annualised EV/EBITDA of 9.2x as compared to Bhartis FY10E EV/EBITDA of 7.8x. This implies a 17.9% premium to what Bharti would be paying. Also, this is about $250-260 per subscriber while Bharti is currently trading at $190 per subscriber. However, in light of earlier deals, it may not be as expensive. The Vodafone Hutch deal happened at about $740 per subscriber. The subscriber base of Vodafone in India has grown almost four times since then. This implies $200 per subscriber at the current subscriber base of Vodafone. Hence, if similar growth is expected from Africa, this may be a fair deal in the long run. Although there would be a short-term overhang on the stock, in the medium to long term it looks positive. We maintain our target price at Rs 388 and rate the stock as STRONG BUY.

Analysts name
Karan Mittal karan.mittal@icicisecurities.com Naval Seth naval.seth@icicisecurities.com

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Bharti Airtel (BHATE)

Deal Valuation Synergies Given the similar nature of markets we expect Bharti to transplant its outsourcing model to the African units. This may result in an uptick in margins in the medium to long run. Also, there may be synergies in terms of network equipment procurement (Bharti is known to have cheapest network equipment procurement cost from the likes of Ericsson etc) Key points 1. Bharti may not get a similar opportunity in the future to expand in emerging markets since there are not many targets left. 2. Even if Nigeria does not happen this time, it may not be a deal breaker since all other 14 countries have given their consent and this deal is not as complex as MTN. 3. Bharti may raise about $1 billion in equity and would have $1.3 billion free cash flow in FY10E. It may have to take debt of $8 billion. The company has enough capacity to raise this amount. This may lead to a debt/equity ratio of 1.2x from current 0.1x. This is in line with that of multi country operators, which ranges from 0.7x to 2.7x. 4. Bharti would be catapulted to top 10 mobile operators in the world. 5. Zain had reportedly invested about $12 billion in African operations, so building a similar kind of asset would be more expensive both in terms of money and time for Bharti Airtel. Exhibit 1: Zains key metrics
Country Nigeria DRC Zambia Tanzania Gabon Ghana Malawi Niger Congo Kenya Burikina Chad Uganda Madagascar Sierra Total Mobile Subs Market ARPU (In USD) penetration (000's) share 45% 14,936 14% 3,569 33% 2,940 33% 4,764 123% 870 61% 1,208 17% 1,711 16% 1,432 75% 1,415 48% 2,191 23% 1,444 19% 1,194 35% 2,243 23% 1,425 39% 555 41,897 25% 45% 70% 39% 62% 9% 72% 67% 53% 17% 51% 70% 37% 38% 46% 47% 7 8 8 5 25 3 8 10 12 4 7 10 4 5 7 8 9mCY09 (In USD million) Revenue EBITDA EBITDA % 985.9 331.2 33.6% 244.3 50.7 20.8% 213.3 97 45.5% 207.1 79.2 38.2% 191.7 79.7 41.6% 34.5 -29.2 -84.5% 111.6 46.9 11.5% 113.3 53.1 46.9% 153.8 42.7 27.8% 117.8 13.5 11.5% 91.1 37.9 41.6% 101.1 43.7 43.2% 76.4 9 11.8% 56.7 11.9 21.0% 33.4 2.2 6.6% 2,732 870 31.8% PAT -88.3 -19.5 41.8 11.2 1.7 -74.1 21.6 27.4 8.6 -28.3 13.4 10.5 -3.6 -18.2 -15.8 -112

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Bharti Airtel (BHATE)

Outlook & Valuation Outlook

The deal looks expensive on the face of it and would be EPS dilutive in the short-term. Also, Bharti would face a tough challenge in integrating operations of 15 different counties with itself given the geo-politically sensitive nature of these countries. However, if Bharti can successfully transplant its outsourcing model in Africa we may see a significant uptick in the margin. Given the growth prospects in Africa the deal would be value accretive for Bharti shareholders in the long run. This is an excellent opportunity to enter the stock for a long-term horizon of 12-15 months.

Valuation SOTP based target price of Rs 388/ share

Assuming revenue CAGR of 8.1% over FY10FY20E and terminal growth of 3% thereon we have arrived at a target price of Rs 334/share for the core business. We value BTIL (ex-Indus) at Rs 22/share and the Indus contribution at Rs 33/share to arrive at a target price of Rs 388 per share. We have not included Zains financial in our estimates. Our target price discounts FY10E and FY11E EPS of Rs 24.6 and Rs 27.5 by 16.5x and 17.0x, respectively. The stock is currently trading at Rs 285. Our target price implies an upside potential of 36%. We maintain our rating as STRONG BUY on Bharti Airtel. Exhibit 2: DCF assumption Core Business
Rs in Crore

WACC Revenue CAGR (FY10E-20E) Present Value of Cash Flow till FY20E Terminal Growth PV of terminal cash flow PV of firm Less: Current Debt PV of the Equity (excluding cash) Number of Equity Shares outstanding Per Share Value (excluding cash) Add Current Cash Per Share (Rs) DCF - Target price (Rs)
Source: Company, ICICIdirect.com Research

11.8% 8.1% 70,027.9 3.0% 66,003.6 136,031.5 11,880.1 124,151.5 379.6 327.0 6.9 334

P/E based valuation of Rs 332/ share

Given the near term industry wide concerns we value the stock at a 5% discount to the Sensex which is trading at ~15.3x FY11 earnings. This implies a target price of Rs 332/share discounting FY11EPS by 14.5x. The stock is currently trading at 12.1x and 12.5x its FY10E and FY11E EPS, respectively. Bharti Airtel has generally been trading at a premium to the benchmark index. However, given the near term industry wide concerns we value the stock at a 5% discount to the benchmark index. The Sensex is currently trading at 15.3x FY11E earnings. We value Bharti Airtel at 14.5x FY11E EPS to arrive at a target price of Rs 332/share. This implies an upside potential of 16.5% over its current market price of Rs 285.

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Bharti Airtel (BHATE)

Exhibit 3: P/E chart

700 600 500 Rs 400 300 200 100 0 Apr-06 Apr-07 Apr-08 Jan-07 Jan-08 Jan-09 Apr-09 Jan-10 Oct-06 Oct-07 Oct-08 Oct-09 Jul-06 Jul-07 Jul-08 Jul-09

Price

PER 25

PER 20

PER 15

PER 10

PER 5

Source: Company, ICICIdirect.com Research

Exhibit 4: Valuation table

Sales Growth (Rs cr) (%) 36961.5 36.8 39410.4 6.6 41262.0 4.7 EPS Growth (Rs) (%) 22.3 26.4 23.6 5.9 22.9 -3.1 PE (x) 12.8 12.1 12.5 EV/EBITDA (x) 7.6 6.9 6.3 RoNW (%) 27.9 23.0 18.4 RoCE (%) 24.6 20.6 18.1

FY09 FY10E FY11E

Source: Company, ICICIdirect.com Research

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Bharti Airtel (BHATE)

ICICIdirect.com coverage universe

Idirect Code MCap (Rs Cr) RCOM Idirect Code MCap (Rs Cr) Idea Idirect Code MCap (Rs Cr) BHATE 108,199.7 CMP Target % Upside 285.0 388.4 36.3% FY09 FY10E FY11E 36961.5 39410.4 41262.0 Sales (Rs Cr) 22250.5 21954.1 23727.2 Sales (Rs Cr) 10131.3 12497.1 15952.0 22.3 23.6 22.9 EPS (Rs) 29.3 19.8 15.1 EPS (Rs) 2.8 2.6 3.3 12.8 12.1 12.5 PE (x) 5.9 8.7 11.4 PE (x) 20.4 22.4 17.9 7.6 6.9 6.3 EV/EBITDA (x) 7.4 7.5 7.6 EV/EBITDA (x) 8.0 6.9 6.0 27.9 23.0 18.4 RoNW (%) 14.3 8.8 6.3 RoNW (%) 6.6 6.0 7.0 24.6 20.6 18.1 RoCE (%) 6.1 4.9 4.6 RoCE (%) 6.4 6.1 7.1

RELCOM 35,428.9

CMP Target % Upside

171.7 165.2 -3.8%

FY09 FY10E FY11E

IDECEL 19,163.3

CMP Target % Upside

58.1 63.1 8.6%

FY09 FY10E FY11E

Source: Company, ICICIdirect.com Research

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Bharti Airtel (BHATE)

RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce, Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more; Pankaj Pandey Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East) Mumbai 400 093 research@icicidirect.com pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Karan Mittal MBA Naval Seth MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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