PC - Bharti Airtel Co Update - Oct 2013 -...

Please refer to Disclosures and Disclaimers at the end of the Research Report.

Bharti Airtel Africa‐ The night is darkest just before dawn

TELECOM: Company Update 22 October 2013

PhillipCapital (India) Pvt. Ltd.

Bharti Airtel’s YTD stock performance has not been inspiring despite significant improvement in the operating conditions of the Indian Telecom market. Bharti Airtel is up 12% YTD significantly underperforming Idea Cellular, which has given an astounding return of 77% YTD. A significant portion of the underperformance of Bharti Airtel can be attributed to its African operations which have disappointed on numerous occasions. The weak operating performance in Africa has led to a significant stock de‐rating and sharp cut in estimates of the international operations. Considering the muted expectations, positive surprises (especially on revenues) are likely as the macroeconomic conditions in Africa are improving. Our key reasons are as follows:

Rs 66 per share value destruction due to Africa downgrades but a reversal could be faster than expectations: We estimate that the market incorporates a negative NPV of Rs 66 for Bharti’s African operations on account of sluggish operating performance and depreciation of INR. Consensus estimates for FY15 Africa EBIDTA have been downgraded by ~40% and we believe that the downgrade cycle has largely bottomed. The African operations can see significant improvements from the current levels as the macroeconomic environment in the major revenue contributing economies is improving as indicated by waning inflation and stable GDP growth. In the most critical revenue contributing market of Nigeria inflation is at a 5 year low and growth is picking up in the non oil sectors. The competitive intensity in Nigeria is stabilizing from the peak levels of late 2012 and early 2013 when the market leader MTN slashed tariffs by ~30%. Overall for Africa, we believe that revenue growth will pick up in the forthcoming quarters but margin improvements will be protracted as Bharti will have to participate in the markets aggressively. Notwithstanding the sluggish margin improvements, we believe that Bharti can surprise the muted market expectations positively with revenue growth and a significant reversal of the negative Africa NPV is likely in the forthcoming quarters.

Bharti Infratel and DTH businesses have ample scope for value unlocking: Bharti’s DTH business EBIDTA is currently insignificant as the business is in an investment mode. On the other hand Bharti Infratel is currently undervalued on account inefficient capital structure. Improving the capital structure of Bharti Infratel and strategic stake sale or listing of the DTH business can unlock Rs 35/share value (Rs 25 per share for Bharti Infratel and Rs 10 per share for Airtel DTH) for Bharti Airtel presenting an upside of 10% from the current levels.

Best equipped for long‐term growth: Bharti has spent the most amongst all telcos and has invested Rs 205bn till date to acquire spectrum through auctions and acquisitions. The company has 3G spectrum in 13 circles and 4G spectrum in 8 circles with a footprint covering all the metros and Category A & B circles barring Gujarat & MP. We believe Bharti is the best prepared Indian telecom operator for long‐term growth driven by data services. The current discounted valuations fail to ascribe fair value to Bharti’s long‐term prospects which are significantly superior to industry peers.

Valuation discount to narrow: Bharti currently trades at EV/EBIDTA of 6.5x on FY14E EBIDTA as compared to Idea Cellular at 8.2x FY14E. We believe the discount is likely to narrow over the medium term with improvement in traction in Africa business, stabilizing of INR and revenue market share improvement in the Indian wireless market. We value Bharti at Rs 460 based on DCF methodology which entails an upside of 31% from the current levels. We maintain our conviction Buy rating on the stock.

BUY BHARTI IN | CMP RS 352

TARGET RS 460 (+31%) Company Data

O/S SHARES (MN) : 3997MARKET CAP (RSBN) : 1408MARKET CAP (USDBN) : 2352 ‐ WK HI/LO (RS) : 370 / 265LIQUIDITY 3M (USDMN) : 29.2FACE VALUE (RS) : 5

Share Holding Pattern, %

PROMOTERS : 65.2FII / NRI : 21.4FI / MF : 8.2NON PROMOTER CORP. HOLDINGS : 3.7PUBLIC & OTHERS : 1.4

Price Performance, % 1mth 3mth 1yr

ABS 2.4 4.8 29.6REL TO BSE ‐0.6 1.4 18.6

Price Vs. Sensex (Rebased values)

50

70

90

110

130

150

Apr‐10 May‐11 Jun‐12 Jul‐13Bharti BSE Sensex

Source: PhillipCapital India Research

Other Key Ratios

Rs bn FY13 FY14E FY15E

Net Sales 804 917 1,024Ebidta 249 299 335Net Profit 23 48 71EPS, Rs 5.7 12.0 17.8PER, X 61.7 29.4 19.8EV/EBIDTA, x 8.5 6.5 5.4EV/Net Sales, x 2.6 2.1 1.8ROE, % 4.2 7.9 10.0Debt/Equity (%) 134.1 104.6 84.0Source: PhillipCapital India Research Est. Naveen Kulkarni, CFA, FRM (+9122 6667 9947) [email protected] Vivekanand Subbaraman (+9122 6667 9766) [email protected]

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22 October 2013 / INDIA EQUITY RESEARCH / BHARTI AIRTEL COMPANY UPDATE

Table of Contents Rs 66/sh value destruction due to Africa sluggishness; reversal could be sharp ∙∙∙∙∙∙∙ 3

Trends in the African markets ‐ Outlook improving ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 5

Africa metrics could be better than muted expectations ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

Market 1: Nigeria – back on growth track ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 8

Nigeria cost structure likely to stabilize over the next 12 months ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 13

Market 2: DRC – penetration gains; the key long term story for Bharti ∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 15

Market 3: Zambia – Large and profitable market ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 18

Market 4: Gabon – Small but most profitable market ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 20

Market 5: Tanzania – Large market with immense growth potential ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 22

Market 6: Ghana – Gaining ground ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 25

Our estimates for Africa are conservative and largely in‐line with consensus ∙∙∙∙∙∙∙∙∙ 27

Significant scope for value unlocking in Infratel; Estimate Rs 25 value unlocking ∙∙∙∙ 28

Value unlocking of ~Rs 10 from the DTH business ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 29

High quality spectrum footprint ensures better long‐term growth prospects ∙∙∙∙∙∙∙∙∙ 30

Implied valuation according to current market price ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 32

Fair Value Calculation ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 33

Appendix ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 35

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Rs 66 per share value destruction due to Africa sluggishness but a reversal could be faster than expectations: Bharti’s foray into Africa with the acquisition of Zain Africa operations in 2010 has led significant equity value erosion and de‐rating. We estimate the value destruction on account of African operations at ~US$4.4bn translating to a per share burden of Rs 66. We have estimated the value destruction based on a NPV calculation; valuing the African operations at 5.5x EV/EBIDTA on FY14E EBIDTA. The negative NPV translates to 16% of the stock value at current levels. Bharti’s African operations are significantly below management’s expectations. The sharp downward revision estimates for Airtel Africa, lowering of valuation multiple for the African operations coupled sharp rupee depreciation have been the primary contributing factors for the de‐rating of the stock. Immense value destruction due to Africa…

‐70

‐60

‐50

‐40

‐30

‐20

‐10

0

10

Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

NPV (Rs/share)

Source: PhillipCapital India Research Estimates

We have charted the NPV impact of Bharti’s Africa foray over the last 24 months. The expectations for the African operations at the beginning of FY12 when the African market growth rate was reasonably strong were of positive a NPV (~Rs 5bn) with FY15E consensus EBIDTA at US$ 2.2bn. The NPV for African operations has nose dived on account of sharp cut in consensus estimates and we believe that the valuation multiple has also been reduced.

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Weak rupee has further aggravated stock price pain In US$ bn Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

FY14 EBITDA consensus estimate 1.8 1.8 1.6 1.3 1.4 1.3 1.3 1.2Multiplier 6.0 6.0 6.0 6.0 5.5 5.5 5.5 5.5Debt 10.7 10.7 10.7 10.7 10.7 10.7 10.7 10.7EV 10.8 10.8 9.6 7.8 7.7 7.2 7.2 6.3NPV 0.1 0.1 (1.1) (2.9) (3.0) (3.6) (3.6) (4.4)Assumed exchange rate (1 US$ = ? INR) 45.0 45.0 48.0 48.0 55.0 54.5 54.5 60.0NPV (Rs bn) 4.5 4.5 (52.8) (139.2) (165.0) (193.6) (193.6) (262.5)NPV (Rs/share) 1 1 (13) (35) (41) (48) (48) (66)

Source: Bloomberg, PhillipCapital India Research Estimates

We note that the cut in FY14E and FY15E EBIDTA estimates have been cut by ~40% over the last 24 months. The sharp reduction in estimates has been on account of not only sluggish but also inconsistent revenue and cost structure growth. While cost control will continue to remain elusive, we believe that visibility for revenue growth is likely to improve significantly in the forthcoming quarters. Growth is in a revival stage in FY14 in many of the major African markets and the telecom industry will benefit immensely from the same.

Massive EBITDA downgrades by consensus (% change) Massive EBITDA downgrades by consensus (US$bn)

60%

65%

70%

75%

80%

85%

90%

95%

100%

105% EBITDA ‐ FY14E

EBITDA ‐ FY15E

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400 FY14 ‐EBITDA

FY15 ‐EBITDA

Source: Bloomberg, PhillipCapital India Research Estimates

The major African markets have been reeling under pressure in FY13 on account of very high inflation and uncertain political environment. While political uncertainty could continue to persist in many of the African economies but inflation rate has come down significantly in the major economies. Nigeria is the largest telecom market in Africa (in terms of number of subscribers) and contributes to 35% of the African revenues for Bharti Airtel. The Nigerian economy has started improving and regulation in the country is pro challengers. We believe improvement in growth in Nigeria will translate to significant improvement in African metrics.

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Trends in the African markets ‐ Outlook improving FY13 saw a slowdown in Bharti’s Africa revenue growth Bharti Airtel’s constant currency revenue growth slowed down significantly in FY13 to 10% YoY as compared to 29% YoY in FY12. The revenue growth is slightly understated when one looks at the US$ revenue growth on account of the marginal depreciation of the African currency basket against the US$. Bharti Airtel acquired Zain’s African operations in FY11. The under investment by Zain and integration challenges led to slower growth in revenues in FY11 but the revenue growth in FY12 was strong.

Bharti’s LC growth has slowed down

‐12%

12%

‐2%‐4%

3%

‐9%

17%

29%

23%

7%10%

21%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

US$ rev. grwth Local curr. Rev. growth Rupee rev. grwth

FY10 FY11 FY12 FY13

Source: Company, PhillipCapital India Research

There has been a marginal depreciation in African currencies against the US$ We analyse Bharti’s African currency revenue basket. While major African currencies have remained stable, some countries such as Malawi & Ghana have witnessed sharp currency depreciation in FY13.

Bharti’s LC growth has slowed down Rs mn FY13 Language % of Airtel ____________ Revenue growth ____________ ____Currency mov't against US$____ Revenue Africa rev FY12 (LC) FY13 (LC) FY12 (INR) FY13 (INR) FY11 (LC) FY12 (LC) FY13 (LC)

Nigeria 81,563 Anglo 35% 26% 8% 25% 25% ‐1% ‐4% ‐1%Zambia 17,056 Anglo 7% 17% ‐16% 18% 18% 1% ‐3% ‐4%Kenya 9,583 Anglo 4% 16% 15% 6% 6% ‐5% ‐10% 5%Ghana 12,417 Anglo 5% 56% 54% 47% 47% 0% ‐9% ‐16%Uganda 7,715 Anglo 3% 61% 28% 42% 42% ‐10% ‐11% ‐1%Sierra Leone 4,425 Anglo 2% 78% 27% 66% 66% ‐12% ‐7% 1%Malawi 3,839 Anglo 2% 11% ‐31% 9% 9% ‐5% ‐6% ‐46%Rwanda 147 Anglo 0% NM NM NM NM NM NM NMDRC 21,568 Franco 9% 40% 3% 41% 41% ‐6% ‐1% 0%Gabon 15,345 Franco 7% 39% ‐21% 48% 48% ‐7% 4% ‐6%Tanzania 14,280 Franco 6% 26% 7% 17% 17% ‐10% ‐8% 1%Congo B 10,907 Franco 5% 3% 17% 10% 10% ‐7% 4% ‐6%Burkina Faso 9,949 Franco 4% 15% 25% 23% 23% ‐7% 4% ‐6%Niger 9,611 Franco 4% ‐7% 15% ‐1% ‐1% ‐7% 4% ‐6%Chad 6,587 Franco 3% ‐13% 22% ‐7% ‐7% ‐7% 4% ‐6%Madagascar 4,787 Franco 2% ‐2% 9% 4% 4% ‐3% 1% ‐7%Seychelles 952 Franco 0% 49% 23% 49% 49% 1% ‐4% ‐4%

TOTAL 230,731 100% 26% 9% 23% 16% ‐4% ‐3% ‐4%

Source: Company, Bloomberg, PhillipCapital India

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Divergent profile in revenue growth due to country factors, withdrawal of handset sales Analyzing the constant currency growth data, we find a wide divergence in local currency revenue growth of Bharti in its African footprint. In several countries, the company was generating a substantial portion of revenue from handset sales, a practice that the company has phased out (H2 2012), leading to a decline in sales. Additionally, markets such as DRC, Tanzania, Nigeria have seen regulatory intervention and actions by market leaders (30%+ price cut by MTN in Nigeria) impacting revenue growth.

Bharti Airtel – Africa business local currency revenue growth

‐31%‐21%

‐16%

3%7% 8% 9% 10%

15% 15% 17%22% 23% 25% 27% 28%

54%

‐40%

‐20%

0%

20%

40%

60%

80%

100% FY12 (LC) FY13 (LC)

. Source: Company, PhillipCapital India Research

However, we also highlight that several markets continue to see strong (>20% YoY) revenue growth – Chad, Seychelles, Burkina Faso, Sierra Leone, Uganda & Ghana; implying that the company has done well in these markets and possibly gained ground. Economic growth profile is improving: Bharti’s African footprint has been witnessing persistent double digit CPI inflation for the past five years, and the same has had a negative impact on non‐food spends of consumers. However, IMF’s outlook on CPI seems to be sombre and the same is witnessing a downward trajectory. We believe that decline in CPI is a significant booster of consumer sentiments and the consumer confidence will rise over the medium term. This will revive consumer spending and will positively help the telecom sector.

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Inflation subsiding in Airtel’s African markets CPI Inflation (%) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Nigeria 11.6% 12.5% 13.7% 10.8% 12.2% 9.9% 8.2% 7.0% 7.0% 7.0% 7.0%Zambia 12.4% 13.4% 8.5% 8.7% 6.6% 7.1% 7.3% 6.5% 5.8% 5.5% 5.5%Kenya 15.1% 10.6% 4.3% 14.0% 9.4% 5.4% 5.0% 5.0% 5.0% 5.0% 5.0%Ghana 16.5% 19.3% 10.7% 8.7% 9.2% 11.0% 9.8% 8.2% 7.5% 7.2% 7.0%Uganda 12.0% 13.1% 4.0% 18.7% 14.0% 5.0% 4.9% 5.1% 5.3% 5.2% 5.0%Sierra Leone 14.8% 9.2% 17.8% 18.5% 13.8% 10.3% 7.7% 6.7% 5.7% 5.4% 5.4%Malawi 8.7% 8.4% 7.4% 7.6% 21.3% 26.0% 8.4% 6.2% 4.7% 4.1% 4.1%Rwanda 15.4% 10.3% 2.3% 5.7% 6.3% 5.7% 6.8% 5.8% 5.3% 5.0% 5.0%DRC 18.0% 46.2% 23.5% 15.5% 2.1% 4.4% 6.0% 6.0% 6.0% 5.8% 5.5%Gabon 5.3% 1.9% 1.4% 1.3% 2.7% ‐1.5% 2.5% 2.5% 2.5% 2.5% 2.5%Tanzania 10.3% 12.1% 7.2% 12.7% 16.0% 8.5% 5.8% 4.9% 4.9% 4.9% 4.9%Congo B 6.0% 4.3% 5.0% 1.8% 5.0% 5.3% 2.8% 2.8% 2.8% 2.7% 2.6%Burkina Faso 10.7% 2.6% ‐0.6% 2.8% 3.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%Niger 10.5% 1.1% 0.9% 2.9% 0.5% 2.1% 2.7% 1.1% 1.4% 1.6% 1.9%Chad 8.3% 10.1% ‐2.1% 1.9% 7.7% 2.6% 3.9% 3.0% 3.0% 3.0% 3.0%Madagascar 9.2% 9.0% 9.3% 10.0% 5.8% 6.9% 7.3% 6.0% 5.5% 5.0% 5.0%Seychelles 37.0% 31.7% ‐2.4% 2.6% 7.1% 4.9% 3.4% 3.0% 3.0% 3.0% 3.0%

Blended CPI 13.2% 14.7% 10.8% 10.6% 9.8% 7.8% 7.0% 6.1% 5.9% 5.8% 5.7%

Source: IMF, PhillipCapital India Research

Shaded area represents IMF estimates

Top‐6 markets account for 70% of revenue We analyse the operating environment for Airtel’s top‐6 African markets, which together account for 70% of its Africa revenue. Below is a summary of these markets.

Top 6 market status – Airtel Africa In Rs bn. FY13 Bharti Africa Market share Mobile Market ___Revenue___ _____PBT_____ _____PAT_____ Competitors Country Rev. contribution (estimate) penetration position (#) FY12 FY13 FY12 FY13 FY12 FY13

Nigeria 35.3% 18% 69% 3 67.0 81.6 (6.2) (9.4) (6.0) (6.2) Etisalat, Glo & MTN DRC 9.3% 23% 28% 2 18.3 21.6 (3.5) (1.9) (3.5) (1.9) Tigo, Vodacom, Orange, Africell Zambia 7.4% 45% 78% 1 18.8 17.1 6.0 2.4 3.0 1.4 MTN, Zamtel Gabon 6.7% 62% 180% 1 18.3 15.3 5.4 4.0 4.2 2.3 Libertis (Maroc) Tanzania 6.2% 32% 55% 2 11.6 14.3 (3.7) (1.9) (2.9) (1.5) Tigo, Vodacom, Zantel (Etisalat) Ghana 5.4% 15% 76% 2 8.4 12.4 (5.0) (5.6) (3.5) (4.2) MTN, Tigo, Vodafone

Source: Company, Regulators, Tigo, Vodacom, MTN, Maroc Telecom

We find that the revenue weighted GDP growth rate for the top 6 markets is robust and more importantly inflation in these economies is closer to the 5 year lows. This will improve consumption growth in the forthcoming quarters and we believe that FY14 and FY15 will be significantly better than FY13 which saw significant pressure on revenue growth and volatile margins. Bharti’s key markets are also expected to see better growth and subsiding inflation ____________2014E____________ ____________2015E____________

Nominal GDP

growthReal GDP growth

CPI Inflation

Nominal GDP growth

Real GDP growth

CPI Inflation

Nigeria 13.0% 7.3% 8.2% 9.4% 6.9% 7.0%DRC 14.5% 10.5% 6.0% 15.4% 10.2% 6.0%Zambia 14.5% 6.5% 7.3% 12.7% 6.0% 7.0%Gabon 4.9% 6.8% 2.5% 3.7% 7.0% 2.5%Tanzania 13.2% 7.2% 5.8% 10.9% 7.0% 4.9%Ghana 18.3% 6.1% 9.8% 16.1% 5.5% 8.2%

Blended growth 13.3% 8.3% 7.0% 11.7% 8.1% 6.1%

Source: IMF, National Bureau of Statistics Nigeria

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Africa metrics could be better than muted expectations We believe the muted market expectations are not taking into consideration the improving macroeconomic environment in Africa and the market structure in various Africa which is competitive but not hyper competitive. Most markets in Africa are 3‐5 player market and Bharti Airtel’s median rank is of number 2 operator. This ensures long‐term profitability in most markets. Bharti Airtel is also taking the requisite steps to improve the management quality and structure in Africa. The company has recently appointed Mr. Christian De Faria as the new head of African operations to be effective from 1st January 2014. Mr. Christian De Faria has 30 years of telecom experience across organizations such as MTN, Telekom Malaysia, Deutsche Telecom and Grundig. Airtel is also de‐centralising decision making for various countries in Africa to ensure faster decisions which will help in reducing the time to market. We believe Airtel is taking the right steps to improve revenue growth in Africa, the potential for which remains immense. Hence, we believe that with an improving macroeconomic environment and critical changes in the management structure, revenue growth could be significantly better than expectations in FY15E. Positive surprises from the African operations will translate to significant and faster improvement in the NPV for the venture as it is a leveraged buyout. In this section we outline the key markets and have observed that most markets are returning back to a growth path after a tough last twelve months.

Market 1: Nigeria – back on growth track Nigeria is the largest market for Airtel Africa contributing 35% of the African revenues. The Nigerian telecom market is one of the most important growth engines for the economy contributing ~8% of the country’s GDP.

Nigeria’s wireless market at ~US$ 8bn is the 1/3rd the size of the Indian telecom market. The Nigerian telecom market de‐grew in CY12 as MTN slashed tariffs by almost 30% to protect its market share in anticipation of introduction of mobile number portability. Bharti Airtel grew by 8% (in local currency) in spite of the market de‐growth which is indicative of the company’s competitiveness. Summary of recent developments in Nigeria Timeline Event

H2 2012 Economy hit by devastating floods Q3 2012 Aggressive price action by MTN (30% tariff reduction) Q4 2012 Ban on promotional offerings after sharp rate cut by MTN Q1 2013 Removal of fuel subsidies Q2‐Q3 2013 Strike in several states in North‐Nigeria; telecom services shutdown in 3 states Mar‐13 Regulator announces MTR cut of 40% Apr‐13 Regulator launched MNP Ban on promotional offerings lifted Jul‐13 2 states reconnected


Regulation is pro‐challengers The regulation in Nigeria is pro challengers as the regulator has reduced mobile termination rates (by 40%) and introduced MNP. These regulations are helpful for the challengers like Bharti Airtel and Etisalat which can gain significant market share from the market leader. The regulator has also provided a level playing field for all the GSM

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operators by providing a total 20MHz of spectrum which comprises of 15MHz in 1800MHz band and 5MHz in the 900MHz band.

At $8bn, the Nigerian telecom market is almost a third of that of India The voice market has witnessed disruption on account of aggressive pricing by MTN in response to the reduction in MTR. Etisalat expects the voice market to grow at a muted 2% CAGR from 2012‐2017, while the overall telecom sector revenues are projected to grow at 5.3% CAGR during the same period on account of sharp growth in data services. This will entail a significantly higher EBIDTA growth over the period for the industry as data revenues have significantly higher margins than voice business. Etisalat Nigeria Telecom market estimates

6.8 6.3 6.7 7.1 6.8 7.1 7.2 7.3 7.6 7.5

0.2 0.6 0.4 0.5 0.6

0.8 1.0 1.3 1.7 2.1

7.0 6.6 7.1 7.6 7.4

7.9 8.2 8.6

9.3 9.6

‐

2.0

4.0

6.0

8.0

10.0

2008A 2009A 2010A 2011A 2012E 2013E 2014E 2015E 2016E 2017E

Voice & SMS Data

Source: Etisalat, PhillipCapital India Research

We believe that Etisalat’s estimates (presented in end of CY12) are very conservative as the GDP growth rate in Nigeria is reviving, particularly in the non crude industry. It is also to be noted that Nigeria continues to remain a 4 player market and competitive intensity in the market is not particularly high. The HHI for the Nigerian market indicates a highly concentrated market and all the 4 players can be reasonably profitable in such an environment. Hirschman‐Herfinadahl Index: Nigeria vs. India (increase implies lower competition)

28.4% 28.7% 28.5% 28.3%30.4%

15.4%14.0% 13.6% 14.5% 14.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2009 2010 2011 2012 H1CY13

HHI Nigeria HHI India

Source: Nigeria Communications Commission (NCC), Company, PhillipCapital India Research

– 10 of 39 –


It is also interesting to note that the HHI index has actually risen over last 4 years notwithstanding aggressive investments by the challengers (in particular Etisalat). The rise in HHI index has been on account of the market leader MTN consolidating its position by aggressive investments and tariff cuts. We believe that the market will continue to remain competitive but not hyper competitive and the scope for penetration led growth will continue to remain high. Thus, growth in the market with revival in macro economic environment can surprise positively.

Airtel has managed to hold on to its revenue share amidst high competition Airtel has held on to its market standing amidst intensifying competition

#4 player Etisalat has been aggressively investing the market and has gained ground at the cost of smaller operators

Stable market share for the top‐3 players MTel and other CDMA operators have lost revenue market share

Subscriber market share of operators in Nigeria Revenue market share of Airtel in Nigeria

52.2, 45%

22.8, 20%

21.1, 18%

15.5, 14%3.2, 3%

Subs in mn ‐ Jul'13

MTN Glo Airtel Etisalat Others & CDMA

1.6

1.3 1.2

1.4 1.5

23%

20%

17%

19%21%

0%

5%

10%

15%

20%

25%

‐

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2008A 2009A 2010A 2011A 2012E

Revenue (US$ bn) Market share

Source: Etisalat, Company, NCC

– 11 of 39 –


Ample scope for data revenue growth: The data business is expected to grow at a 29% CAGR from 2012‐17; driving mobile revenue growth. Etisalat estimates that the internet penetration of Nigeria is at 28% and as of H1 2013, 40% of the mobile subscribers consume data. 3G is at a nascent stage and managements’ commentary indicates significant scalability potential. Smartphone penetration too is at its infancy; with MTN estimating that 5.3mn (10% as of June 2013) of its users have smart‐devices. However, the encouraging trend is that 4.3mn of these users (81%) are 3G subscribers.

Proportion of operator’s subscribers using data Airtel's market share in data similar to than that in voice (Jul 13, mn subs)

45% 43%40%

36%34%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

MTN Airtel Total Globacom Etisalat

MTN Airtel Total

9.3 , 18%

5.4 , 11%

9.9 , 20%

25.9 , 51%

Airtel

Etisalat

Globacom

MTN

Source: Etisalat, MTN, Company, PhillipCapital India Research

Airtel is doing reasonably well in data; its subscriber market share in mobile data users is comparable to that of its voice subscriber market share. Additionally Airtel also has 2mn 3G users, which represent 22% of its total data subscribers (the corresponding number for MTN is 17%).

About Nigeria Nigeria is the largest African telecom market (by subscribers) with a population of 169mn and a mobile penetration of 69%.

Macro‐economic snapshot – Nigeria Telecom now contributes to 8.5% of Nigeria’s GDP Data‐point

Population 169.1Population under 25 years 63.1%Population growth 2.8%CPI inflation 12.2%Real GDP growth 6.6%Real per‐capita GDP growth 3.7%ARPU ($) 6.5Wireless subs 114.8Real mobile penetration 69%No. of players with 1mn+ subs. 4

Source: IMF, Company

Source: Company, NBS, IMF, PhillipCapital India Research

0.6%

8.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0% Telecom contribution to GDP

– 12 of 39 –


Strategic Focus and Positioning of players MTN Airtel Glo Etisalat

Launch year 2001 2001 2003 2007Subscribers (mn) 47.4 19.6 18.8 13.9Market Share (%) 47.6 19.6 18.9 13.9Shareholders MTNI (78.8%), Private

(21.2%)Airtel (79.1%), Private

(20.1%)100% Local EMTS (40%) Mubadala

(30%) PTHL (30%)

Source: Company

MTN: MTN is the clear market leader with a subscriber market share of 48%. The company is considered to be one of the most innovative companies in Africa. The company has Pan Nigerian network coverage. Airtel: Bharti Airtel entered Nigeria in 2010 with the acquisition of Zain’s established operations. Airtel is considered to be the price leader and has a disruptive pricing strategy. The company had cut tariffs by as ~60%. Airtel now has an aggressive data focus with 3.5G network in all the 36 major cities /state capitals in Nigeria. Etisalat: The Company started operations in 2007 and has aggressively expanded its footprint. The company is perceived to offer the best data experience across the country. The company has pioneered flat/unitary tariff as a late entrant and has consistently leveraged this for growth and market attraction. Globacom: The Company offers the lowest rate in the market, with on‐net CUG rate that is as low as 2 cent/min. Globacom has established itself as a truly Nigerian brand with a strong local appeal and reinforced by localized propositions.

– 13 of 39 –


Nigeria cost structure likely to stabilize over the next 12 months In this section we analyse the cost structure for the Nigerian operations of Bharti Airtel and MTN. MTN’s EBIDTA margins in Nigeria were 58.3% in CY12 are one of the best margins across telecom companies worldwide. The EBIDTA margins for MTN in Nigeria have been under pressure in the last 2 years on account of rising competitive intensity and pro challenger regulations which included reduction in mobile termination rates and introduction of mobile number portability. The sharp cut in tariffs resulted in decline in revenues but increase in interconnect costs on account of increase in minutes of usage. This translated in Net revenue margin decline of 240bps YoY while EBIDTA margins while EBIDTA margins declined by 250bps.

MTN Nigeria revenue and cost structure MTN cost analysis (NGN mn) 2011 2012 Comment

Revenue (a) = (1)+(2)+(3)+(4) 757,978 753,578 O/w: Airtime & subscription (1) 595,600 537,900 % of revenue 78.6% 71.4% O/w: interconnect income (2) 91,700 92,300 Earned on incoming off‐net calls % of revenue 12.1% 12.2% O/w: data income (3) 59,600 105,800 % of revenue 7.9% 14.0% O/w: other income (4) 11,100 17,500 Includes VAS, handset & accessories income % of revenue 1.5% 2.3% Cost of revenue (b) = (5)+(6) 135,800 153,000 Includes MTR cost & statutory charges % of revenue 17.9% 20.3% O/w: interconnect costs (5) 49,000 66,800 Linked to off‐net outgoing calls % of revenue 6.5% 8.9% O/w: Other statutory charges (6) 86,800 86,200 Revenue share charges % of revenue 11.5% 11.4% Net Revenue 622,178 600,578 % of revenue 82.1% 79.7% Growth Other opex (c) = (7)+(8)+(9)+(10)+(11) 154,100 160,900 % of revenue 20.3% 21.4% O/w: facilities cost (7) 38,900 42,100 Linked to number of BTS' deployed % of revenue 5.1% 5.6% BTS (2G) 7,046 8,457 BTS (3G) 2,074 3,250 Running cost/mo (NGN) 410,858 375,275 Facilities cost of 3G BTS assumed to be 60% of that of 2G BTS Running cost/mo (Rs) 122,989 126,189 O/w: maintenance (8) 19,000 18,000 % of revenue 2.5% 2.4% BTS (2G) 7,046 8,457 BTS (3G) 2,074 3,250 Running cost/mo (NGN) 200,676 160,450 Maintenance cost of 3G BTS assumed to be 60% of that of 2G BTS Running cost/mo (Rs) 60,072 53,952 O/w: marketing (9) 19,600 17,200 Semi Fixed cost % of revenue 2.6% 2.3% O/w: professional fees (10) 33,600 33,800 Semi Fixed cost % of revenue 4.4% 4.5% O/w: others (11) 43,300 50,100 Includes staff, admin, leasing, admin & others % of revenue 5.7% 6.6% EBITDA 468,078 439,678 % of revenue 61.8% 58.3%

Source: MTN

– 14 of 39 –


It is important to note that while competitive intensity has increased and has resulted in lower gross margins, the impact on marketing and other costs has not been substantial and the company has managed to mitigate the impact of lower tariffs to some extent by judiciously managing its discretionary marketing spends. This indicates that telecom companies in Nigeria can manage their cost structure to some extent.

Airtel Nigeria could see margins improving from FY15E onwards: We have estimated the cost structure for Bharti Airtel based on MTN’s cost structure in Nigeria. We estimate that Airtel’s margins in Nigeria are significantly lower than the company’s margins for Africa as a whole and EBIDTA margins have declined further in CY12 on account of tariff cuts by the market leader. We believe that EBIDTA margins will at best stabilize in CY13 as pressure on tariffs continues to persist which is impacting the gross margins. While there is pressure on tariffs, we expect revenue growth to pick up in CY13 and sustain in CY14. This will help in lead to margin improvements from CY14.

Airtel P&L analysis (NGN mn) 2011E 2012E 2013E 2014E 2015E 2016E

Revenue 223,908 242,561 268,784 295,323 324,134 350,517 Growth (%) 26.0% 8.3% 10.8% 9.9% 9.8% 8.1%Minutes growth 15.6% 6.6% 6.6% 5.7%Incremental revenue 46,150 18,653 26,223 26,538 28,812 26,383 Variable cost 62,319 73,590 83,724 90,264 97,280 103,723 Growth 18.1% 15.6% 6.6% 6.6% 5.7%% of revenue 27.8% 30.3% 31.1% 30.6% 30.0% 29.6%Interconnect costs 36,679 45,813 52,944 56,445 60,161 63,583 Growth 24.9% 15.6% 6.6% 6.6% 5.7%% of revenue 16.4% 18.9% 19.7% 19.1% 18.6% 18.1%Other statutory charges 25,641 27,777 30,780 33,819 37,118 40,140 Growth 8.3% 10.8% 9.9% 9.8% 8.1%% of revenue 11.5% 11.5% 11.5% 11.5% 11.5% 11.5% Net revenue 161,589 168,971 185,060 205,058 226,855 246,795 Growth 4.6% 9.5% 10.8% 10.6% 8.8%% of revenue 72.2% 69.7% 68.9% 69.4% 70.0% 70.4%Total network cost 32,868 32,286 34,543 35,541 36,371 36,841 Growth ‐1.8% 7.0% 2.9% 2.3% 1.3%% of revenue 14.7% 13.3% 12.9% 12.0% 11.2% 10.5%Cost per site/mo (NGN) 611,534 535,725 519,653 493,671 478,861 464,495 2G sites 3,929 4,148 4,448 4,648 4,748 4,848 3G sites 1,411 1,869 2,269 2,569 2,869 3,169 Site addition ‐ 2G 232 220 300 200 100 100Site addition ‐ 3G 600 458 400 300 300 300 Employee cost 17,695 18,135 19,404 20,569 21,597 22,677 Growth 2.5% 7.0% 6.0% 5.0% 5.0%% of revenue 7.9% 7.5% 7.2% 7.0% 6.7% 6.5% Marketing & other costs 51,593 58,021 63,823 70,206 77,226 84,949 Growth 12.5% 10.0% 10.0% 10.0% 10.0%% of revenue 23.0% 23.9% 23.7% 23.8% 23.8% 24.2% Total opex 164,476 182,033 201,495 216,579 232,474 248,189 Growth 10.7% 10.7% 7.5% 7.3% 6.8%% of revenue 73.5% 75.0% 75.0% 73.3% 71.7% 70.8% EBITDA 59,432 60,529 67,290 78,743 91,661 102,329 Growth 1.8% 11.2% 17.0% 16.4% 11.6%% of revenue 26.5% 25.0% 25.0% 26.7% 28.3% 29.2%

Source: PhillipCapital India Research Estimates

– 15 of 39 –


Based on our hypothesis of the cost structure in Nigeria, we believe the pressure on fixed costs and marketing costs is not very high and margins can improve with efficiency gains in managing the SG&A and network costs better. Our expectation of margin improvements is conservative and the company can surprise positively with margin gains from FY15 onwards.

Market 2: DRC – penetration gains; the key long term story for Bharti Democratic Republic of Congo (DRC) is the second largest market for Airtel Africa contributing 9.3% of the company’s African revenue. DRC is Africa’s fourth‐largest country with a population of 72mn. Telecom penetration is at a nascent stage in DRC, with the real telecom penetration estimated at just 28%. Airtel is the second largest operator with Vodacom being the market leader, while Africell, Orange and Tigo are challengers. The stark under penetration and ensuing opportunity recently attracted Africell, which entered the market in November 2012. Airtel has lost out significantly to Africell with its subscriber market share dipping from 29% in 2011 to 23% in Q1 2013. Outlook – Penetration opportunity available, however, competition is escalating. The silver lining in Airtel’s performance during 2012 is the halving of its PAT loss despite revenue growth of only 3% (assisted by regulatory factors – floor tariff introduced). We believe that the company will be able to take corrective action and hold on to its market share. Given the robust economic prospects of DRC and the penetration opportunity, we believe that the market can deliver steady growth for a sustained period. Data‐points

Population 72Population under 25 years 64.8%Population growth 3.0%CPI inflation 2.1%Real GDP growth 7.2%Real per‐capita GDP growth 4.0%ARPU ($) 3.9 Wireless subs 114.8Real Telecom Penetration 28%No. of players 5


Summary of events Regulatory intervention has led to strong profitability due to tariff floor of USc 8/min. Millicom’s annual report (2012) says that • Tower sharing is already in place with Airtel, Tigo & others participating. • Imposition of taxes in DRC has resulted in reduced purchasing power

Timeline Event

Apr‐12 Regulator had set up a floor price of US¢ 8/min to avoid dilution of revenues Jul‐12 3G licences alloted to Africell, Airtel, Tigo & Vodacom Nov‐12 Entry of 5th mobile operator – Africell Q1 2013 Floor price of US¢ 8/min continues for another quarter Q2 2013 Airtel launches 3G in DRC Regulatory extended decision to extend the floor price ruling for another 3 months to Sep'13

– 16 of 39 –


Airtel has lost out to new entrant, Africell Africell entered the market in November 2012 and has an aggressive strategy of subscriber acquisition. While the mobile penetration in DRC is low at just 20%, DRC is one of the poorest and most under developed countries in the world with an extremely low human development index. Mobile penetration will increase over a medium term as economic conditions improve. DRC is one of the fastest growing countries in Africa.

Movement of subscriber market share Subscriber details – 1Q 2013 (in mn)

30% 31% 29% 29%30% 29% 27%

24% 23%

5% 9%

0%

20%

40%

60%

80%

100%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Vodacom Airtel Tigo Orange Africell

11.2 , 42%

6.1 , 23%

4.5 , 17%

2.4 , 9%

2.4 , 9%

Vodacom Airtel Tigo Orange Africell

Source: Africell, PhillipCapital India Research

Revenue growth had slowed down significantly in CY12 to a mere 3% on account of rise in competitive activity. We believe this impact of rise in competitive activity is temporary as scope for penetration led growth is immense. We believe will return high growth rates in the forthcoming quarters.

Airtel’s revenue movement Revenue growth impacted by entry of competition

165

213

259 258

361 371

‐

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012

Revenue (CDF bn)

29%

21%

‐1%

40%

3%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2008 2009 2010 2011 2012

Growth


In spite of slowdown in revenue growth in CY12, Bharti Airtel has managed to reduce its losses significantly. We believe that Bharti has managed to curtail losses by reducing its participation in the market.

– 17 of 39 –


Regulatory factors have aided reduction in PAT losses for Airtel

(139)

(70)(33)

258

361 371

(200)

(100)

‐

100

200

300

400

2010 2011 2012

PAT Revenue


Note: non‐operating income is minimal for DRC as FX fluctuation has been limited

The macroeconomic environment is turning benign with improving prospects of GDP growth and decline in inflation. Inflation in DRC is closer to 5 year lows and real GDP growth will pick up in the years ahead. This will enable penetration led growth in the market. It is also important to note that DRC is a 5 player market and Bharti is the number 2 player in the market. We believe there is substantial scope for Bharti Airtel to gain market share as well as improve profitability in the forthcoming quarters.

Strong real GDP growth outlook with benign CPI Evolution of real mobile penetration in DRC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Real GDP growth CPI inflation

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010 2011 2012 2Q13

Source: IMF, Vodacom, Africell, PhillipCapital India Research

– 18 of 39 –


Market 3: Zambia – Large and profitable market Zambia is the third largest and the second most profitable market for Bharti Airtel with a revenue contribution of 7.5% of the total African revenues in CY12. Zambia is a three player market and Airtel is the market leader. Data‐points

Population 14.5 Population under 25 years 66.2%Population growth 2.4%CPI inflation 6.6%Real GDP growth 7.3%Real per‐capita GDP growth 3.9%Wirless subs 10.5Real mobile penetration 78%No. of players 3


We find the company’s operating performance has lagged its peers as it has lost significant market share from 53% to 45% in CY12. Zambia has high penetration of mobile services at 78%.

Market share movement – Zambia (subs in mn)

4.2 , 53%2.7 , 34%

1.0 , 13%

2011

Airtel

MTN

Zamtel

4.7 , 45%

4.1 , 39%

1.7 , 16%

2012

Airtel

MTN

Zamtel

Source: Media reports, PhillipCapital India Research

Zambia is facing macroeconomic headwinds on account of rising inflation but GDP growth rate is expected to pick up from CY14 onwards. We do not expect inspiring growth for Zambia operations as the market has high degree of penetration and Bharti has limited room to gain market share.

– 19 of 39 –


Focus charts

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Real GDP growthCPI inflation

1.7

2.6 3.5

4.4

5.4

8.2

10.5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

‐

2.0

4.0

6.0

8.0

10.0

12.0

2006 2007 2008 2009 2010 2011 2012

Subscribers (mn) ‐ LHS

Mobile Penetration ‐RHS

Source: IMF, Company, MTN, PhillipCapital India Research

We believe the Zambia operations will continue to remain one of the most profitable operations for Airtel in Africa on account dominant market share and concentrated market structure.

Financial metrics (amounts in ZWK mn)

32%

14%10%

17%

‐13%‐20%

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

‐

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012

Revenue ‐ LHS

Growth ‐RHS

1,671

1,964

1,642

258 361 371

‐

500

1,000

1,500

2,000

2,500

2010 2011 2012

Revenue PAT


– 20 of 39 –


Market 4: Gabon – Small but most profitable market Gabon is Bharti’s most profitable African operation. Gabon is a very small country with highly penetrated market and high degree of competitive intensity as it is a 4 player market. Data‐points

Population 1.6Population under 25 years 62.4%Population growth 1.5%CPI inflation 2.7%Real GDP growth 5.6%Real per‐capita GDP growth 4.0%Wirless subs 2.4Wireless teledensity 180%No. of players 4


Bharti’s revenue has declined in the market as the company has stopped handset bundling. Also, the regulator has interfered with pricing which has had impact on revenue growth. We do not expect inspiring revenue growth from Gabon as it has very high wireless tele density and scope for further penetration remains low.

Financial metrics (CFA bn)

‐

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012

Revenue (CFA bn)

134

185

147

(38)

42

22

(50)

‐

50

100

150

200

2010 2011 2012

Revenue PAT


– 21 of 39 –


Arch rival Libertis sees strong revenue growth… …while Airtel falters

‐

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

2011 2012

Libertis Airtel

37%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

2008 2009 2010 2011 2012

LC revenue Growth

Source: Company, Libertis, PhillipCapital India Research

Macro‐economic trends remain strong

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Real GDP growth CPI inflation


– 22 of 39 –


Market 5: Tanzania – Large market with immense growth potential Tanzania contributes 6.2% of Airtel’s Africa revenues. Tanzania is a 4 player market with immense scope for wireless penetration. The current wireless penetration is around 55%. Tanzania also has suffered from high inflation over the last two years. Inflation is declining and real GDP growth rate is expected to stabilize in the forthcoming years (according to IMF). Stabilization of inflation and GDP growth rate will improve consumer confidence and perk up telecom market growth. Data‐points

Population 48.0 Population under 25 years 64.2%Population growth 2.4%CPI inflation 16.0%Real GDP growth 6.9%Real per‐capita GDP growth 4.4%Wireless subs 27.2Real mobile penetration 55%No. of players 4


Bharti is the number 2 player in Tanzania with a subscriber market share of 31% (end of CY12) and minutes market share of 23% (June 2013). Vodacom is the largest telecom player in Tanzania. Tanzania’s regulator has reduced interconnect rates by 69%; a move helpful for the challengers, however, the government has also imposed excise duty on SIM cards which raises customer acquisition costs. Timeline of events Timeline Event Q3 '12 Review of MTR; new rates expected by Jan'13 Increase in excise duty from 10% to 12%; import duty relief on cap. Goods has been reduced to 90%Q4 '12 Regulator has appointed external agency to study MTR Q1 '13 W.e.f 1st Mar'13; MTR reduced from 112 TSH to 35 TSH (69%), further glide path till 2017Q2 '13 Further increase in excise duty to 14.5% 10% withholding tax on commissions paid to mobile money agents 0.15% excise duty on all money transfers Excise duty of TSH 1000/mo on SIM cards Import duty relief on cap. Goods import reduced to 75%


Bharti has gained subscriber market share in Tanzania and the country presents a good avenue for growth as there is immense scope for penetration growth and economic conditions are improving in the country. Bharti’s growth in the market has been reasonable but growth rate in CY12 at 7% YoY was significantly lower than CY11 at 27% YoY. While the revenue growth in the country has declined but Airtel has managed to significantly reduce losses in CY12.

– 23 of 39 –


Airtel has seen consistent revenue growth… …and a reduction in losses

‐

50

100

150

200

250

300

350

400

450

2007 2008 2009 2010 2011 2012

Revenue (TZS bn)

313

396 424

(117) (99)

(45)

(200)

(100)

‐

100

200

300

400

500

2010 2011 2012

Revenue PAT

As Airtel has gained subscriber market share Minutes (bn) market share Q2 2013

28% 29% 27%

31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012

Voda Airtel Tigo Others

3.53 , 43%

1.94 , 23%

2.43 , 29%

0.38 , 5%

Voda Airtel Tigo Others

Macro indicators improving and subscriber growth is set to continue

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Real GDP growth

CPI inflation

3.0

5.6

8.3

13.0

17.5

21.0

25.7 27.5 26.6

0%

10%

20%

30%

40%

50%

60%

70%

‐

5.0

10.0

15.0

20.0

25.0

30.0

2005 2006 2007 2008 2009 2010 2011 2012 1H'13




– 24 of 39 –


Mobile money a key growth area for Tanzania Tanzania offers a robust opportunity for Airtel Money as it is among the most under‐banked nations. Airtel’s competitors, Tigo & Vodacom have seen a rapid offtake in mobile financial services (MFS), with ~50% of mobile subscribers of these companies using MFS.

Limited Access to financial services an opportunity for Airtel Tigo MFS adoption rates

Source: GSMA, Vodacom, Tigo, PhillipCapital India Research

TZ = Tanzania, TW = Rwanda, GH = Ghana, TD = TChad

A read‐across of Tigo & Vodacom’s investor presentations’ reveals the following:

• MFS can contribute meaningfully to revenue – 14% of Vodacom’s Tanzania revenue

comes from MFS, while 6% of Tigo’s Africa revenue is genetrated through MFS. Thus there is ample revenue opportunity from MFS in Tanzania. ARPU generated from MFS too is meaningful, with Vodacom’s MFS ARPU at US$ 1.5 (36% of its Tanzania ARPU), while Tigo’s MFS ARPU at US$ 1.4 is 20% of its total ARPU.

• Strong customer retention tool – ~50% of Tigo & Vodacom’s mobile customers use

MFS. These companies have highlighted that MFS has is a strong customer retention tool

• Presenting an interesting growth opportunity for Airtel – We believe that Airtel

Money has a substantial growth opportunity, not just in Tanzania, but even in other African markets including Nigeria, Kenya, Ghana etc.

– 25 of 39 –


Market 6: Ghana – Gaining ground Ghana is the sixth largest market for Bharti Airtel contributing 5.4% of the African revenues. Ghana has high degree of wireless penetration and with 5 wireless telecom operators the competitive intensity in the market is high. Ghana is one of the fastest growing markets for Airtel Africa. The macroeconomic conditions are expected to improve from CY14 with decline in inflation and stable real GDP growth. Data‐points

Population 26.0 Population under 25 years 57.5%Population growth 2.6%CPI inflation 9.2%Real GDP growth 7.9%Real per‐capita GDP growth 5.2%ARPU (US$) 3.9 Wireless subs (including multiple SIMS) 27.5Real Wireless teledensity 76%No. of players 5Source: Company, PhillipCapital India Research

Bharti Airtel is the number 4 player in Ghana market and has been able gain subscriber market share in the last 4 years. The company’s Ghana revenue CAGR stood at 55% from CY10‐12E primarily led by subscriber acquisitions. The Ghana market presents a great opportunity for data revenue growth as well as mobile money services.

Airtel’s Ghana revenue grows at a rapid pace

‐

50

100

150

200

250

300

350

400

450

500

2007 2008 2009 2010 2011 2012

Revenue (GHC mn)

481% 121%

56% 54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012Revenue Growth


– 26 of 39 –


…as the company has gained market share …by intensifying its investments

9% 10% 12%12% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 Aug‐13

MTN Vodafone Tigo Airtel Glo Expresso

179

279

431

(139)(115)

(145)(200)

(100)

‐

100

200

300

400

500

2010 2011 2012

Revenue PAT

Source: National Communications Authority Ghana, Company, PhillipCapital India Research

High CPI remains challenging while subscriber growth continues

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

Real GDP growth

CPI inflation

11.6

15.1

17.4

21.2

25.6 27.5

0%

20%

40%

60%

80%

100%

120%

‐

5.0

10.0

15.0

20.0

25.0

30.0

2008 2009 2010 2011 2012 Aug'13



Source: Company, MTN, IMF, PhillipCapital India Research

– 27 of 39 –


Our estimates for Africa are conservative and largely in‐line with consensus We expect muted revenue and EBIDTA growth in FY14 on account continued disappointments but considering the improving growth prospects FY14 could surprise positively on revenues but EBIDTA margins will continue to remain under pressure as the company will have to step up market participation to manage revenue growth. Our FY15 estimates are conservative considering competitive pressures would have stabilized and macroeconomic conditions would have improved further. Our estimates for FY15 are likely to be upgraded in the forthcoming quarters. As the revenue growth prospects improve, we believe the valuation of the African operations is likely to improve at a brisk pace which will limit the pressure on the domestic business.

Africa P&L statement US$ mn Mar‐11 Mar‐12 Mar‐13 Mar‐14 Mar‐15 Mar‐16 Mar‐17 Mar‐18

KPI's Minutes (mn) 46,296 71,913 92,832 108,048 134,223 165,692 195,354 224,144Growth (%) 55.3 29.1 16.4 24.2 23.4 17.9 14.7Subscribers (mn) 44.2 53.1 63.7 73.7 91.7 107.7 123.7 139.7Net adds (mn) 8.9 10.6 10.0 18.0 16.0 16.0 16.0ARPU (US$) 6.8 7.1 6.3 5.7 5.4 5.3 5.2 5.1% change 3.8 (11.1) (9.9) (4.0) (3.0) (2.0) (1.0)P&L Revenue (US$ mn) 2,878 4,137 4,417 4,680 5,408 6,324 7,192 8,104Adjusted growth (%) 17.0 6.8 6.0 15.6 16.9 13.7 12.7Access charges 525 820 785 731 890 1,077 1,244 1,399(cents/min) 1.13 1.14 0.85 0.68 0.66 0.65 0.64 0.62YoY growth (%) 27.1 ‐22.1 ‐6.9 21.7 21.0 15.5 12.4% of revenue 18.2 19.8 17.8 15.6 16.5 17.0 17.3 17.3Net revenue 2,353 3,317 3,631 3,949 4,518 5,247 5,948 6,705% of revenue 81.8 80.2 82.2 84.4 83.5 83.0 82.7 82.7Growth 9.5 8.7 14.4 16.1 13.4 12.7Licence fees, revenue share & spectrum charges 112 174 198 211 243 285 324 365% of revenue 3.9 4.2 4.5 4.5 4.5 4.5 4.5 4.5Network operations costs 460 666 762 815 903 995 1,092 1,193% of revenue 16.0 16.1 17.2 17.4 16.7 15.7 15.2 14.7Cost per BTS (US$ '000s) 38.6 44.9 45.7 43.9 43.9 43.9 43.9 43.9YoY growth (%) 44.7 14.4 7.0 10.8 10.2 9.7 9.3Employee costs 286 342 355 384 411 440 471 505% of revenue 10.0 8.3 8.0 8.2 7.6 7.0 6.6 6.2YoY growth (%) 19.6 3.8 8.1 7.1 7.1 7.0 7.0Number of employees 5,687 4,792 4,932 4,982 5,032 5,082 5,132 5,182Employees added (895) 140 50 50 50 50 50Average no. of emp. 6,273 5,240 4,862 4,957 5,007 5,057 5,107 5,157Cost per employee (US$ '000s) 56.1 65.4 73.1 77.5 82.2 87.1 92.3 97.8Selling, general and adminstration expense 729 1,040 1,160 1,319 1,581 1,906 2,143 2,362% of revenue 25.3 25.1 26.3 28.2 29.2 30.1 29.8 29.1YoY growth (%) 16.1 ‐9.3 13.7 19.9 20.6 12.5 10.2Gross adds 43.0 47.2 53.6 64.5 77.8 87.5 96.4SG&A per gross add (US$) 24.2 24.6 24.6 24.5 24.5 24.5 24.5Monthly churn (%) 7.4 6.7 6.5 6.5 6.5 6.3 6.1Total operating costs (US$ mn) 2,112 3,043 3,260 3,459 4,028 4,702 5,274 5,824EBITDA (US$ mn) 766 1,094 1,157 1,221 1,380 1,622 1,918 2,281EBITDA margin (%) 26.6 26.4 26.2 26.1 25.5 25.6 26.7 28.1Growth (%) 42.9 5.7 5.6 13.0 17.5 18.2 18.9


– 28 of 39 –


Significant scope for value unlocking in Infratel; Estimate Rs 25 value unlocking Bharti Infratel’s stock price has corrected by 27% since the IPO in December 2012. The sharp correction in the stock price can be attributed to market perception of growth, inefficient capital structure and possibilities of the company using the cash reserves for value dilutive acquisitions. While the company has categorically denied the rumors of acquisitions in Africa, inefficient capital structure continues to plague the stock performance. The underperformance of Bharti Infratel has not helped Bharti Airtel stock performance and we believe there is immense scope for value unlocking in the future. We note that Bharti Infratel’s assets are available at almost at replacement cost. We believe the market perception of Infratel’s value will change over time as the company takes measures to improve the capital structure and unlocks value for the share holders. Bharti Infratel value unlocking prospects FY13 FY14E FY15E FY16E FY17E FY18E Terminal value

Sales ‐ Infratel 102,720 112,992 124,291 136,720 147,658 159,471Sales growth 10% 10% 10% 8% 8%EBITDA INCL. 42% Indus 38,354 43,340 48,974 54,851 60,885 65,756EBITDA growth 13% 13% 12% 11% 8%Capex 21,470 20,339 19,887 19,141 17,719 19,136Capex to sales 21% 18% 16% 14% 12% 12%Tax 5,572 7,590 9,599 11,784 14,245 15,384Tax rate (%) 33% 33% 33% 33% 33% 33%Implied EBIT 16,884 23,001 29,088 35,710 43,166 46,619 352,440EBIT margin 16% 20% 23% 26% 29% 29%Cash flow 11,312 15,411 19,489 23,926 28,921 31,235 352,440Discount Factor 1.000 0.927 0.886 0.859 0.838 0.838

PV of cash flow 400,925 Add: Cash in Infratel 27,190 Value of Infratel for Airtel 85 Implied value 60 Value unlocking potential 25 Infratel CMP 160 Airtel's stake in Infratel 79.4% Exit EBIT multiple 7.0 Discount rate 11%


In our DCF valuation for Bharti Airtel, we value Bharti Infratel’s assets at Rs 85 per share. Our DCF valuation of Infratel’s assets is conservative. We note that the market valuation ascribes a value of Rs 60 per share for Bharti Infratel. This is a significant discount and entails a value unlocking of Rs 25 per share for Bharti Airtel. At current levels the value unlocking of Bharti Infratel presents an upside of 7% from the current levels.

– 29 of 39 –


Value unlocking of ~Rs 10 from the DTH business We believe that the DTH business’ valuation implied in the current price is miniscule. The company has performed commendably with its incremental revenue and net adds from the DTH business exceeding that of the market leader, Dish TV. On other counts such as ARPU and subscriber addition too, the company has done well in comparison to Dish TV.

Airtel has done well vis‐à‐vis Dish TV … adding higher incremental revenue (Rs bn) than Dish FY11 FY12 FY13

Incremental revenue (Rs bn) Airtel 4.9 5.2 3.3 Dish 3.5 5.2 2.1

Net adds (mn) Airtel 3.4 1.6 0.9 Dish 2.8 1.1 1.1

ARPU (Rs) Airtel 162 168 177 Dish 169 180 178

Monthly Churn (%) Airtel 0.5% 1.1% 1.5% Dish 0.9% 1.3% 1.0%

Source: Company, Dish TV

Our target price of Rs 64 for Dish TV implies an EV/subscriber of Rs 7,600/sub on an FY14 basis. Airtel reports its net subscribers based on 90 days of inactivity, while Dish does so on 120 days – implying that on a like to like basis, Airtel’s subscriber base is slightly understated vis‐à‐vis Dish TV. This coupled with the robust operating performance of Airtel DTH vis‐à‐vis Dish TV implies that using Dish TV’s EV/subscriber metric for the valuation of Airtel DTH is conservative. As shown below, we determine Rs 10/share value unlocking potential for Bharti Airtel from its DTH business. FY14E Comment

EBITDA estimate 3,277 Annualised EBITDA of Q1FY14, with a QoQ growth of 5% Market multiple for Bharti 6.5 Market valuation of Airtel DTH 20,236 Target EV/sub 7,570 We assign the same EV/sub multiple to Airtel DTH Implied valuation 58,253 Incremental upside (Rs/sh) 10


‐

1.0

2.0

3.0

4.0

5.0

6.0

FY11 FY12 FY13

Airtel Dish

– 30 of 39 –


High quality spectrum footprint ensures better long‐term growth prospects Bharti is the best placed operator for long‐term growth with a significant 3G and 4G combined spectrum foot print. Bharti has been at the fore front of investing in spectrum assets and has invested Rs 205bn till date in acquiring spectrum assets.

Data footprint of telcos (ex‐BSNL/MTNL) Spectrum in MHz Bharti Idea Vodafone Aircel RCom Tata Tele Reliance‐Jio Others

Circle 2100 2300 2100 2300 2100 2300 2100 2300 2100 2300 2100 2300 2100 2300 2300

AP 5.0 ‐ 5.0 ‐ ‐ ‐ 5.0 20.0 ‐ ‐ ‐ ‐ ‐ 20.0 ‐

Assam 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 20.0 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Bihar 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 20.0 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Delhi 5.0 20.0 ‐ ‐ 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Gujarat ‐ ‐ 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 20.0

Haryana ‐ 20.0 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 ‐

HP 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ ‐ ‐ 20.0 20.0

J&K 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 20.0 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Karnataka 5.0 20.0 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 ‐

Kerala ‐ 20.0 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 ‐

Kolkata ‐ 20.0 ‐ ‐ 5.0 ‐ 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

MP ‐ ‐ 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 ‐ 5.0 ‐ ‐ 20.0 20.0

Maharashtra ‐ 20.0 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 ‐

Mumbai 5.0 20.0 ‐ ‐ 5.0 ‐ ‐ ‐ 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

North East 5.0 ‐ ‐ ‐ ‐ ‐ 5.0 20.0 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Odisha ‐ ‐ ‐ ‐ ‐ ‐ 5.0 20.0 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

Punjab ‐ 20.0 5.0 ‐ ‐ ‐ 5.0 ‐ 5.0 ‐ 5.0 ‐ ‐ 20.0 ‐

Rajasthan 5.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ ‐ ‐ 20.0 ‐

TN (incl. Chennai) 5.0 ‐ ‐ ‐ 5.0 ‐ 5.0 20.0 ‐ ‐ ‐ ‐ ‐ 20.0 ‐

UP (E) ‐ ‐ 5.0 ‐ 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ ‐ 20.0 20.0

UP (W) 5.0 ‐ 5.0 ‐ ‐ ‐ ‐ ‐ ‐ ‐ 5.0 ‐ ‐ 20.0 20.0

WB 5.0 ‐ ‐ ‐ 5.0 ‐ 5.0 20.0 5.0 ‐ 5.0 ‐ ‐ 20.0 20.0

Total 65.0 160.0 55.0 ‐ 45.0 ‐ 65.0 160.0 65.0 ‐ 45.0 ‐ ‐ 440.0 120.0

No. of circles 13 8 11 ‐ 9 ‐ 13 8 13 ‐ 9 ‐ ‐ 22 6

Source: TRAI

Note: Footprint as a result of Wireless Business Services Private Limited’s (Qualcomm’s BWA venture) acquisition by Airtel

The spectrum assets acquired by Bharti are not yielding significant revenues as the company is still in a ramp up mode. Bharti has built a robust 3G network in the 13 circles of operation. The network is in a capacity utilisation phase and can support a significantly higher subscriber base. Thus Bharti’s 3G network will be EBIDTA accretive from the current levels and growth in EBIDTA is likely to be margin accretive for Bharti’s domestic operations.

– 31 of 39 –


Among private sector operators, Bharti has invested the maximum for data spectrum

205

128 116

99 86

59 58

‐

50

100

150

200

250

Airtel R‐Jio Voda Aircel RCom TTSL Idea Source: Company, PhillipCapital India Research

We note that Airtel is the only incumbent operator having a 4G spectrum and has also launched 4G‐Long Term Evolution (LTE) services in Bangalore, Chandigarh, Kolkata & Pune. The company had acquired 4G spectrum in the BWA auctions in Kolkata, Maharashtra, Karnataka & Punjab while it had later opportunistically acquired Wireless Business Services Private Limited’s (WBSPL – Qualcomm’s BWA venture), giving it access to 4G spectrum in metros as well as Kerala and Haryana. We estimate that the company paid the value of the spectrum, i.e. Rs 49bn to acquire WBSPL.

– 32 of 39 –


Implied valuation according to current market price: We estimate the market implied values for various businesses with Bharti Airtel and find that the market valuation is at considerable discount to the comparable peer Idea Cellular. As detailed in the earlier section, the NPV of Bharti’s Africa operations work out to a negative Rs 66 and Infratel and DTH businesses are valued at Rs 60 and Rs 5 respectively. Taking these into consideration we arrive at a value to the domestic business of Rs 353 implying a FY14E EV/EBIDTA of 6.6x as compared to Idea Cellular trading at 8.2x FY14E EV/EBIDTA. Bharti’s domestic business has superior assets and margin profile compared to Idea Cellular. Hence, Bharti Airtel should trade in‐line with Idea Cellular. Market implied valuation for the Bharti Airtel

353Trading @6.6x FY14EV/EBITDA

‐665.5x of FY14ConsensusEBITDA

60 ‐Derivedfrom Infratel

CMP

5 ‐Derivedas 6.3x FY14EV/EBITDA

352 ‐6.5x FY14

EV/EBITDA

‐

50

100

150

200

250

300

350

400

Implied valuation of domestic biz.

Africa business Infratel DTH CMP

Source: Company, Bloomberg, PhillipCapital India Research Estimates

Our valuation (7.5x FY14 EV/EBITDA) still implies a significant discount to Idea Cellular’s valuation. We value the core business at Rs 397 which implies an upside of 13% from the current levels. Even on our conservative estimates for Africa, the DCF valuation for Africa works out to a negative Rs 37 NPV which is higher than market implied valuation of Negative Rs 66. We estimate value unlocking for DTH and Infratel business at Rs 35. Thus, we note that Bharti’s assets can provide a significant upside from the current levels. Our target valuation for the domestic business

397Implied

multiple of 7.5x FY14EV/EBITDA

‐37Africa

85‐our DCFvalue forInfratel

15 ‐ourEV/Subvalue for Airtel DTH

460 ‐7.9x FY14

EV/EBITDA

‐

50

100

150

200

250

300

350

400

450

500

OUR valuation of domestic biz.

Africa business Infratel DTH Target price

Source: Company, Bloomberg, PhillipCapital India Research Estimates

– 33 of 39 –


Fair Value Calculation We look at Bharti Airtel with a 5‐year horizon to clock revenue CAGR of 13%. Bharti is currently witnessing market share stabilization and we expect the company to grow with the sector in the medium to long term. Our revenue estimates for 3G services are conservative, but this segment has the potential to surprise us positively. Our estimates for Bharti’s Africa business too are conservative and have the potential to surprise positively as the macroeconomic scenario improves.

Derivation of Enterprise value 2018 (excluding intermediate FCF) _____________Segmental Growth Profile_____________ _____________EV 2020 calculation_____________

Sales FY13 Sales CAGR (5‐year %) Sales FY18E

EBIT margin (%) EBIT (N)

Yield required (%) P/E EV/EBIT EV (2020)

Wireless services 440,304 10 718,744 25.0 179,686 6.7 15 10.5 1,886,702Telemedia services 35,897 8 52,585 25.0 13,146 8.0 13 8.8 115,030Enterprise carrier services 53,203 10 86,169 20.0 17,234 8.0 13 8.8 150,796Tower business services 103,154 8 152,262 30.0 45,679 8.7 11 8.0 365,433Africa 240,539 15 486,269 20.0 97,254 11.7 9 6.0 583,560Intersegment (69,507) 7 (99,163) 28.0 (27,766) 10.0 10 7.0 (194,359)Total 803,590 12 1,396,867 23 325,233 8 13 8.9 2,907,162


Below we outline the derivation of our DCF valuation showcasing the multiples we assign to the businesses. We also roll‐forward our DCF vis‐à‐vis our prior computation to arrive at a September 2014 target price of Rs 460. We consider Rs 212(Rs 53hare; 100% of computed potential regulatory impact post Sept 2013 reserve price cuts) as the NPV hit from regulatory eventualities. Intermediate cash flow generation Cash Flows (Rs mn) FY14E FY15E FY16E FY17E FY18E

EBIT 126,284 146,269 174,229 222,109 275,537NOPLAT 87,328 100,875 118,817 151,415 189,317Depreciation 172,498 188,423 206,752 206,752 206,752Capex 139,300 158,500 161,200 172,285 178,012FCF 120,527 130,798 164,369 185,882 218,057% conversion 95 89 94 84 79Discount factor 1.0 0.9 0.8 0.7 0.6PV 120,527 116,784 131,034 132,307 138,579NPV 120,527 237,310 368,344 500,651 639,231

Source: Company, PhillipCapital India Research Rs mn/ Rs per share Value

Enterprise value‐2018 2,907,162NPV Intermediate FCF 639,231Net cash‐ end of FY2014 (545,649)Return requirement 12%EV Future value end of FY2014 2,486,785Target value end of FY2014 1,941,135Target value per share (end March 2014) 485Target value per share (end of Sep 2014) 514Assumed hit on regulatory issues 53TP adjusted for regulatory hit 461


– 34 of 39 –


1year forward band charts P/E P/BV

12x

16x

20x

24x

0

100

200

300

400

500

600 (Rs)

2x

4x

6x

8x

0

300

600

900

1200

1500

1800 (Rs)

MCAP /SALES EV/EBITDA

1x

3x

5x

7x

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000 (Rs mn)

6x

9x

12x

15x

0

1000000

2000000

3000000

4000000

5000000

6000000 (Rs mn)

EV/SALES

1x

3x

5x

7x

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000 (Rs mn)

Source: Company, PhillipCapital India Research Estimates

– 35 of 39 –


Appendix AFRICA: Macro story of demographics remains extremely favourable… As highlighted by Airtel on numerous occasions, Africa remains a youthful nation. We note that in most African markets of Airtel’s presence, the proportion of population under‐25 years of age is well over 60%; implying favourable demographics when compared with the World (45%) or India (50%). Airtel’s African markets have extremely favourable demographics

0%

10%

20%

30%

40%

50%

60%

70%

80%

Seychelles

World

India

Ghana

Sierra Leone

Kenya

Rwanda

Madagascar

Gabon

Nigeria

Tanzania

DRC

Malawi

Burkina Faso

Chad

Congo B

Zambia

Niger

Uganda

% of youth population (pop under 25 years of age)

Source: Populationpyramid.net, CIA World Factbook

Per capita GDP growth in African markets has been witnessing a downward trajectory and growth has also been quite volatile. While IMF’s 2013 outlook too appears sombre; the same appears to be recovering from 2014. Thus, we highlight that the real per capita GDP profile for African countries is currently poor, but we are likely to witness improvements in 2014.

Per capita real GDP growth to see an uptrend Per capita real GDP growth (%) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

Nigeria 3.1% 4.1% 5.1% 4.5% 3.7% 3.4% 4.5% 4.0% 4.0% 4.0% 3.7%Zambia 2.7% 3.3% 4.4% 3.6% 3.9% 2.7% 3.1% 2.6% 2.3% 2.0% 1.7%Kenya 3.1% ‐0.2% 4.1% 3.8% 4.0% 3.1% 7.3% 7.0% 6.1% 3.5% 2.8%Ghana 5.7% 1.4% 5.3% 12.1% 5.2% 5.2% 3.4% 2.9% 2.5% 2.4% 5.3%Uganda 6.9% 0.8% 2.8% 2.8% ‐0.5% 2.3% 3.1% 3.6% 3.6% 3.6% 3.6%Sierra Leone 2.6% 0.7% 2.7% 3.3% 12.2% 10.4% 11.1% 9.5% 4.9% 2.6% 2.6%Malawi ‐4.0% ‐0.5% 2.7% 3.8% 1.7% 2.2% 2.7% 2.6% 2.5% 2.4% 2.3%Rwanda 5.8% ‐4.3% 7.3% ‐0.9% 7.9% 3.0% 3.1% 2.7% 2.6% 3.6% 3.4%DRC 3.1% ‐0.2% 4.1% 3.8% 4.0% 3.1% 7.3% 7.0% 6.1% 3.5% 2.8%Gabon ‐0.5% ‐4.3% 5.2% 5.5% 4.0% 5.1% 5.3% 5.4% 5.7% 6.0% 6.3%Tanzania 4.7% 3.4% 4.4% 3.9% 4.4% 3.9% 4.1% 3.9% 3.8% 3.6% 3.5%Congo B 2.6% 4.4% 5.7% 0.5% 0.9% 3.5% 2.6% 5.4% 5.1% 7.8% 2.5%Burkina Faso 2.7% ‐0.1% 5.3% 1.9% 6.5% 4.1% 4.0% 4.4% 4.4% 4.3% 4.3%Niger 5.8% ‐4.3% 7.3% ‐0.9% 7.9% 3.0% 3.1% 2.7% 2.6% 3.6% 3.4%Chad 0.5% 1.7% 10.8% ‐2.4% 6.2% 1.4% 7.8% 6.5% 1.1% 0.7% 0.1%Madagascar 4.3% ‐6.6% ‐2.2% ‐0.8% ‐0.6% 0.1% 1.3% 1.5% 2.1% 2.6% 2.7%Seychelles ‐4.0% ‐0.5% 2.7% 3.8% 1.7% 2.2% 2.7% 2.6% 2.5% 2.4% 2.3%

Blended growth 1.5% 5.3% 3.9% 4.9% 4.1% 5.3% 5.0% 4.4% 4.1% 3.7%


– 36 of 39 –


Financials

Income Statement Y/E Mar, Rs bn FY12 FY13 FY14E FY15E

Net sales 715 804 917 1,024Growth, % 20 12 14 12Total income 715 804 917 1,024Other Operating expenses ‐478 ‐555 ‐618 ‐689EBITDA (Core) 237 249 299 335Growth, % 18.6 5.1 20.1 12.0Margin, % 33.1 30.9 32.6 32.7Depreciation ‐134 ‐155 ‐172 ‐188EBIT 103 94 126 146Growth, % 5.6 (9.0) 34.7 15.8Margin, % 14.4 11.7 13.8 14.3Interest paid ‐38 ‐44 ‐47 ‐31Other Non‐Operating Income 0 0 0 0Pre‐tax profit 65 50 79 115Tax provided ‐23 ‐27 ‐24 ‐36Profit after tax 42 23 55 79Others (Minorities, Associates) 0 0 ‐7 ‐8Net Profit 42 23 48 71Growth, % (30.0) (46.1) 110.0 48.3Net Profit (adjusted) 0 0 0 0Unadj. shares (bn) 4 4 4 4Wtd avg shares (bn) 4 4 4 4

Balance Sheet Y/E Mar, Rs bn FY12 FY13 FY14E FY15E

Cash & bank 20 17 177 222Debtors 64 66 54 59Inventory 1 1 2 2Other current assets 63 118 105 103Total current assets 148 203 338 386Gross fixed assets 1,774 1,964 2,103 2,262Net fixed assets 1,336 1,369 1,336 1,306Non‐current assets 87 101 101 101Total assets 1,571 1,673 1,775 1,793 Current liabilities 489 450 457 465Total current liabilities 489 450 457 465Non‐current liabilities 548 679 649 579Total liabilities 1,037 1,129 1,106 1,044Paid‐up capital 19 19 20 20Reserves & surplus 487 484 600 671Shareholders’ equity 534 544 669 750Total equity & liabilities 1,571 1,673 1,775 1,793

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs bn FY12 FY13 FY14E FY15E

Pre‐tax profit 65 50 79 115Depreciation 134 155 172 188Chg in working capital 15 16 31 5Total tax paid ‐23 ‐27 ‐24 ‐36Other operating activities 0 0 0 0Cash flow from operating activities 245 193 258 273Capital expenditure ‐342 ‐188 ‐139 ‐159Chg in marketable securities ‐183 ‐189 13 2Cash flow from investing activities ‐525 ‐377 ‐126 ‐157Equity raised/(repaid) 0 0 69 0Debt raised/(repaid) ‐35 118 ‐30 ‐70Other financing activities ‐40 ‐50 0 0Cash flow from financing activities ‐75 69 39 ‐70Net chg in cash 2 ‐4 159 46

Valuation Ratios & Per Share Data FY12 FY13 FY14E FY15E

Per Share data EPS (INR) 10.6 5.7 12.0 17.8Growth, % (30.0) (46.1) 110.0 48.3Book NAV/share (INR) 133.5 136.0 167.3 187.4FDEPS (INR) 10.6 5.7 12.0 17.8CEPS (INR) 44.0 44.4 55.1 64.9CFPS (INR) 39.7 43.2 64.5 68.3Return ratios Return on assets (%) 4.6 3.1 4.9 5.6Return on equity (%) 8.1 4.2 7.9 10.0Return on capital employed (%) 6.1 4.4 6.7 7.5Turnover ratios Asset turnover (x) 0.7 0.7 0.7 0.9Sales/Total assets (x) 0.5 0.5 0.5 0.6Sales/Net FA (x) 0.6 0.6 0.7 0.8Working capital/Sales (x) (0.5) (0.3) (0.3) (0.3)Fixed capital/Sales (x) 1.9 1.7 1.5 1.3Working capital days (184.4) (120.3) (117.7) (107.4)Liquidity ratios Current ratio (x) 0.3 0.5 0.7 0.8Quick ratio (x) 0.3 0.4 0.7 0.8Interest cover (x) 2.7 2.1 2.7 4.7Total debt/Equity (%) 129.3 134.1 104.6 84.0Net debt/Equity (%) 125.5 130.9 78.1 54.3Valuation PER (x) 33.2 61.7 29.4 19.8Price/Book (x) 2.6 2.6 2.1 1.9EV/Net sales (x) 2.9 2.6 2.1 1.8EV/EBITDA (x) 8.8 8.5 6.5 5.4EV/EBIT (x) 20.2 22.6 15.3 12.4

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Recommendation History

B (TP 430)

B (TP 430)

B (TP 500)

B (TP 423)

S (TP 235)

N (TP 365)

B (TP 380)

200

250

300

350

400

450

500

1/3/2011 5/24/2011 10/11/2011 2/29/2012 7/16/2012 12/5/2012 4/25/2013 9/11/2013


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Management Vineet Bhatnagar (Managing Director) (91 22) 2300 2999 Jignesh Shah (Head – Equity Derivatives) (91 22) 6667 9735

Research Automobiles Deepak Jain (9122) 6667 9758 Banking, NBFCs Manish Agarwalla (9122) 6667 9962 Sachit Motwani, CFA, FRM (9122) 6667 9953 Consumer, Media, Telecom Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Ennette Fernandes (9122) 6667 9764 Vivekanand Subbaraman (9122) 6667 9766 Cement Vaibhav Agarwal (9122) 6667 9967 Economics Anjali Verma (9122) 6667 9969

Engineering, Capital Goods Ankur Sharma (9122) 6667 9759 Infrastructure & IT Services Vibhor Singhal (9122) 6667 9949 Varun Vijayan (9122) 6667 9992 Metals Dhawal Doshi (9122) 6667 9769 Dharmesh Shah (9122) 6667 9974 Mid‐caps Kapil Bagaria (9122) 6667 9965 Oil&Gas, Agri Inputs Gauri Anand (9122) 6667 9943 Saurabh Rathi (9122) 6667 9951

Pharma Surya Patra (9122) 6667 9768 Retail, Real Estate Abhishek Ranganathan, CFA (9122) 6667 9952 Neha Garg (9122) 6667 9996 Quant Shikha Khurana (9122) 6667 9948 Sr. Manager – Equities Support Rosie Ferns (9122) 6667 9971

Sales & Distribution Kinshuk Tiwari (9122) 6667 9946 Ashvin Patil (9122) 6667 9991 Shubhangi Agrawal (9122) 6667 9964 Kishor Binwal (9122) 6667 9989 Sidharth Agrawal (9122) 6667 9934 Dipesh Sohani (9122) 6667 9756

Dilesh Doshi (Sales Trader) (9122) 6667 9747 Suniil Pandit (Sales Trader) (9122) 6667 9745 Rajesh Ashar (Sales Trader) (9122) 6667 9748

Mayur Shah (Execution) (9122) 6667 9945

Contact Information (Regional Member Companies)

SINGAPORE

Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

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Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may or may not match or may be contrary at times with the views, estimates, rating, target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd. which is regulated by SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only and neither the information contained herein nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment or derivatives. The information and opinions contained in the Report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication to future performance. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax and financial advisors and reach their own regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. In no circumstances it be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which we believe are reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst have no known conflict of interest and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. The Research Analyst certifies that he /she or his / her family members does not own the stock(s) covered in this research report. Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it or its affiliates may hold either long or short positions in such securities. PhillipCapital (India) Pvt. Ltd does not hold more than 1% of the shares of the company(ies) covered in this report. Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic or political factors. Past performance is not necessarily indicative of future performance or results. Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorized use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety. Caution: Risk of loss in trading in can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd. which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities andExchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo").Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: 2nd Floor, C‐Block, Modern Centre, Mahalaxmi, Mumbai – 400011

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