Thursday, February 25, 2010

>BHARTI AIRTEL: African safari gamble worth it (ICICI SECURITIES)

We upgrade Bharti Airtel (BAL) to BUY from Hold as its entry into Africa via Zain’s African assets (ZAF) is positive from a long-term horizon and reduces the risk of intense competition in India. BAL has bid for ZAF (excluding Sudan & Morocco) at US$10.7bn. The acquisition will give BAL control over ZAF and we believe while valuations are at a premium based on FY10E EV/E of 9.6x, the strategy will pay rich dividends in the long term. ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to only 6% EPS dilution in FY12E (the second year of acquisition) and be EPS-accretive from FY13. We see the current fall in BAL’s stock price (11% post announcement) as a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals. Upgrade to BUY.

ZAF acquisition EPS-accretive by FY13. The ZAF acquisition is EPS-dilutive in FY11 and FY12, but we expect it to be EPS-accretive from FY13. We expect dilution in FY12 to be 6% assuming 100% debt funding. The acquisition through leveraging BAL’s balance sheet will improve the capital structure with low interest cost. In our view, this is a one time opportunity for BAL to enter the African markets and the premium valuations are justified for control.

“Cash combined with courage in a crisis, is priceless.” – Warren Buffett

African assets – Hidden jewel. We see the current profitability and market situation in Africa as misleading – post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.

We upgrade BAL to BUY at Rs345 target price as the current price correction is a knee jerk reaction in our view and entry into Africa via ZAF is a long-term strategy, thereby reducing the risk of hyper competition in the Indian markets. BAL’s increased debt owing to the ZAF acquisition leads to better capital structure, given that BAL’s balance sheet is being currently underleveraged in spite of its ability to raise low-cost debt. We attribute Rs273 value to BAL’s mobility business and Rs72 to towers with a total value of Rs345, implying an upside of 24%.

To read the full report: BHARTI AIRTEL