l

Equity Research l

India l Telecommunications

8 August 2012

Bharti Airtel
The wait for good things gets longer
Downgrade to In-Line. Delay in auctions implies an

extended period of pressure on mobile profitability. While our long-term thesis of an imminent shake-up in the sector and/or tariff hikes stays, the wait for realising these gains is getting longer (12-15 months vs. 6-9 months). In the interim, 1Q signifies sustained impact of competition and accelerated data network rollout on mobile profitability. We reduce FY13-14E EBITDA estimates by ~7% and EPS by 30-34% on account of (i) lower India mobile revenue/EBITDA and (ii) slight moderation in Africa. We lower PT to Rs300 (from Rs380), which includes higher regulatory impact of Rs49 (Rs32 assumed earlier).

IN-LINE
Rs274.35

(from OUTPERFORM)
PRICE TARGET

PRICE as at 08 August 2012

Rs300.00
Reuters code

Bloomberg code

BHARTI IN
Market cap

BRTI.BO
12 month range

Rs1,041.9bn (US$18.9bn)
EPS adj est change 2013E

Rs272.60 - 418.95
-33.5% 2014E -29.8%

Wait for rationality gets longer. While developments in the sector (high debt, auctions, spectrum re-pricing) all point towards an eventual shake-up and inevitable tariff adjustment, the transition period is getting longer. Delay in auctions and potential legal challenges will further prolong this phase, thus potentially offering better price points for entry. While well intended, Bhartis aggressive data rollout will accentuate the near-term pressure on profitability given the lagged impact on revenues. Bhartis 1Q India capex is in line with the FY13 guidance (US$2.0-2.2bn), thus indicating sustained pace of rollout through the rest of the year. While data registered healthy pickup (traffic up 25%qoq, rev. up 8%qoq), meaningful gains will be back-ended as the present contribution is relatively small (c4.3%). 1Q FY13 Pain getting prolonged. 1Q results missed expectations by a large margin. The disappointment was more on costs than on revenue. The accelerated network rollout (2.5G/3G) and higher SG&A indicate the pressure on profitability, which more than negated operating leverage. Africa was also relatively weak and management commentary indicated a weakening outlook for overall mins growth (given local and macro issues) and margins although Bharti might continue to gain market share. Reducing earnings and PT. We cut EBITDA estimates by ~7% and EPS by 30-34% and reduce PT to Rs300 (Rs380) mainly on the back of lower India mobile RPM/margins as well as moderation in Africa. The cut in PT now also incorporates higher regulatory impact of Rs49 (Rs32) given no reduction in spectrum usage charge (3-8%) in the recent government decision. We have also cut Africa EBITDA by 8%/5% in FY13/14E. Rahul Singh
Rahul.Singh@sc.com +91 22 4205 5901
BHART I IN Rs274.35 Rs300.00

Year end: March Sales (Rsbn) EBITDA (Rsbn) EBIT (Rsbn) Pretax profit (Rsbn) Net profit adjusted (Rsbn) FCF (Rsbn) EPS adjusted (Rs) DPS (Rs) Book value/share (Rs) EPS growth adj (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj (%) Div payout (%) Net gearing (%) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) PBR (x) PER adj (x) Dividend yield (%)

2012 714.5 237.2 103.5 65.3 42.7 97.2 11.25 0.00 118.91 -19.4 nm 33.2 14.5 6.0 0.0 135.4 9.1 8.6 2.9 8.6 2.8 33.1 0.0

2013E 784.8 251.2 96.7 65.3 41.0 55.9 10.81 1.10 124.78 -3.9 nm 32.0 12.3 5.2 10.2 128.2 8.9 8.0 2.2 6.7 2.2 25.4 0.4

2014E 840.3 282.8 110.2 84.5 52.2 137.5 13.75 3.55 133.07 27.2 222.7 33.7 13.1 6.2 25.8 103.6 10.7 9.4 1.9 5.7 2.1 20.0 1.3

2015E 877.7 303.8 113.8 92.2 56.9 118.9 15.00 6.20 140.15 9.1 74.6 34.6 13.0 6.5 41.3 86.8 11.0 10.1 1.7 5.0 2.0 18.3 2.3

Source: Company, Standard Chartered Research estimates

Share price performance

460 360
260 Aug-11 Nov-11 Bharti Airtel Feb-12 May-12 Aug-12 BSE SENSEX 30 INDEX (rebased)

Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$)
Source: Company, FactSet

-1 mth -15 -15 -

-3 mth -12 mth -13 -33 -18 -35 Bharti (45.4%) 32% 25,975,130

Saurav Anand
Saurav.Anand@sc.com +91 22 4205 5910

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2012 http://research.standardchartered.com

Bharti Airtel

8 August 2012

Fig 1: Bharti SOTP based price target

Dec-12 Old India EV (Rsm) DCF based Africa EV (Rsm) DCF based Less: Net debt (Rsm) Equity value (Rsm) Equity value per share (Rs) Add: Value of Indus stake (Rs) Less: Regulatory impact (Rs) Price target (Rs)
Source: Standard Chartered Research estimates

Mar-13 New 1,185,341 637,943 645,757 1,177,527 310 38 -49 300

1,429,374 627,783 638,123 1,419,033 374 38 -32 380

Fig 2: Bharti: Revised estimates

FY12A Minutes (bn) RPM (Rs) Revenue (Rsbn) EBITDA (Rsbn) of which: Africa (US$m) EBITDA margin (%) PAT (Rsbn) EPS (Rs) 918.3 0.43 714.5 237.2 1,097.2 33.2 42.7 11.2 Old 989.9 0.44 774.1 269.7 1,410.0 34.8 61.7 16.2 FY13E New 991.2 0.43 784.8 251.2 1,299.6 32.0 41.0 10.8 -33.5% -33.5% % change 0.1% -1.5% 1.4% -6.9% -7.8% Old 1038.6 0.45 827.5 303.3 1,627.0 36.6 74.4 19.6 FY14E New 1041.3 0.44 840.3 282.8 1,552.0 33.7 52.2 13.8 -29.8% -29.8% % change 0.3% -2.5% 1.5% -6.8% -4.6% FY15E 1076.0 0.44 877.7 303.8 1,744.0 34.6 56.9 15.0

Source: Company, Standard Chartered Research estimates

Fig 3: 1Q FY13 quarter results

1QFY13 Net revenues EBITDA EBITDA margin (%) Depreciation EBIT Interest Other income PBT Taxes PAT EPS
Source: Company, Standard Chartered Research estimates

4QFY12 187,294 62,329 33.3 36,584 25,745 -10,572 0 17,056 -6,976 10,059 2.7

QoQ (%) 3.3 -6.2 -3.05 -19.1

1QFY12 169,749 57,058 33.6 31,313 25,745 -8,550 0

YoY (%) 14.0 2.5 -3.4 -19.1

193,501 58,487 30.2 37,647 20,840 -8,211 0 12,629 -4,878 7,622 2.0

-26.0 -24.2 -24.2

17,195 -5,141 11,956 3.2

-26.6 -36.2 -36.2

Equity Research

Bharti Airtel

8 August 2012

Fig 4: Quarterly segment-wise details

1QFY12 Wireless Revenue (Rsm) qoq growth (%) EBITDA (Rsm) EBITDA margin (%) ARPU (Rs) MoU (min) Wireless Voice ARPU (Rs) Voice RPM (ps) Data as % of revenues Data Customer Base (mn) Of which 3G Total MBs on the network Data ARPU (Rs) Number of cell sites Minutes (mn) qoq growth (%) Revenue per minute (Rs) Passive Infrastructure Revenue (Rsm) EBITDA (Rsm) EBITDA margin (%) Number of towers Tenancy Rental/tower/month (Rs) Indus towers Tenancy Telemedia Revenue (Rsm) EBITDA (Rsm) EBITDA margin (%) ARPU (Rs) Long Distance and enterprise NLD minutes (mn) Revenue (Rsm) EBITDA (Rsm) EBITDA margin (%) Digital TV Customers (mn) Net adds (mn) ARPU (Rs) Africa Rev (US$ mn) EBITDA (US$ mn) EBITDA margin (%) ARPU (US$) MoU (mins) Rev/min (US) Total minutes (mn) Network sites (mn) 979 246 25.2% 7.3 121 6.0 16,337 12,703 1,030 270 26.2% 7.3 128 5.7 17,950 13,628 1,057 282 26.7% 7.1 125 5.7 18,496 14,112 1,071 298 27.8% 6.8 122 5.6 19,131 14,831 1,066 275 25.8% 6.5 120 5.4 19,651 15,439 Margin decline due to (i) unrest in Nigeria and DRC, (ii) tariff pressure due to increased competitive intensity specially in Ghana and (iii) local macro-economic factors influenced by global slow-down 6,262 599 163 6,614 352 161 7,069 455 160 7,228 159 166 7,440 172 166 19,878 10,410 2,303 22.1 20,305 11,042 2,371 21.5 20,551 11,881 2,008 16.9 21,588 11,209 1,631 14.6 22,241 11,906 1,963 16.5 Margin showing signs of uptick 9,457 4,304 45.2 952 9,528 4,213 44.2 955 9,128 3,542 38.8 916 9,159 3,754 41.0 933 9,442 3,809 40.3 962 Marginal decline in EBITDA margin due to higher revenue contribution from voice 22,767 8,585 37.7% 32,942 1.77 36,203 108,922 1.87 23,766 8,902 37.7% 33,056 1.79 37,117 108,998 1.89 24,393 9,110 37.3% 33,203 1.81 37,623 109,101 1.91 24,183 9,346 38.6% 33,326 1.82 37,277 109,114 1.94 24,048 8,788 36.5% 33,660 1.82 365,332 109,318 1.97 161 36.1 15.6 NA NA NA NA 117,144 228,331 4.6% 0.43 153 36.2 16.1 NA NA NA NA 118,011 224,734 -1.6% 0.44 157 37.5 15.8 NA NA NA NA 119,044 227,115 1.1% 0.45 158 36.7 16.2 35,780 2,711 10,006 44 120,905 238,779 5.1% 0.44 154 35.7 16.3 38,660 3,713 12,566 40 126,010 247,860 3.8% 0.43 Sites added increased significantly with higher wireless capex at ~Rs19bn in 1Q Traffic growth robust; incremental 9bn minutes added qoq 98,404 3.6% 33,614 34.2 190 445 97,827 -0.6% 32,926 33.7 183 423 101,764 4.0% 34,431 33.8 187 419 105,096 3.3% 35,719 34.0 189 431 106,848 1.7% 32,350 30.3 185 433 Sharp 3% decline in voice RPM due to (i) TRAI regulations on bundling of combo vouchers, (ii) incomplete pass-through of increased service tax and (iii) continued competitive intensity Revenue growth muted due to ~3% decline in RPM 2QFY12 3QFY12 4QFY12 1QFY13 Comments

Source: Company, Standard Chartered Research estimates

Equity Research

Bharti Airtel

8 August 2012

Income statement (Rsbn)

Year end: Mar Operating revenue Gross profit Operating expenses Other income Other expenses EBIT Net interest Associates Other non operational Exceptional items Pretax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj EBITDA EPS (Rs) EPS adj (Rs) DPS (Rs) Avg fully diluted shares (m) 2011 594.7 392.8 (193.1) 0.0 (102.1) 97.6 (25.3) 0.0 0.0 0.0 72.2 (17.8) (1.5) 0.0 53.0 53.0 199.7 13.95 13.95 1.00 3,798 2012 714.5 515.8 (278.6) 0.0 (133.7) 103.5 (38.2) 0.0 0.0 0.0 65.3 (22.6) (0.0) 0.0 42.7 42.7 237.2 11.25 11.25 0.00 3,798 2013E 784.8 575.1 (323.8) 0.0 (154.5) 96.7 (31.4) 0.0 0.0 0.0 65.3 (23.0) (1.3) 0.0 41.0 41.0 251.2 10.81 10.81 1.10 3,798 2014E 840.3 622.7 (340.0) 0.0 (172.5) 110.2 (25.7) 0.0 0.0 0.0 84.5 (30.8) (1.5) 0.0 52.2 52.2 282.8 13.75 13.75 3.55 3,798 2015E 877.7 654.1 (350.3) 0.0 (189.9) 113.8 (21.6) 0.0 0.0 0.0 92.2 (33.7) (1.6) 0.0 56.9 56.9 303.8 15.00 15.00 6.20 3,798

Cash flow statement (Rsbn)

Year end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2011 97.6 102.1 25.3 (17.8) 18.0 (34.7) 190.5 (277.9) 0.0 0.0 (326.6) (604.5) (4.4) 0.0 578.3 (221.7) 352.2 (61.8) 0.0 (87.3) 2012 103.5 133.7 44.0 (22.6) (17.5) (8.5) 232.6 (135.4) 0.0 0.0 (25.7) (161.1) (5.8) 0.0 73.0 (115.0) (47.8) 23.8 0.0 97.2 2013E 96.7 154.5 34.3 (23.0) 7.4 (58.0) 212.0 (156.1) 0.0 0.0 2.9 (153.2) (13.0) 0.0 (33.0) (41.3) (87.3) (28.6) 0.0 55.9 2014E 110.2 172.5 26.3 (30.8) (46.3) 30.6 262.5 (125.0) 0.0 0.0 0.7 (124.3) (22.2) 0.0 (100.0) (26.3) (148.6) (10.4) 0.0 137.5 2015E 113.8 189.9 22.6 (33.7) 3.4 (69.1) 227.0 (108.1) 0.0 0.0 0.9 (107.2) (31.6) 0.0 (50.0) (22.6) (104.2) 15.6 0.0 118.9

Balance sheet (Rsbn)

Year end: Mar Cash Short term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long term assets Total long term assets Total assets Short term debt Accounts payable Other current liabilities Total current liabilities Long term debt Convertible bonds Deferred tax Other long term liabilities Total long term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year end shares (m) 2011 15.8 (0.0) 54.9 2.1 39.2 112.1 651.4 637.3 0.0 64.2 1,353.0 1,465.1 0.0 284.3 0.0 284.3 616.7 0.0 (0.0) 47.8 664.5 948.8 487.7 28.6 516.2 1,465.1 600.9 3,798 2012 39.6 (0.0) 66.0 1.5 41.2 148.2 676.8 643.1 0.0 64.2 1,384.2 1,532.4 0.0 314.7 0.0 314.7 689.7 0.0 (0.0) 47.8 737.5 1,052.2 451.6 28.6 480.1 1,532.4 650.2 3,798 2013E 11.0 (0.0) 68.6 3.2 43.2 126.0 703.9 617.6 0.0 64.2 1,385.8 1,511.7 0.0 303.5 0.0 303.5 656.7 0.0 (0.0) 47.8 704.5 1,008.0 473.8 29.8 503.7 1,511.7 645.8 3,798 2014E 0.5 (0.0) 73.4 3.7 43.2 120.9 681.2 591.1 0.0 64.2 1,336.6 1,457.4 0.0 316.3 0.0 316.3 556.7 0.0 (0.0) 47.8 604.5 920.8 505.3 31.3 536.6 1,457.4 556.2 3,798 2015E 16.2 (0.0) 76.7 5.5 43.2 141.6 623.4 565.4 0.0 64.2 1,253.1 1,394.6 0.0 275.0 0.0 275.0 506.7 0.0 (0.0) 47.8 554.5 829.5 532.2 32.9 565.1 1,394.6 490.5 3,798

Financial ratios and other

Year end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op cash / EBIT (x) Depreciation / CAPEX (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj (x) PBR (x) Dividend yield (%) Other ARPM (Rs) MoU (mins) Total Mins (bn mins) ARPU (Rs) 2011 66.1 33.6 16.4 8.9 24.6 42.2 -41.5 -70.8 -70.8 -59.2 2012 72.2 33.2 14.5 6.0 34.6 20.2 -19.4 -19.4 -19.4 nm 2013E 73.3 32.0 12.3 5.2 35.2 9.8 -3.9 -3.9 -3.9 nm 2014E 74.1 33.7 13.1 6.2 36.5 7.1 27.2 27.2 27.2 222.7 2015E 74.5 34.6 13.0 6.5 36.5 4.5 9.1 9.1 9.1 74.6

11.6 11.2 0.5 2.0 0.3 2.4 27.8 390.4

9.1 8.6 0.5 2.2 0.8 3.3 30.9 550.0

8.9 8.0 0.5 2.2 0.8 4.1 31.3 538.0

10.7 9.4 0.6 2.4 1.2 5.8 30.8 520.0

11.0 10.1 0.6 2.0 1.5 7.5 31.2 482.4

116.4 52.2 3.9 1.7 0.4

135.4 56.6 2.7 2.8 0.5

128.2 54.4 3.1 2.7 0.4

103.6 48.8 4.3 2.1 0.4

86.8 45.3 5.3 1.8 0.5

2.5 7.6 15.5 22.9 22.9 2.8 0.3

2.9 8.6 19.7 33.1 33.1 2.8 0.0

2.2 6.7 17.4 25.4 25.4 2.2 0.4

1.9 5.7 14.5 20.0 20.0 2.1 1.3

1.7 5.0 13.5 18.3 18.3 2.0 2.3

0.44 466 814 204

0.43 444 918 192

0.43 439 991 190

0.44 438 1,041 192

0.44 440 1,076 194

Source: Company, Standard Chartered Research estimates

Equity Research

Bharti Airtel

8 August 2012

Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated. SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year for the following companies: Bharti Airtel Ltd.

Bharti Airtel Ltd.

04/11/11 OP : Rs442.00 19/01/12 OP : Rs417.00 08/02/12 OP : Rs403.00 03/05/12 OP : Rs380.00

480 460 440 420 400 380 360 340 320 300 280 260 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12

Source: FactSet prices / SCB ratings and price targets Recommendation Distribution and Investment Banking Relationships % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months 11.0% 12.3% 8.3%

% of covered companies currently assigned this rating OUTPERFORM IN-LINE UNDERPERFORM As of 30 June 2012 Research Recommendation Terminology 61.1% 30.7% 8.2%

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Equity Research

Bharti Airtel

8 August 2012

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