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Recommendation
Reco Bharti Airtel RCom Buy Sell CMP 299 123 TP 350 106 Upside 17 (14)

Switch to Bharti Airtel Buy Bharti Airtel and Sell Reliance Communications
We recommend a switch to Bharti Airtel (Bharti) Communications (RCom) based on following arguments: from Reliance

Relative Stock Performance

400 350 300 250 200 150 100 50 0 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Bharti RCom Jun-13 Aug-

INR depreciation to impact RCom severely: The rupee has fallen over 19% in the last three months to ~`67 against the USD. Telecom firms which have foreign currency debt exposure will be hurt by the ongoing slide in the rupee but Bharti is better placed as it is repaying its debt from the cash flows of African operations. Bhartis net debt as of June 2013 was ~US$9.8bn, out of which ~US$7.5bn was USD denominated loan. In Africa, a majority of Bhartis revenue is coming from the Nigerian geography. We note that the currency basket of Bhartis African revenues has been relatively more resilient; the Nigerian naira (NGN) has been down by ~2% against the USD vs. an ~19% commensurate fall in the INR in the last three months. On a YTD basis also, the NGN in down ~3.5% vs an ~21% fall in the INR against the USD; so Bharti Airtel is not expected to incur any significant negative impact due to sharp depreciation of the INR. Due to translation of accounts into rupee, Bharti might see losses on the interest repayment front but the company will not incur any economic losses. In addition, the company will benefit from positive impact of cross-currency gains in the African business. On the other hand, RComs interest and principal repayments occur from cash flows of domestic operations, the forex losses due to which are expected to be massive given the sharp depreciation in the rupee. RComs net debt as of June 2013 was ~US$6.6bn, out of which ~US$4.6 was in foreign currency and we believe most of it is unhedged. If the rupee remains at current levels, the losses incurred by RCom due to rupee depreciation on account of interest and principal payments might turn out to be actual economic losses. We estimate that the restatement of debt at `65 (from the closing of June 2013 quarter of `59) can increase its liabilities by ~`2,700cr or `14/share impact. The losses due to restatement of debt on account of foreign currency fluctuations will negatively impact the net worth of the company, eroding it by the respective amount.

RIL deal high on action, low on sparkle: Reliance Jio Infocomm (RJI), the telecom arm of Reliance Industries Ltd, has entered into a definitive agreement with RCom for sharing tower infrastructure. The deal entails RJI utilizing up to 45,000 sites of RComs existing nationwide network for its 4G services. The aggregate value of the deal is `12,000cr (~US$2.1bn) over the lifetime of the agreement. RCom has not specified the tenure of the agreement and monthly rental details. Assuming RJI has signed the agreement for balance life of the BWA spectrum, which is 17 years, the rent comes to ~`13,070 per tower per month, which is much less than what Bharti Infratel is operating at, ie ~`36,000. Though this deal will allow RCom to improve its asset utilization, the company appears to be offering a significant discount which is not sufficient to deleverage RComs loan book.

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Operationally Bharti better placed than RCom: Bharti continues to maintain its wireless leadership in India, with a wireless subscriber share of ~28%. In terms of KPIs also, as per revenue market share (RMS) data for 4QFY2013, Bharti leads at 31.2% whereas RComs RMS is at 8%, even when its subscriber market share is more than 14%. This is evident from the ARPU profile of these companies. The APRU of RCom currently stands at ~`129/month which is much lower than ~`197/month of Bhartis domestic operations. Bharti continues to be our preferred pick amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, relatively better KPIs and upside in stock price on account of listing of Bharti Infratel. Outlook and Valuation: RComs valuations have surged recently over expectations of improved asset monetization (sale/lease of cable/tower assets) post tower and intercity fibre lease deal with Reliance Jio Infocom. We believe the valuation premium with RCom trading at 8.1x FY2015E EV/EBITDA as compared to Bharti at 5.4x FY2015E EV/EBITDA is excessive, considering RComs weak growth prospects, financial leverage and uncertainty in asset monetization. In addition, on an EV/Sales basis, Rcom is trading at an expensive valuation of 2.5x FY2015E as against Bharti which is trading at 1.8x FY2015E. Thus, on most of the parameters, Bharti is a better stock to hold compared to RCom, and the former can witness significant outperformance in the coming quarters.

Key financials Bharti Airtel (Consolidated, IFRS)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 59,467 42.1 6,035 (33.7) 33.7 15.9 18.8 2.3 12.4 8.2 2.9 8.7

FY2012 71,475 20.2 4,261 (29.4) 33.2 11.2 26.6 2.2 8.4 8.1 2.5 7.5

FY2013 80,359 12.4 2,297 (46.1) 30.9 6.0 49.8 2.3 4.6 7.0 2.2 7.2

FY2014E 83,535 4.0 3,640 58.5 32.0 9.2 32.5 2.1 6.8 8.1 2.1 6.4

FY2015E 92,173 10.3 5,168 42.0 33.1 12.9 23.1 1.9 8.9 9.7 1.8 5.4

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Key financials RCom (Consolidated, Indian GAAP)
Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2011 22,430 3.8 1,429 (69.6) 37.5 6.9 17.9 0.6 3.5 2.4 2.6 6.8

FY2012 19,775 (11.8) 817 (42.8) 29.7 4.0 31.0 0.7 2.2 2.6 3.1 10.4

FY2013 21,238 7.4 669 (18.1) 31.2 3.2 38.0 0.8 2.0 3.7 3.0 9.7

FY2014E 22,050 3.8 660 (1.4) 30.6 3.2 38.5 0.7 1.9 4.3 2.8 9.2

FY2015E 23,647 7.2 1,075 63.0 30.8 5.2 23.6 0.7 3.1 4.8 2.5 8.1

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Advisory Team Tel: (91) (022) 39500777 E-mail: advisory@angelbroking.com Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Bharti Airtel No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

September 2, 2013

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