We believe Bharti offers a rare combination of high quality, solid and visible earnings growth at attractive valuations. The company is best placed to ride regulatory bumps, thanks to its superior scale and strong balance sheet.
We conservatively estimate 16% EPS CAGR over FY10-11 based on ~1.7m monthly net-adds from November 2008 to March 2011 (last six months average: 2.64 million) and ~200bps erosion in wireless EBITDA margin (adjusted for site rentals).
With effective net-debt < $400 million, no greenfield capex and strong FCF generation in FY10 (ex-3G), the company is much better placed versus peers to absorb potential spectrum-related taxes.
Our worst-case fundamental value for Bharti is Rs660/ share, assuming zero tower upside and negative $800m NPV from 3G. Catalysts are: (1) 3Q recovery in revenue growth, (2) a material y-o-y decline in FY10 capex, and (3) increase in tower sharing factor of Infratel / Indus.
Our Rs850 target price comprises Rs790 from core business + Infratel (ex-Indus) and Rs60 from 37.4% effective stake in Indus.
At 1-yr fwd PE of 11.6x, the stock is trading 10% below its 5-yr trough valuation and 29% premium to Sensex (vs 4-yr avg. of 33%).
Key risks to our target price include irrational competition post RCOM’s GSM expansion, aggressive 3G bids and M&A discount.