Citigroup - Bharti Airtel (BRTI.BO): Buy: Tower Power - Raising Target Price to Rs960

[Sunil]

Summary

New target price on the tower option — We incorporate an option value of Rs158 for Bharti's towerco based on improving visibility in tower dynamics in India. Maximum leverage on many value drivers to robust Indian wireless growth keeps Bharti our top regional telco pick and a India model portfolio constituent. Many drivers to more tower sharing in India — (1) Significant build-out ahead largely in rural areas – sharing bodes well for significant capex savings; (2) potential cost savings could see low tariffs go lower to drive penetration growth: a national objective; and (3) policy and regulatory forces are all in favor. Sharing at ~25% now; we estimate this will rise to 60-70% by FY11. TowerCo: opportunity to further leverage Bharti's competitive edge — Bharti's demonstrated rollout capabilities, tower share of 36-38% (versus 22% subs share) and early initiatives on infrastructure sharing (asset spin-off, tower sharing MoU with Vodafone) open up the opportunity for Bharti Infratel to become the largest towerco in India. TowerCo potential: numbers and value — On a DCF, we see US$6.1bn of NPV from the towerco initiative. The implied EV/EBITDA of 17.5x FY08E and 11.7x FY09E are at discounts to a US peer group trading at ~20x on the same metric. Valuation implications for Bharti, and risks — TowerCo NPV is Rs145/Bharti share. We estimate cost savings at Rs13/share – all of which add to an option value of Rs158/share from its tower initiatives. We see this gradually building into the stock price as execution data points filter in. Slower tower sharing uptake would be the key risk to our argument.

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