RESULTS REVIEW 1QFY16 5 AUG 2015

Bharti Airtel SELL

Beats estimates; but outlook remains grim Bharti’s 1QFY16 results (adjusted for extra-ordinaries) were ahead of estimates as the company’s domestic wireless business continues to outperform on the back of robust data revenue growth. During the quarter Bharti was also able to divest tower assets worth US$ 1.3bn in Africa.

Yet, this result doesn’t assuage our concerns on the damaging prospects of Reliance Jio’s market entry, which could pressure FY17/18 voice as well as data pricing. We value the company’s India business at 6x rolling 12 month forward EV/EBITDA arriving at a target price of Rs 375 and maintain our anti-consensus SELL stance.

Investors should look at the company’s Africa tower divestiture(s) and/or exit from African operations as exit opportunities as we believe that these positives are dwarfed by concerns in the India business due to competitive factors.

Q1FY16 results exceed expectations : Revenues of Rs 237bn grew by 3%YoY/3%QoQ; EBITDA grew by a healthy 7%YoY/2% QoQ to Rs 82.6bn. In the mobile segment, volume trends surprised positively with 5%QoQ/7%YoY growth, led by 4%QoQ/8%YoY decline in voice RPM.

Africa : tower sale the key highlight : The company’s Africa business continues to witness sluggish growth trends, underperforming low expectations and growing just 1%YoY/1%QoQ on a constant currency basis. During the quarter, the key highlight was the divestiture of tower assets in four countries, Congo B, Ghana, Nigeria and Uganda, helping the company raise US$ 1.34bn. The company’s Africa PBT improved significantly (reduced losses) due to the same.

Outlook and view : We believe that the company faces a bleak growth outlook from the competitive threats in the data business, led by the entry of Reliance Jio. Our estimates are significantly below consensus, and we retain our SELL stance.

FINANCIAL SUMMARY # (Rsmn) 1QFY16 1QFY15 YoY (%) 4QFY15 QoQ (%) FY13 FY14 FY15 FY16E FY17E Net Sales 236,808 230,055 2.9 230,398 2.8 769,470 858,635 921,351 939,037 995,336 EBITDA 82,562 77,200 6.9 81,123 1.8 232,579 277,770 313,883 318,074 340,322 APAT 18,764 16,610 40.2 24,976 21.1 22,756 27,520 56,063 54,404 74,527 Diluted EPS (Rs) 4.9 4.4 13.0 6.6 (24.9) 6.0 6.9 14.0 13.6 18.6 P/E (x) 68.8 59.8 29.4 30.3 22.1 EV / EBITDA (x) 9.6 8.3 7.9 7.4 7.0 RoE (%) 4.8 5.4 10.0 9.2 11.7 Source: Company, HDFC sec Inst Research * FY13 financials not comparable YoY led by change in accounting of Indus to equity basis # Consolidated

INDUSTRY TELECOM CMP (as on 4 Aug 2015) Rs 413 Target Price Rs 375 Nifty 8,517

Sensex 28,072

KEY STOCK DATA

Bloomberg/Reuters BHARTI IN/BRTI.BO

No. of Shares (mn) 3,997

MCap (Rs bn) / ($ mn) 1,652/25,899

6m avg traded value (Rs mn) 2,245

STOCK PERFORMANCE (%)

52 Week high / low Rs 452 / 336

3M 6M 12M Absolute (%) 5.2 12.0 9.6 Relative (%) 3.1 14.8 0.5

SHAREHOLDING PATTERN (%)

Promoters 65.45

FIs & Local MFs 9.46

FIIs 16.28

Public & Others 8.81

Source : BSE

Vivekanand Subbaraman vivekanand.s@hdfcsec.com +91-22-6171-7321

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

BHARTI AIRTEL : RESULTS REVIEW 1QFY16

QUARTERLY CONSOLIDATED FINANCIALS SNAPSHOT (Rs mn) 1QFY16 1QFY15 YoY (%) 4QFY15 QoQ (%) 1QFY16E Vs est (%) Net Sales 236,808 230,055 2.9 230,398 2.8 232,339 1.9 License Fee 23,101 22,003 5.0 21,735 6.3 21,918 5.4 Access charges 27,419 27,889 (1.7) 27,988 (2.0) 27,708 (1.0) Network cost 51,548 51,236 0.6 48,276 6.8 49,724 3.7 Employee cost 12,115 11,680 3.7 11,881 2.0 12,000 1.0 SG&A 40,063 40,047 0.0 39,395 1.7 39,789 0.7 Total Operating Expenses 154,246 152,855 0.9 149,275 3.3 151,139 2.1 EBITDA 82,562 77,200 6.9 81,123 1.8 81,199 1.7 Depreciation 40,404 40,365 0.1 38,401 5.2 40,401 0.0 EBIT 42,158 36,835 14.5 42,722 (1.3) 40,798 3.3 Finance cost 12,308 10,516 17.0 12,287 0.2 13,770 (10.6) Finance income (834) (3,957) (78.9) (3,395) (75.4) (3,500) (76.2) FX (Gains) / Loss 7,802 3,006 159.6 10,811 (27.8) 3,000 160.1 Exceptional (gain)/loss (4,581) 2,519 1,326 - PBT 27,463 24,751 11.0 21,693 26.6 27,528 (0.2) Tax 13,481 14,627 (7.8) 10,668 26.4 13,538 (0.4) (Gain)/Loss from JV (2,126) (1,578) (2,136) (2,000) Minority Interest 565 617 (8.4) 322 75.5 300 88.3 RPAT 15,543 11,085 40.2 12,839 21.1 15,691 (0.9) APAT* 18,764 16,610 13.0 24,976 (24.9) 18,691 0.4 Source: Company, HDFC sec Inst Research * APAT is net of forex gain/loss and exceptional items MARGIN ANALYSIS As % of Net Sales 1QFY16 1QFY15 YoY (bps) 4QFY15 QoQ (bps) 1QFY16E Vs est (bps) License Fee 9.8 9.6 19 9.4 32 9.4 32 Access charges 11.6 12.1 (54) 12.1 (57) 11.9 (35) Network cost 21.8 22.3 (50) 21.0 81 21.4 37 Employee cost 5.1 5.1 4 5.2 (4) 5.2 (5) SG&A 16.9 17.4 (49) 17.1 (18) 17.1 (21) Total Opex 65.1 66.4 (131) 64.8 35 65.1 8 EBITDA Margin 34.9 33.6 131 35.2 (35) 34.9 (8) EBIT Margin 17.8 16.0 179 18.5 (74) 17.6 24 RPAT Margin 6.6 4.8 175 5.6 99 6.8 (19) APAT Margin 7.9 7.2 70 10.8 (292) 8.0 (12) Tax Rate 49.1 59.1 (1,001) 49.2 (9) 49.2 (9) Source: Company, HDFC sec Inst Research

Bharti’s consolidated EBITDA was marginally ahead of estimates, led by positive surprise on revenue. During the quarter there were several exceptional items including (1) gains (net of depreciation, tax and minority interest impact) pertaining to divestiture of tower assets in Uganda, Ghana, Congo B & Nigeria of Rs 11.3bn (2) charges and provisions on account of dispute settlements and restructuring of Rs 6.7bn Adjusted PAT was in-line with estimates. EBITDA margins were in-line with our estimates with SGA savings offsetting higher than expected network costs.

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

Management highlighted that India revenue growth adjusted for the change in termination rates stood at 13%YoY, against a reported number of 10%YoY. India EBITDA margin was positively impacted by 70bps YoY/50bps QoQ, on account of the regulatory changes. Despite improving EBITDA and EBIT margins, PBT margins declined YoY/QoQ on account of high spectrum amortisation and interest costs. Africa continues to disappoint, as constant currency revenue growth stood at 1%YoY/1%QoQ. Africa network operating cost increased by 10% QoQ as a result of the tower asset divestiture. This has resulted in lower EBITDA margins. Africa PBT margin improved sharply (reduced losses) as a result of the tower deals.

FINANCIAL SUMMARY : INDIA & AFRICA 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 % chg YoY % chg QoQ India (Rs mn) Revenue 158,449 158,705 162,564 166,705 173,696 9.6% 4.2% EBITDA 60,524 61,088 63,594 67,870 70,213 16.0% 3.5% EBIT 35,628 36,474 38,850 41,962 43,017 20.7% 2.5% PBT 35,168 35,665 40,734 41,266 35,525 1.0% -13.9% PAT 23,481 24,499 28,194 28,115 22,466 -4.3% -20.1% Margin (%) EBITDA 38.2% 38.5% 39.1% 40.7% 40.4% 222 bps -29 bps EBIT 22.5% 23.0% 23.9% 25.2% 24.8% 228 bps -41 bps PBT 22.2% 22.5% 25.1% 24.8% 20.5% -174 bps -430 bps PAT 14.8% 15.4% 17.3% 16.9% 12.9% -189 bps -393 bps Africa (in US$ mn) Revenue 1,164 1,140 1,103 1,000 970 -16.6% -3.0% EBITDA 283 269 241 207 185 -34.7% -10.7% EBIT 47 63 51 31 12 -74.1% -61.0% PBT (77) (69) (115) (218) (138) 79.2% -36.7% Rep. PAT (137) (124) (136) (183) (154) 12.4% -16.1% Margin (%) EBITDA 24.3% 23.6% 21.8% 20.7% 19.1% -528 bps -165 bps EBIT 4.0% 5.6% 4.6% 3.1% 1.3% -277 bps -186 bps PBT -6.6% -6.1% -10.4% -21.8% -14.2% -760 bps 758 bps PAT -11.7% -10.9% -12.3% -18.3% -15.8% -408 bps 248 bps Source: Company, HDFC sec Inst Research

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

EBITDA margin improvements have been aided by regulatory changes and operating leverage. Management mentioned that EBITDA margin was higher by 40bps QoQ/60bps YoY due to regulatory changes. However, EBIT margin improvements haven’t kept pace with EBITDA margin improvements due to spectrum amortisation and interest costs. Non-wireless businesses : Telemedia and Enterprise business, saw sharp improvement in EBIT margin, led by robust growth. Airtel’s DTH business witnessed robust revenue growth and operating leverage. The company’s DTH business continues to outperform Dish TV and Videocon DTH.

SEGMENTAL PERFORMANCE : INDIA BUSINESS (Rs mn) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 % chg YoY % chg QoQ Wireless Revenue 127,525 126,342 131,635 134,135 137,987 8.2% 2.9% EBITDA 47,294 46,565 48,857 51,478 53,014 12.1% 3.0% EBITDA margin (%) 37.1% 36.9% 37.1% 38.4% 38.4% 133 bps 4 bps EBIT 28,440 27,646 29,833 32,016 31,918 12.2% -0.3% EBIT margin (%) 22.3% 21.9% 22.7% 23.9% 23.1% 83 bps -74 bps Telemedia Revenue 10,705 11,160 11,171 11,288 11,427 6.7% 1.2% EBITDA 3,947 4,506 4,407 5,165 5,270 33.5% 2.0% EBITDA margin (%) 36.9% 40.4% 39.5% 45.8% 46.1% 925 bps 36 bps EBIT 1,756 2,129 2,013 2,849 2,967 69.0% 4.1% EBIT margin( %) 16.4% 19.1% 18.0% 25.2% 26.0% 956 bps 73 bps Enterprise Revenue 16,111 17,037 16,177 17,805 19,690 22.2% 10.6% EBITDA 1,437 4,102 3,568 3,079 4,108 185.8% 33.4% EBITDA margin (%) 8.9% 24.1% 22.1% 17.3% 20.9% 1194 bps 357 bps EBIT 1,755 2,487 1,929 1,542 2,425 38.2% 57.3% EBIT margin( %) 10.9% 14.6% 11.9% 8.7% 12.3% 142 bps 366 bps Passive Infra Revenue 13,328 13,744 13,692 13,518 13,946 4.6% 3.2% EBITDA 3,223 6,355 6,550 6,766 6,791 110.7% 0.4% EBITDA margin( %) 24.2% 46.2% 47.8% 50.0% 48.7% 2451 bps -136 bps EBIT 4,964 5,306 5,511 5,950 6,087 22.6% 2.3% EBIT margin( %) 37.2% 38.6% 40.2% 44.0% 43.6% 640 bps -37 bps DTH business Revenue 5,915 6,263 6,234 6,348 6,848 15.8% 7.9% EBITDA 1,438 1,529 1,707 2,078 2,408 67.5% 15.9% EBITDA margin( %) 24.3% 24.4% 27.4% 32.7% 35.2% 1086 bps 242 bps EBIT (626) (676) (360) 81 415 NM 412.3% EBIT margin (%) -10.6% -10.8% -5.8% 1.3% 6.1% 1664 bps 478 bps Others Revenue 781 727 690 715 796 2.0% 11.3% EBITDA (426) (566) (430) 317 (488) 14.6% -253.9% EBITDA margin (%) -54.5% -77.9% -62.3% 44.3% -61.3% NM NM EBIT (571) (479) (472) 473 (289) NM NM EBIT margin (%) -73.1% -65.9% -68.4% 66.1% -36.3% NM NM Source: Company, HDFC sec Inst Research

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

KEY OPERATING METRICS – INDIA WIRELESS BUSINESS 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 % chg YoY % chg QoQ

Overall EOP Subs (in 000's) 209,411 211,752 217,215 226,017 230,662 10.1% 2.1% MOU (in mins/sub) 435 418 416 418 424 -2.6% 1.4% RPM (in Rs) 0.465 0.472 0.486 0.475 0.468 0.5% -1.5% ARPU (in Rs) 202 198 202 198 198 -2.1% -0.1% MOUs (in mn) 270,827 263,905 267,485 277,869 290,802 7.4% 4.7% Wireless Revenue (in mn) 125,970 124,589 130,116 131,874 136,000 8.0% 3.1% Monthly Churn % 2.7 3.1 2.7 2.5 3.3 60 bps 78 bps Voice KPIs Voice Revenue (in Rs mn) 103,070 99,371 100,756 100,648 101,580 -1.4% 0.9% Voice RPM (in Rs) 0.381 0.377 0.377 0.362 0.349 -8.2% -3.6% Non Voice KPIs (incl. data) Non Voice Rev (in Rs mn) 22,900 25,218 29,360 31,226 34,420 50.3% 10.2% Non Voice RPM (in Rs) 0.085 0.096 0.110 0.112 0.118 40.0% 5.3% Data KPIs Subs (in 000's) 39,320 40,108 42,249 46,386 49,470 25.8% 6.6% Usage (mn MBs) 55,610 67,668 77,281 86,627 102,015 83.4% 17.8% Usage/Sub (MBs) 495 563 622 656 706 42.7% 7.6% Rate/MB 0.280 0.267 0.274 0.268 0.256 -8.8% -4.7% ARPU (Rs) 139 150 170 176 181 30.2% 2.6% Data Revenue (Rs mn) 15,594 18,048 21,141 23,235 26,090 67.3% 12.3% Data as % of wireless rev 12.4% 14.5% 16.2% 17.6% 19.2% 680 bps 156 bps Non-data KPIs (in Rs mn) SMS+VAS revenue 6,892 6,733 7,749 7,500 7,731 12.2% 3.1% Others 425 453 473 490 600 41.2% 22.3% Non-voice, non-data rev 7,316 7,185 8,222 7,991 8,330 13.9% 4.2% Non-data VAS % of Wireless rev 5.8% 5.8% 6.3% 6.1% 6.1% 32 bps 7 bps Source: Company, HDFC sec Inst Research

Minutes growth exceeded estimates and was driven by elasticity as voice RPM declined. Adjusted for the termination cut, voice RPM declined by 4%YoY (Rs 0.0138/min decline to Rs 0.367/min) The sharp increase in monthly churn is an area of concern and management attributed the same to market interventions by the company and comeptitive pressures. Data revenue grew 67%YoY/12%, a continuation of healthy trends, driven by greater per subscriber usage and customer adds. At this juncture, reduction in per MB realisations isn’t alarming as the same is driven by increased utilisation of data packs by customers, rather than rate decreases.

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

KEY OPERATING METRICS : AFRICA WIRELESS BUSINESS 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 % chg YoY % chg QoQ

EOP Subs (in 000's) 69,086 71,367 74,599 76,263 78,323 13.4% 2.7% MOU (in mins/sub) 136 138 140 137 141 3.7% 2.7% RPM (in US Cents) 4.12 3.94 3.63 3.22 3.02 -26.7% -6.3% ARPU (in US$) 5.60 5.43 5.09 4.43 4.26 -24.0% -3.8% MOUs (in mn) 28,256 28,966 30,361 31,045 32,791 16.0% 5.6% Wireless Revenue (in $ mn) 1,164 1,140 1,103 1,000 970 -16.6% -3.0% Churn % 7.0 6.1 5.5 5.8 5.4 -162 bps -39 bps Active Subs (VLR) % 86.6 85.7 84.0 83.9 83.5 -307 bps -40 bps Voice KPIs Voice Revenue (in US$ mn) 913 869 844 748 706 -22.7% -5.6% Voice RPM (in US cents) 3.23 3.00 2.78 2.41 2.15 -33.3% -10.6% Non Voice KPIs (incl. data) Non Voice Rev (in $ mn) 250 271 259 252 264 5.4% 4.9% Non Voice RPM (in US cents) 0.89 0.94 0.85 0.81 0.80 -9.1% -0.7% Data KPIs Subs (in 000's) 9,882 11,049 11,242 12,289 13,039 31.9% 6.1% Usage (mn MBs) 6,541 8,061 9,475 11,256 13,843 111.6% 23.0% Usage/Sub (MBs) 231 253 290 321 359 55.8% 11.8% Rate/MB (in US cents) 1.31 1.21 1.10 1.00 0.92 -29.8% -8.0% ARPU ($) 3.0 3.1 3.2 3.2 3.3 9.3% 2.9% Revenue ($ mn) 86 98 104 113 128 48.5% 13.2% Data rev % 7.4% 8.6% 9.4% 11.3% 13.2% 576 bps 188 bps Non Voice Rev (excl. data) ($ mn) 164 174 155 139 136 -17.1% -1.8% Source: Company, HDFC sec Inst Research

Currency effects continued to play a spoil-sport in the company’s Africa business, where reported revenue growth sharply diverged constant currency revenue growth, which stood at 1%YoY/1%QoQ. In Africa too, the company faces pressures in voice business, akin to India. Africa data revenue surged 49%YoY/13%QoQ, driven by elasticity of usage to pricing reduction.

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

KEY ASSUMPTIONS FY12 FY13 FY14 FY15 FY16E FY17E FY18E

India Subs (in 000's) 181,279 188,220 205,519 226,017 240,017 254,017 266,017 India MOUs (in mn) 888,485 967,520 1,029,576 1,080,087 1,189,760 1,267,549 1,340,929 India MOU/Sub 431 436 436 417 425 428 430 India RPM (in Rs) 0.436 0.425 0.445 0.475 0.458 0.458 0.459 India ARPU (in Rs) 188 186 194 198 195 196 197 India Wireless rev. (Rs mn) 387,260 411,476 457,696 512,549 544,993 580,791 616,136 India Voice rev. (Rs mn) 325,606 341,774 379,613 403,846 400,368 405,217 407,242 India Voice RPM (in Rs) 0.366 0.353 0.369 0.374 0.337 0.320 0.304 India Voice rev. % 84.1% 83.1% 82.9% 78.8% 73.5% 69.8% 66.1% Non Voice KPIs (incl data) : India Non voice rev. (Rs mn) 61,654 69,703 78,083 108,703 144,626 175,574 208,894 Non Voice RPM (in Rs) 0.069 0.072 0.076 0.101 0.122 0.139 0.156 Non voice rev. % 15.9% 16.9% 17.1% 21.2% 26.5% 30.2% 33.9%

India and South Asia Revenue (Rs mn) 518,936 524,249 576,867 645,295 683,633 721,512 766,528 % chg YoY 11.6% 1.0% 10.0% 11.9% 5.9% 5.5% 6.2% EBITDA (Rs mn) 183,861 170,397 205,387 251,053 265,598 283,586 304,285

Margin % 35.4% 32.5% 35.6% 38.9% 38.9% 39.3% 39.7% % chg YoY 5.5% -7.3% 20.5% 22.2% 5.8% 6.8% 7.3% Africa Revenue (US$ mn) 4,137 4,417 4,491 4,592 4,119 4,417 4,668 % chg YoY 54.8% 6.8% 1.7% 2.2% -10.3% 7.2% 5.7% EBITDA (US$ mn) 1,094 1,176 1,171 1,000 846 915 977 Margin % 26.4% 26.6% 26.1% 21.8% 20.5% 20.7% 20.9% % chg YoY 84.6% 7.6% -0.5% -14.6% -15.3% 8.1% 6.8% Consolidated Revenue (Rs mn) 715,058 769,470 858,635 921,351 939,037 995,336 1,055,963 % chg YoY 20.0% 7.6% 11.6% 7.3% 1.9% 6.0% 6.1% EBITDA (Rs mn) 237,123 232,579 277,770 313,883 318,074 340,322 364,878 Margin % 33.2% 30.2% 32.4% 34.1% 33.9% 34.2% 34.6% % chg YoY 15.6% -1.9% 19.4% 13.0% 1.3% 7.0% 7.2% Source: HDFC sec Inst Research

We build in a tepid oiutlook for the Bharti’s India wireless business due to the entry of Reliance Jio. We expect the company’s voice as well as data business revenue to get impacted by pricing pressure We expect India and South Asia EBITDA margin to witness gradual improvements as India business margin pressures are offset by reduced losses in South Asia. For Africa, our EBITDA margin estimates factor in higher network costs due to tower divestiture

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

REVISION IN ESTIMATES

Rs mn FY16E FY17E

Revised Earlier % chg Revised Earlier % chg India - Wireless KPIs EOP Subs (in 000's) 240,017 240,017 0.0% 254,017 254,017 0.0% MOU (in mins/sub) 425 425 0.0% 428 428 0.0% RPM (in Rs) 0.458 0.484 -5.4% 0.458 0.509 -10.0% ARPU (in Rs) 195 206 -5.4% 196 218 -10.0% MOUs (in mn) 1,189,760 1,189,760 0.0% 1,267,549 1,267,549 0.0% India - Financials Overall Revenue 683,633 711,333 -3.9% 721,512 778,754 -7.4% EBITDA 265,598 276,360 -3.9% 283,586 306,084 -7.4% EBITDA margin % 38.9% 38.9% 0 bps 39.3% 39.3% 0 bps Africa - Wireless KPIs EOP Subs (in 000's) 82,364 82,364 0.0% 88,129 88,129 0.0% MOU (in mins/sub) 140 140 0.0% 147 147 0.0% RPM (in US Cents) 3.1 3.7 -15.8% 2.9 3.5 -15.8% ARPU (in US$) 4.3 5.1 -15.8% 4.3 5.1 -15.8% MOUs (in mn) 133,021 133,021 0.0% 150,121 150,121 0.0% Wireless Revenue (in $ mn) 4,119 4,892 -15.8% 4,417 5,245 -15.8% Africa - Financials ($ mn) Rs / $ 62.0 62.0 0.0% 62.0 62.0 0.0% Overall Revenue 4,119 4,892 -15.8% 4,417 5,245 -15.8% EBITDA 846 1,043 -18.8% 915 1,154 -20.7% EBITDA margin % 20.5% 21.3% -77 bps 20.7% 22.0% -128 bps Consolidated - Financials Overall Revenue 939,037 1,014,625 -7.4% 995,336 1,103,920 -9.8% EBITDA 318,074 341,011 -6.7% 340,322 377,614 -9.9% EBITDA margin % 33.9% 33.6% 26 bps 34.2% 34.2% -1 bps Adj. PAT 54,404 68,898 -21.0% 74,527 74,253 0.4% PAT margin % 5.8% 6.8% -100 bps 7.5% 6.7% 76 bps O/s shares 4,000 4,000 0.0% 4,000 4,000 0.0% EPS 13.6 17.2 -21.0% 18.6 18.6 0.4% Source: HDFC sec Inst Research

We reduce our RPM assumptiosn for the India wireless business as we build in a sharp decline in pricing on account of competitive pressures. Our voice RPM assumptions are Rs 0.337/min for FY16 and Rs 0.320/min for FY17 (FY15 : Rs 0.374/min; Q1FY16 : Rs 0.349/min) We also reduce our Africa business estimates led by persistent weakness in underlying revenue growth and unfavourably currency moves. We reduce our EBITDA estimates for the company’s Africa business as we build in network cost escalation led by tower asset divestiture.

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

We value Bharti’s domestic wireless business at 6.0x rolling 12-month forward EV/EBITDA, a discount to Idea (6.5x) due to the company’s lower growth prospects. We remain concerned about Bharti’s domestic wireless business on account of (1) increasing capex to support data growth: this is likely to cap FCF potential (2) sustained competitive pressures preventing tariff increases (3) looming threat of Reliance Jio’s entry in the telecom business. We believe that Reliance Jio’s competitive entry could be very damaging for Bharti, if voice RPM is under pressure.

SOTP VALUATION SUMMARY

Segments Methodology Rolling 12m EBITDA (Rs bn)

EBITDA/share (Rs)

EV/EBITDA multiple (x)

Value (in Rs bn)

Value/Share (Rs)

Wireless EV/EBITDA 198 49 6 1,185 297 Telemedia " 19 5 5 97 24 Enterprise " 18 4 5 88 22 DTH " 10 3 11 85 21 International " 58 14 4 231 58 Infratel DCF* 557 139 Enterprise Value 2,243 561 (-) Net debt 653 163 Equity Value 1,589 398 (-) One time spectrum charge 92 23 Target price 1,498 375 * Details available in our Bharti Infratel result update ; we assign 25% holdco discount to the valuation of Bharti Infratel and Airtel DTH Source: HDFC sec Inst Research SOTP VALUATION SUMMARY

Target price (Rs/sh)

Voice RPM change (FY17E) 0.0% -2.5% -5.0% -7.5% -10.0%

FY17E Voice RPM (Rs) 0.337 0.328 0.320 0.311 0.303

FY17E data revenue growth (%)

10%

FY17E Data revenue (Rs bn)

129 370 354 338 322 306 20% 140 388 372 356 340 325 30% 152 406 390 375 359 343 40% 164 425 409 393 377 361 50% 175 443 427 411 395 380

Source: HDFC sec Inst Research Note : We assume stable cost inflation as well as a steady multiple of 6x rolling 12-m forward multiple to arrive at a target price.

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

PEER VALUATIONS

Company Country M-Cap (US$ mn) Rating

P/E ROE % FY15-17 CAGR(%) EV/EBITDA (x)

FY16 FY17 FY16 FY17 EBITDA EPS FY16 FY17

Bharti India 25,884 SELL 30.3 22.1 9.2 11.7 4.1 15.3 7.4 7.0 Idea India 9,271 SELL 15.3 20.1 15.7 10.8 15.7 (4.1) 7.5 6.2 Bharti Infratel India 14,234 BUY 35.1 29.8 15.2 18.0 16.0 23.6 14.5 12.5

Towercos American Tower Corp USA 40,364 NR 37.0 30.0 6.0 16.4 30.3 30.3 17.2 15.6 Crown Castle Intl. Corp USA 27,328 NR 55.3 43.2 4.2 7.7 (20.9) (20.9) 18.0 17.1 TBIG Indonesia 2,861 NR 18.1 15.8 4.5 25.5 22.1 22.1 13.2 11.7 Global telcos (developing) Bharti Airtel* India 25,884 NR 25.2 22.4 9.7 10.1 9.7 19.2 6.7 6.0 Idea Cellular* India 9,271 NR 17.3 20.3 13.6 10.2 17.9 (4.6) 5.9 5.2 Bharti Infratel* India 14,234 NR 37.3 31.1 14.5 16.9 13.7 21.0 15.5 13.5 China Mobile China 262,622 NR 17.6 16.3 12.1 12.1 6.5 5.7 4.6 4.3 XL Axiata Indonesia 1,921 NR 28.2 15.9 5.8 9.8 10.3 164.2 4.7 4.3 PT Telkom Indonesia 21,542 NR 15.8 14.5 22.5 22.9 8.4 9.5 5.8 5.3 AIS Thailand 20,723 NR 16.2 15.9 89.9 91.0 5.7 7.2 9.9 9.4 True Corp Thailand 7,803 NR 40.1 25.2 7.8 12.8 20.5 62.2 10.3 8.5 Maxis Behrad Malaysia 12,855 NR 23.8 22.6 46.1 50.8 3.3 5.9 12.9 12.5 Telekom Malaysia Malaysia 6,434 NR 23.9 22.0 13.6 14.1 4.3 9.4 7.1 6.9 Turkcell Turkey 9,841 NR 11.3 10.5 15.5 15.1 8.0 9.7 6.1 5.6 Turk Tele Turkey 8,434 NR 10.2 9.1 33.8 35.8 4.9 16.1 5.8 5.5 Telefonica Brazil Brazil 20,443 NR 14.1 12.6 8.6 9.1 8.5 12.3 5.4 5.0 Source: HDFC sec Inst Research, Bloomberg ; * Bloomberg consensus estimates

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

CONSOLIDATED INCOME STATEMENT (Rs mn) FY13 FY14 FY15 FY16E FY17E Net Sales 769,470 858,635 921,351 939,037 995,336 Growth (%) 7.6 11.6 7.3 1.9 6.0 License Fee 66,486 76,631 87,391 90,132 95,567 Access charges 113,227 111,923 112,759 121,714 129,098 Network cost 173,333 197,202 203,372 210,241 222,903 Employee cost 38,823 46,228 47,123 48,120 51,005 SG&A 145,022 148,881 156,823 150,756 156,441 Total Operating Cost 536,891 580,865 607,468 620,962 655,014 EBIDTA 232,579 277,770 313,883 318,074 340,322 EBIDTA (%) 30.2 32.4 34.1 33.9 34.2 EBIDTA Growth (%) (1.9) 19.4 13.0 1.3 7.0 Depreciation 148,148 156,496 155,311 156,995 172,099 EBIT 84,431 121,274 158,572 161,079 168,222 Interest 36,937 35,957 28,603 32,204 26,836 Forex loss/(gain) 3,148 12,423 21,530 20,000 0 PBT 44,346 72,893 108,439 108,875 144,609 E/o loss/(gain) - (538) 8,532 (15,000) - Tax 25,184 48,449 54,047 62,170 64,566 Minority Interest (88) 2,467 1,248 4,749 5,516 Share of loss/(profit) & others (3,506) (5,211) (7,223) (5,223) (3,223)

PAT 22,756 27,726 51,835 62,180 74,527 EO loss/(gain) (net of tax) - (207) 4,228 (7,776) - APAT 22,756 27,520 56,063 54,404 74,527 APAT Growth (%) (46.6) 20.9 103.7 (3.0) 37.0 EPS 6.0 6.9 14.0 13.6 18.6 EPS Growth (%) (46.6) 20.9 103.7 (3.0) 37.0

Source: Company, HDFC sec Inst Research

CONSOLIDATED BALANCE SHEET (Rs mn) FY13 FY14 FY15 FY16E FY17E SOURCES OF FUNDS Share Capital 18,988 19,987 19,987 19,987 19,987 Reserves 484,229 577,573 599,578 650,953 700,170 Others - - - - - Total Shareholders Funds 503,217 597,560 619,565 670,940 720,157 Minority Interest 40,886 42,102 48,525 53,274 58,790 Long Term Debt 569,137 549,919 452,283 452,283 652,283 Short Term Debt 98,226 209,039 211,389 211,389 158,542 Total Debt 667,363 758,958 663,672 663,672 810,825 Non-current liabilities 58,466 74,141 203,011 219,856 240,080 TOTAL SOURCES OF FUNDS 1,269,932 1,472,761 1,534,773 1,607,742 1,829,852

APPLICATION OF FUNDS Net Fixed Assets 638,277 596,429 579,157 687,574 701,703 Acquired intangible assets 648,386 809,716 922,283 907,283 1,057,283 Other non-current assets 108,685 201,770 228,923 149,551 155,744 Non-current assets 1,395,348 1,607,915 1,730,363 1,744,408 1,914,730 Inventories 1,109 1,422 1,339 1,406 1,477 Trade Receivables 67,824 62,441 67,252 65,733 69,674 Cash & Equivalents 81,624 112,073 104,559 134,317 239,549 Other Current Assets 46,349 47,921 48,860 54,766 47,957 Current Assets 196,906 223,857 222,010 256,222 358,657 Trade Payables 259,902 283,981 339,670 390,621 437,495 Other Current Liabilities 62,419 75,030 77,931 72,814 76,586 Current Liabilities 322,321 359,011 417,601 463,435 514,081 Net current Assets (125,416) (135,154) (195,591) (207,213) (155,424) TOTAL APPLICATION OF FUNDS 1,269,932 1,472,761 1,534,773 1,607,742 1,829,852

Source: Company, HDFC sec Inst Research

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

CONSOLIDATED CASH FLOW (Rs mn) FY13 FY14 FY15 FY16E FY17E Reported PAT 22,756 27,726 51,835 62,180 74,527 PAT from Operations 22,756 27,726 51,835 62,180 74,527 Depreciation 148,148 156,496 155,311 156,995 172,099 Interest 40,085 48,381 50,133 52,204 26,836 Working Capital Change 23,841 29,723 18,739 6,021 34,641 OPERATING CASH FLOW ( a ) 234,830 262,326 276,018 277,400 308,103 Capex (133,167) (114,159) (146,411) (181,406) (182,421) Free Cash Flow 101,663 148,167 129,607 95,995 125,682 Investments & Others (55,890) (135,574) (74,070) 155,000 - INVESTING CASH FLOW ( b ) (189,057) (249,733) (220,481) (26,406) (182,421) Capital Issuance 31,654 67,960 - - - Debt Issuance (36,194) 17,024 (106,351) 115 157,669 Interest & other finance income (31,154) (40,011) 83,200 (80,880) (143,049) Dividend (4,413) (4,596) (17,882) (15,804) (30,310) FINANCING CASH FLOW ( c ) (40,107) 40,377 (41,033) (96,570) (15,690) NET CASH FLOW (a+b+c) 5,666 52,970 14,504 154,425 109,992 Parked in overdrafts 75,709 83,419 6,990 184,183 215,224 Closing Cash & Equivalents 81,624 112,073 104,559 134,317 239,549

Source: Company, HDFC sec Inst Research

KEY RATIOS FY13 FY14 FY15 FY16E FY17E PROFITABILITY (%) EBITDA Margin 30.2 32.4 34.1 33.9 34.2 EBIT Margin 11.0 14.1 17.2 17.2 16.9 APAT Margin 3.0 3.2 6.1 5.8 7.5 RoE 4.8 5.4 10.0 9.2 11.7 RoCE 3.8 4.0 6.5 7.1 7.6 Core ROCE 2.9 3.0 4.8 5.1 5.4 EFFICIENCY Tax Rate (%) 56.8 66.0 54.1 50.2 44.6 Asset Turnover (x) 0.6 0.6 0.6 0.6 0.5 Inventory (days) 1 1 1 1 1 Debtors (days) 32 27 27 26 26 Payables (days) 123 121 135 152 160 Cash Conversion Cycle (days) (91) (94) (107) (126) (134) Debt/EBITDA (x) 2.9 2.7 2.1 2.1 2.4 Net D/E 1.2 1.1 0.9 0.8 0.8 Interest Coverage 2.3 3.4 5.5 5.0 6.3 PER SHARE DATA EPS (Rs/sh) 6.0 6.9 14.0 13.6 18.6 CEPS (Rs/sh) 45.0 46.0 52.9 52.9 61.7 DPS (Rs/sh) 1.0 1.8 3.9 3.4 6.4 BV (Rs/sh) 132.5 149.5 155.0 167.8 180.2 VALUATION P/E 68.8 59.8 29.4 30.3 22.1 P/BV 3.1 2.8 2.7 2.5 2.3 EV/EBITDA 9.6 8.3 7.9 7.4 7.0 OCF/EV (%) 10.5 11.4 11.1 11.8 12.9 FCF/EV (%) 4.6 6.5 5.2 4.1 5.3 FCFE/Mcap (%) 3.9 6.8 6.1 3.9 6.0 Dividend Yield (%) 0.2 0.4 0.9 0.8 1.5

Source: Company, HDFC sec Inst Research

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

RECOMMENDATION HISTORY

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 30-Apr-15 381 SELL 355 5-Aug-15 413 SELL 375

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Bharti Airtel TP

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BHARTI AIRTEL : RESULTS REVIEW 1QFY16

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