Switch Stragey report by Angel Broking: Switch to Bharti Airtel from Reliance Communications
INR depreciation to impact RCom severely: The rupee has fallen over 19 percent in the last three months to ~Rs 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. Bharti's 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 Bharti's revenue is coming from the Nigerian geography. We note that the currency basket of Bharti's African revenues has been relatively more resilient; the Nigerian naira (NGN) has been down by ~2 percent against the USD vs. an ~19 percent commensurate fall in the INR in the last three months. On a YTD basis also, the NGN in down ~3.5 percent vs an ~21 percent 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, RCom's 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. RCom's 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 Rs 65 (from the closing of June 2013 quarter of Rs 59) can increase its liabilities by ~Rs 2,700cr or Rs 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 RCom's existing nationwide network for its 4G services. The aggregate value of the deal is Rs 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 ~Rs 13,070 per tower per month, which is much less than what Bharti Infratel is operating at, ie ~Rs 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 RCom's loan book.
Operationally Bharti better placed than RCom: Bharti continues to maintain its wireless leadership in India, with a wireless subscriber share of ~28 percent. In terms of KPIs also, as per revenue market share (RMS) data for 4QFY2013, Bharti leads at 31.2 percent whereas RCom's RMS is at 8 percent, even when its subscriber market share is more than 14 percent. This is evident from the ARPU profile of these companies. The APRU of RCom currently stands at ~Rs 129/month which is much lower than ~Rs 197/month of Bharti's 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: "RCom's 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 RCom's 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," says Angel Broking research report.
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