Event Update February 23, 2017

Rating matrix Rating : Buy (BHATE) | 369 Target : | 410 Target Period : 12 months Potential Upside : 11%

Airtel heralds consolidation phase of industry Whats Changed? Bharti Airtel has entered into a definitive agreement with to Target Unchanged acquire full ownership in the entity. Airtel will take over outstanding EPS FY18E Unchanged spectrum payments & other operational contracts, including tower lease, EPS FY19E Unchanged Rating Unchanged which amounts to ~| 2400 crore as per the company. The transaction is subject to requisite regulatory approvals from DoT & the CCI is expected Key Financials to be completed in 12 months. In addition, Airtel is also free from any | Crore FY16 FY17E FY18E FY19E exposure to claims related to the period Telenor owned the business. We Net Sales 96,619 96,807 97,328 105,133 will include the deal financials in our valuations once the deal is complete. EBITDA 34,093 35,949 34,538 37,836 Net Profit 5,484 4,124 2,873 4,128 Telenor India - 4.4 crore subs base with revenue market share of 2.1% EPS (|) 13.7 10.3 7.2 10.3 We note that Telenor India had been struggling with its operations and

was looking to exit its operations from India, which was evident from its Valuation summary absence in the last spectrum auction. The deal, on the other hand, will FY16 FY17E FY18E FY19E help Airtel further strengthen its spectrum holding in the 1800 MHz band P/E 26.9 35.8 51.3 35.7 wherein Telenor India has 43.3 MHz across the seven circles viz. Andhra Target P/E 29.9 39.7 57.0 39.7 EV / EBITDA 6.9 6.9 7.1 6.4 Pradesh, , UP (E), UP (W), , and . Airtel P/BV 2.2 2.2 2.2 2.1 will also be able to expand its subscriber base by 4.4 crore (active RoNW (%) 6.16.94.25.9subscriber as per Trai of 3.9 crore as of December, 2016) and, hence, RoCE (%) 9.4 8.5 7.7 8.8 expand its subscriber market share to 29.1% from 24.2% pre-deal. The

revenue market share is likely to improve ~200 bps from the current Premium over the 2010 and TRAI recommended prices 33.3% after the deal, depending on the rationalisation in the Bihar circle Particulars Amount where the 50% cap is breached. Telenor India had revenues of 4.5 billion Market Capitalisation (| Crore) 147,504.1 NOK (~| 3602 crore) and EBITDA of 399 million NOK (~| 318 crore) in Total Debt (FY16) (| Crore) 95,043.0 9MFY17. We highlight that Airtel has a far superior EBITDA margin profile Cash (FY16) (| Crore) 3,708.7 of 39-41% in the Indian mobility business and would be in a position to EV (| Crore) 217,732.1 52 week H/L 385/ 283 turn around the operational performance of acquired circles from Telenor Equity capital 1,998.7 and derive cost synergies. Face value 5.0 Industry, eventually, to move towards three to four player market Price Chart The Indian telecom industry is in the process of shrugging off its longstanding troubles of the market being overpopulated with seven to 10,000 500 9,000 450 nine players against the optimum number three to four players, which 8,000 400 could bring in sanity. The ongoing wave of consolidation has been forced 7,000 350 300 upon as smaller players struggle to withstand the price war triggered by 6,000 250 . The Airtel-Telenor deal is in the lines of ongoing mergers like + 5,000 200 RCom, Idea-Vodafone merger, etc. Consolidation would also bring in 4,000 150 3,000 100 some pricing discipline gradually in the sector once the subscriber base 2,000 50 across the top four or five players gets stabilised and would benefit all players, including Airtel. Feb-17 Sep-14 Sep-15 Mar-14 Mar-15 Mar-16 Aug-16 Acquisition further cements leadership foothold for Airtel Price (R.H.S) Nifty (L.H.S) With the acquisition, Bharti Airtel would further cement its position in the Research Analyst Indian telecom space with a post merger subscriber base of ~31 crore and remains a preferred choice owing to the superior operating metrics. Bhupendra Tiwary [email protected] Airtel has a superior margin profile (39-41% in the Indian mobility versus 30-32% for peers) and is keen on improving the leverage situation by selling/intending to sell stake in the non-core/unprofitable ventures & Sneha Agarwal [email protected] restructuring its business operations. Airtel possesses extensive spectrum coverage across circles with 942.9 MHZ of total spectrum (pre-deal), ~24.1% of the total spectrum in the industry (ex- BSNL/MTNL, pre-deal) and would not have any spectrum requirement in the near term. Considering the above-mentioned benefits, we remain positive on Bharti Airtel and maintain our BUY recommendation on the stock with a DCF based target price of | 410.

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Analysis The merger will lead to several synergies for Airtel, helping it augment its subscriber, revenue & spectrum market share further. Exhibit 1: Revenue Market Share changes post the deal Circles Airtel's H1FY17 RMS (%) Telenor's H1FY17 RMS (%) Combined Entity's RMS (%) A. P. 45.2 3.2 48.4 Bihar 53.7 7.0 60.7 Delhi 40.4 - 40.4 Gujarat 14.7 4.1 18.8 17.2 - 17.2 H. P. 50.9 - 50.9 J & K 41.9 - 41.9 52.9 - 52.9 8.4 - 8.4 26.0 - 26.0 M. P. 24.4 - 24.4 Maharashtra 16.8 3.0 19.8 26.1 - 26.1 Orissa 48.3 - 48.3 Punjab 36.4 - 36.4 Rajasthan 47.6 - 47.6 35.5 - 35.5 U. P. (East) 30.1 8.7 38.8 U. P. (West) 20.2 9.1 29.3 33.7 - 33.7 Assam 39.3 0.3 39.6 North East 49.1 - 49.1 Overall 33.4 2.1 35.5

Source: Company, ICICIdirect.com Research

Exhibit 2: Spectrum holding Circles Bharti Telenor Bharti+Telenor LSA/Mhz 900 1800 2100 2300 1800 900 1800 2100 9.0 10.00 5.00 30.0 6.4 9.0 16.40 5.00 Assam 8.0 9.45 5.00 30.0 6.0 8.0 15.45 5.00 Bihar 7.8 8.00 10.00 30.0 7.2 7.8 15.20 10.00 Delhi 6.0 7.00 10.00 30.0 - 6.0 7.00 10.00 Gujarat - 11.20 5.00 10.0 5.0 - 16.20 5.00 Haryana - 16.20 5.00 20.0 - - 16.20 5.00 Himachal Pradesh 7.4 10.20 5.00 10.0 - 7.4 10.20 5.00 Jammu & Kashmir 6.2 5.00 10.00 20.0 - 6.2 5.00 10.00 Karnataka 8.8 8.80 5.00 30.0 - 8.8 8.80 5.00 Kerala - 11.20 5.00 20.0 - - 11.20 5.00 Kolkata 7.0 9.00 - 30.0 - 7.0 9.00 - Madhya Pradesh - 18.80 5.00 40.0 - - 18.80 5.00 Maharashtra - 13.20 5.00 20.0 5.0 - 18.20 5.00 Mumbai 5.0 15.20 5.00 30.0 5.0 15.20 5.00 North East 8.8 10.00 5.00 30.0 - 8.8 10.00 5.00 Orissa 7.4 13.00 5.00 30.0 - 7.4 13.00 5.00 Punjab 10.0 10.00 - 20.0 - 10.0 10.00 - Rajasthan 6.0 10.00 10.00 - - 6.0 10.00 10.00 Tamilnadu(inc Chennai) 6.2 11.80 10.00 30.0 - 6.2 11.80 10.00 Uttar Pradesh (East) 6.2 6.00 5.00 - 6.8 6.2 12.80 5.00 Uttar Pradesh (West) - 11.20 5.00 - 7.0 - 18.20 5.00 West Bengal 6.6 6.20 5.00 30.0 - 6.6 6.20 5.00 Total 116.4 231.45 125.00 490.0 43.4 116.4 274.85 125.00

Source: Company, ICICIdirect.com Research

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Airtel will also be able to expand its subscriber base by 4.4 crore (active subscriber as per Trai of 3.9 crore as of December, 2016) and, hence, expand its subscriber market share to 29.1% from 24.2% pre-deal. The revenue market share will also improve ~200 bps from the current 33.3%, depending on the rationalisation in the Bihar circle where the 50% cap is breached. Exhibit 3: Telenor India’s financials Particulars (| Crore) FY15 FY16 9MFY17 Subscription and traffic reveneus 3,650.4 3,928.6 3,021.5 Interconnect revenues 660.6 600.1 547.9 Mobile revenues company's subscriptions 4,311.0 4,528.6 3,569.4 Other mobile revenues 31.9 24.8 22.8 Total mobile revenues 4,342.9 4,553.4 3,592.2 Non-mobile revenues 10.1 10.8 9.4 Total revenues 4,353.0 4,564.3 3,601.6 EBITDA before other income and expenses -379.3 33.0 318.4 EBITDA Margin (%) -8.7 0.7 8.8 Other income and expenses -83.9 -540.3 71.0 EBITDA -463.1 -507.2 389.4 Depreciation and amortisation -304.1 -741.7 -147.7 Impairment losses 0.0 -1,838.2 -3,611.8 Operating profit/loss -767.2 -3,087.2 -3,370.1 No. of mobile subscriptions (in million) 40.9 44.7 44.7

Source: Company, ICICIdirect.com Research

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Valuation With the acquisition, Bharti Airtel would further cement its position in the Indian telecom space with a post merger subscriber base of ~31 crore and remains a preferred choice owing to the superior operating metrics. Airtel has a superior margin profile (39-41% in the Indian mobility versus 30-32% for peers) and is keen on improving the leverage situation by selling/intending to sell stake in the non-core/unprofitable ventures & restructuring its business operations. Airtel possesses extensive spectrum coverage across circles with 942.9 MHz of total spectrum (pre-deal), ~24.1% of the total spectrum in the industry (ex- BSNL/MTNL, pre-deal) and would not have any spectrum requirement in the near term. Considering the above-mentioned benefits we remain positive on Bharti Airtel and maintain our BUY recommendation on the stock with a DCF based target price of | 410.

Exhibit 4: DCF assumptions Particulars Amount WACC 10.2% Revenue CAGR over FY17E - FY22E 5.0% PV of Cash Flow Till Terminal Year 44,767.6 Terminal Growth 3.9% Present Value of terminal cash flow 207,459.8 PV of firm 252,227.4 Less: Net Debt 88,328.4 Total present value of the Equity (excluding current cash) 163,899.0 Number of Equity Shares outstanding 399.7 DCF - Target price (|) 410

Source: Company, ICICIdirect.com Research

Exhibit 5: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%) FY16 96,619.3 4.9 13.7 5.8 26.9 6.9 6.1 9.4 FY17E 96,807.5 0.2 10.3 -24.8 35.8 6.9 6.9 8.5 FY18E 97,327.9 0.5 7.2 -30.3 51.3 7.1 4.2 7.7 FY19E 105,132.9 8.0 10.3 43.7 35.7 6.4 5.9 8.8

Source: Company, ICICIdirect.com Research

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Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E Total operating Income 96,619.3 96,807.5 97,327.9 105,132.9 Profit after Tax 5,484.3 4,124.4 2,873.1 4,127.7 Growth (%) 4.9 0.2 0.5 8.0 Add: Depreciation 17,449.8 19,651.9 19,952.2 21,447.1 Employee Expenses 4,911.2 4,328.0 4,618.8 5,036.9 Add: Interest Paid 6,988.9 7,805.1 8,483.6 8,243.6 Marketing Expenses 15,998.7 14,530.6 14,802.9 15,708.3 (Inc)/dec in Current Assets 150.3 1,885.9 374.4 (925.3) Access Charges 10,942.3 10,413.6 10,907.2 11,782.2 Inc/(dec) in CL and Provisions 5,218.2 -1,591.3 4,056.1 4,008.7 Network Operating 21,166.8 22,204.5 22,910.1 24,628.3 Others 0.0 0.0 0.0 0.0 License Fee 9,492.7 9,368.9 9,386.0 9,982.8 CF from operating activities 35,291.4 31,876.0 35,739.4 36,901.8 Other Costs 14.2 0.0 0.0 0.0 (Inc)/dec in Investments 4,442.7 -700.0 -500.0 -500.0 Other expenses - 13.3 164.6 158.1 (Inc)/dec in Fixed Assets -49,032.1 -34,244.0 -22,000.0 -22,000.0 Total Operating Expenditure 62,525.9 60,858.9 62,789.5 67,296.7 Others 6,275.2 449.5 86.2 106.5 EBITDA 34,093.4 35,948.6 34,538.3 37,836.3 CF from investing activities -38,314.2 -34,494.5 -22,413.8 -22,393.5 Growth (%) 8.8 5.4 -3.9 9.5 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Depreciation 17,449.8 19,651.9 19,952.2 21,447.1 Inc/(dec) in loan funds -5,466.6 5,122.0 -4,000.0 -4,000.0 Interest 6,988.9 7,805.1 8,483.6 8,243.6 Dividend paid & dividend tax -636.1 -2,104.6 -2,104.6 -2,104.6 Other Income 0.0 0.0 0.0 0.0 Interest Paid 6,988.9 7,805.1 8,483.6 8,243.6 Exceptional Items (1,450.5) 564.2 - - Others 4,673.4 -8,488.2 -16,967.2 -16,487.2 PBT 11,105.2 7,927.3 6,102.5 8,145.5 CF from financing activities 5,559.7 2,334.2 -14,588.2 -14,348.2 MI / Profit from associates -315.9 -622.3 -796.0 -808.6 Net Cash flow 2,536.9 -284.3 -1,262.6 160.0 Total Tax 5,936.8 4,425.3 4,025.4 4,826.4 Opening Cash 1,171.8 3,708.7 3,424.4 2,161.8 PAT 5,484.3 4,124.4 2,873.1 4,127.7 Closing Cash 3,708.7 3,424.4 2,161.8 2,321.8

Growth (%) 5.8 -24.8 -30.3 43.7 Source: Company, ICICIdirect.com Research EPS (|) 13.7 10.3 7.2 10.3

Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (Year-end March) FY16 FY17E FY18E FY19E (Year-end March) FY16 FY17E FY18E FY19E Liabilities Per share data (|) Equity Capital 1,998.7 1,998.7 1,998.7 1,998.7 EPS 13.7 10.3 7.2 10.3 Reserve and Surplus 63,631.4 65,651.1 66,419.6 68,442.7 Cash EPS 57.4 59.5 57.1 64.0 Total Shareholders funds 65,630.1 67,649.8 68,418.3 70,441.4 BV 164.2 169.2 171.2 176.2 Total Debt 95,043.0 107,287.0 103,287.0 99,287.0 DPS 1.6 5.3 5.3 5.3 Deferred Tax Liability 1,435.6 1,435.6 1,435.6 1,435.6 Cash Per Share 9.3 8.6 5.4 5.8 Others 15,235.7 15,685.2 15,771.4 15,877.8 Operating Ratios Total Liabilities 177,344.4 192,057.6 188,912.3 187,041.9 EBITDA Margin (%) 35.3 37.1 35.5 36.0 EBIT Margin (%) 17.2 16.8 15.0 15.6 Assets PAT Margin (%) 4.2 4.8 3.0 3.9 Gross Block 290,738.0 324,982.0 346,982.0 368,982.0 Inventory days 0.6 0.6 0.6 0.6 Less: Acc Depreciation 109,011.7 128,663.7 148,615.9 170,063.0 Debtor days 27.6 25.0 24.0 24.0 Net Block 181,726.3 196,318.4 198,366.2 198,919.0 Creditor days 146.4 140.0 150.0 150.0 Investments 14,194.9 14,894.9 15,394.9 15,894.9 Return Ratios (%) Inventory 169.2 169.5 170.4 184.1 RoE 6.1 6.9 4.2 5.9 Debtors 7,310.6 6,630.7 6,399.6 6,912.9 RoCE 9.4 8.5 7.7 8.8 Loans and Advances 4,883.2 3,669.5 3,504.8 3,596.6 RoIC 10.3 9.2 8.4 9.5 Other Current Assets 3,796.4 3,803.8 3,824.2 4,130.9 Valuation Ratios (x) Cash 3,708.7 3,424.4 2,161.8 2,321.8 P/E 26.9 35.8 51.3 35.7 Total Current Assets 19,868.1 17,697.9 16,060.9 17,146.2 EV / EBITDA 6.9 6.9 7.1 6.4 Creditors 38,745.6 37,131.6 39,997.8 43,205.3 EV / Net Sales 2.4 2.6 2.5 2.3 Provisions 232.6 238.6 257.0 277.6 Market Cap / Sales 1.5 1.5 1.5 1.4 Other Current Liabilities 8,544.6 8,561.3 9,732.8 10,513.3 Price to Book Value 2.2 2.2 2.2 2.1 Total Current Liabilities 47,522.8 45,931.5 49,987.6 53,996.2 Solvency Ratios Net Current Assets -27,654.7 -28,233.6 -33,926.7 -36,850.0 Debt/EBITDA 2.8 3.0 3.0 2.6 Others Assets 9,078.0 9,078.0 9,078.0 9,078.0 Debt / Equity 1.4 1.6 1.5 1.4 Application of Funds 177,344.4 192,057.6 188,912.3 187,041.9 Current Ratio 0.3 0.3 0.3 0.3

Quick Ratio 0.3 0.3 0.3 0.3

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

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ICICIdirect.com coverage universe (Telecom) CMP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company (|) TP(|) Rating (| Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Bharti Airtel (BHAAIR) 369 410 Buy 147,504 13.7 10.3 7.2 26.9 35.8 51.3 6.9 6.9 7.1 9.4 8.5 7.7 6.1 6.9 4.2 (BHAINF) 299 350 Buy 55,303 11.8 15.5 16.2 25.2 19.3 18.5 9.7 9.2 8.4 15.1 18.5 20.7 12.2 17.6 18.6 (IDECEL) 118 105 Hold 42,500 8.6 -1.6 -6.0 13.8 NM NA 6.4 9.5 11.3 9.0 3.1 1.0 12.0 NM NM Tata Comm. (TATCOM) 745 785 Buy 21,221 -7.4 56.0 17.8 NM 13.3 41.7 11.2 11.7 10.0 5.1 5.7 7.6 NA NA 36.4 Source: Company, ICICIdirect.com Research

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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

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