Bharti Airtel: 2QFY11 weak but elasticity exists in Africa: HSBC

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Bharti Airtel (BHARTI IN)
N(V): 2QFY11 weak but elasticity exists in Africa
 2QFY11 lower than our estimates, driven by seasonality
 Africa reflects early signs of usage elasticity; MOUs up by 9%
 N(V) with TP of INR 370





Bharti 2QFY11 numbers disappointed with net income 8% below our estimates; largely
driven by margin decline in Africa and decline in minutes of usage on back of seasonality.
Operating parameters for the company were mixed with APRU and MoU declining 6% and
5% respectively. However, the revenue per minute (RPM) decline was just 1% (refer to Figure
3), compared to 5% in the previous quarter as management preferred maintaining realization
rate rather than gaining minutes (traffic growth less than 1% during the quarter).

Key growth drivers for the stock- We believe India business will be dependant on the usage
growth going forward, at least for the next 2-3 quarters, by the time data revenues assume
some stability. Separately we expect growth drivers for the Africa business to be usage
elasticity and progress on tower sharing. We believe the first full quarter numbers for Africa
give a fair indication on elasticity in Africa, which form the foundation of Bharti’s ability to
replicate the minute factory model in our view. Even though margins dipped for the Africa
business, we don’t view that as a significant concern as there has not been enough investment
in the business in a few of the earlier quarters.

Bharti various initiatives in Africa – The management highlighted various initiatives for the
Africa business: 1) focus on network architecture to drive network utilization rates 2) finalizing
3G network partners in 9 African countries 3) strengthen distribution by following a match box
distribution model 4) focus on non-voice potential 5) reduce man power challenges/costs
through outsourcing. Our analysis between Bharti Africa and MTN cost structure suggest that
scope exists for Bharti to achieve savings in the selling and administration costs and employee
costs. Bharti management emphasised the effectiveness of spending as well. (Figure 5)

Next couple of quarters may be tough given the 3G launch related expenses, initial
pressures of mobile number portability. While various initiatives being considered in Africa
appear positive, meaningful margin expansion is unlikely in the near term in our view.
However investors will also be focussed on the 3G adoption rates and we expect the stock to
be range bound.

Valuation and risks: We retain our N(V) rating and SOTP based target price of INR370 on
Bharti. We value Bharti’s India business at INR403 per share and Africa business at -INR33.
The key upside risks, in our view, are sector consolidation and ability to monetize tower assets.
We would view acceptance of TRAI’s recommendation as negative (estimated net impact of –
INR67 on target price).