Bharti Airtel – 2QFY2011 Result Update-Angel Broking

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  Bharti Airtel – 2QFY2011 Result Update

Angel Broking maintains an Accumulate on Bharti Airtel with a Target Price of Rs358.

Muted revenue growth: For 2QFY2011, Bharti Airtel (Airtel) reported lower-thanexpected

results. Consolidated revenue stood at `15,215cr, with 24.4% qoq

growth (estimate of `15,308cr), mainly led by a steep fall in MOU to 454min

(estimate of 476min) in the mobile–India and South Asia–business. Further, in

2QFY2011, Airtel witnessed full-quarter revenue contribution of `3,891cr from

Zain Africa (estimate of `3,884cr). Zain Africa reported strong 9% qoq growth in

MOU to 112min (v/s our estimate of 106 min) as against 103min in 1QFY2011;

however, ARPM declined by 8.3% qoq to US $0.066/min. Airtel’s other segments

such as telemedia services, enterprise services and passive infrastructure services

grew by 1.8%, 2.3% and 3.7% qoq, respectively, during the quarter.

OPM slips due to African business: Overall EBITDA margin fell by 243bp qoq to

33.7% due to cost run-up in African operations, which posted a 356bp qoq drop

in margin to 23.9%. However, the mobile–India and South Asia–business posted

a robust performance, with EBITDA margin at 35.2% despite a steep fall in MOU.

Outlook and valuation: The trend witnessed in ARPU over the past eight quarters

points towards easing price war and decreasing price elasticity in the Indian

mobile market. We expect the strong operating cash flow from the organic

business to help Airtel in deleveraging its balance sheet from the current debt-toequity

of 1.2x to 0.9x in FY2012. Further, we expect a turnaround in its African

business, on the back of various outsourcing initiatives taken by Airtel to aid its

margins. We expect Airtel’s Indian mobile subscriber base to grow at an 18.5%

CAGR over FY2010–12E to 179mn subscribers. We value Airtel at EV/EBITDA of

7x FY2012E EBITDA, which gives us a Target Price of `358 and continue to

maintain our Accumulate view on the stock.

Investment rationale

Easing price war

Over the quarters, the rate of decline in ARPU has abated to a great extent. ARPU

has been declining since the onset of the price war in 3QFY2009. ARPU for Airtel

witnessed a ~`25 qoq decline in absolute terms until 3QFY2010, post which the

decline run rate settled down at lower ~`10 qoq. This envisages that the hypercompetition

intensity, which haunted the industry in the past, is now abating.

Going forward, we expect MOU to remain stable and ARPM to marginally decline

from the current levels, as the improving VAS share will arrest its downside.

Strong cash flows from the organic business will help debt

management

The mobile–India and South Asia–business and other segments, including

telemedia services and passive infrastructure services, are operationally strong,

contributing more than 85% to Airtel’s EBITDA. Easing competition in the mobile–

India business and South Asia–business and improving operating metrics due to

lower NOE will drive the company’s strong operating cash flows. Further, margins

will be aided by improvement in the tenancy ratio as well as an uptick in sharing

revenue per sharing operator per month on the back of increasing cost-cutting

measures by telcos via sharing of passive infrastructure. In addition, the capex,

which had peaked in 1HFY2011, will drop down to ~`11,500cr from FY2012.

Hence, we expect the strong operational cash flow from India business to help the

company in deleveraging its balance sheet from the current debt-to-equity of 1.2x

to 0.9x by FY2012.

Turnaround in Africa to aid profitability

We expect the turnaround in the African business to aid the company’s profitability.

Airtel is presently focussing on growing its Africa business via exploiting the high

price elasticity nature of the African market. Further, the company has undertaken

various outsourcing initiatives to cut down on Zain Africa’s network operating

expenses as well as employee costs. Thus, we expect Zain Africa’s EBITDA to scale

up to 26.6% in FY2012 from 23.9% currently, thereby aiding Airtel’s profitability.

Outlook and valuation

Over FY2010–12E, we expect the company’s India mobile subscriber base to grow

at an 18.5% CAGR to 179mn subscribers and revenue to post an 11% CAGR. For

the African business, we expect decent subscriber net additions, taking the

subscriber base to 53mn in FY2012 from the current 40mn. We value the

company at EV/EBITDA of 7x FY2012E EBITDA, which gives us a Target Price of

`358 and continue to maintain our Accumulate view on the stock.