Bharti Airtel -Africa concerns confirmed in 2Q results; JPMorgan

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Bharti Airtel Limited
Neutral  - BRTI.BO, BHARTI IN
Africa concerns confirmed in 2Q results; watching 2H margins in India



2Q results confirmed our concerns about near-term profitability in Africa
and the need for Bharti to invest in scale before it can see operating
leverage benefits. Performance in the India and South Asia business was
muted with ARPMs protected over volume growth. We are not convinced
that ARPM declines have bottomed out just yet, as we expect MNP to drive
competitive pressures in the post-paid segment. We would look for
evidence of a turnaround in Africa and Bharti protecting its revenue share
in India before turning more positive.


• Africa: Near-term margin concerns confirmed: Africa weighed down
on 2Q results, diluting the EBITDA margin by 3.6pp and net profit by
19%. Furthermore, comments by management that the restructuring
program would take 1-2 quarters to pan out keep us cautious on nearterm
profitability. We increase our FY11 revenue estimate by 11% on
account of a 5% beat in 2Q and increased net add forecast but we reduce
our margin forecast by 5pp to 23% margin and our absolute EBITDA
estimate by 7%. We expect increased marketing spend and higher access
and network costs. Re-branding expenses if recognized in a single
quarter would imply further downside.

• India and South Asia: Good 2Q strategy; watching margins in 2H:
Protecting ARPMs over volume growth worked well for Bharti in 2Q, in
our view. While revenue (excl. Africa) increased only 0.5% Q/Q we
note that the margin decline, too, was limited at 40bp. For 2H we expect
increases in network opex (as capex increases 22% H/H on our
estimates) and SG&A expenses ahead of the 3G launch. We forecast a
37.6% margin for FY11 (consolidated 34.2%).

• We roll out our Dec-11 SOTP-based price target of Rs356 (down slightly
from our Mar-11 PT of Rs360). A key upside risk is better performance
in Africa, while downside risks include higher-post paid competition and
the regulatory overhang.