Bharti Airtel: Fighting battles, will it win the war?": Nomura

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􀁾 Action
Africa showed a reasonable start, representing 26% of group revenue and 17% of
group EBITDA in 2Q; minutes elasticity was1.0x. Domestic trends were mixed, with
flat wireless traffic volume reflecting the company’s intentions to maintain prices; a
1% q-q price decline was better than its peers. Irrespective of logistics and labour
challenges, cost comparisons between Africa and India suggest scope for further
margin efficiencies in the medium term, we think, but near-term stock sentiment
could be weak amid: a) competition concerns leading up to 3G launches; b) MNP
impact; and c) overhang from Vodafone’s 5% stake in Bharti. Maintain NEUTRAL.


􀁡 Catalysts
Operational improvements in Africa and progress on 3G/data would be positive
catalysts. Regulatory risks on MNP and spectrum prices remain.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.


Fighting battles, will it win the
war?
􀁣 Broadly an in-line result – Africa early days, India mixed
Domestic revenues and EBITDA ex-Africa were flat q-q, with a 37%
margin. With the first full-quarter contribution from Africa, consolidated
margin fell to 34%. The company is still undertaking some cost/capex
assessments in Africa, and it is perhaps a bit too early to extrapolate
these margin trends, we believe. Domestic wireless trends were
mixed – flat revenues and a 2% drop in EBITDA, with the rest broadly
in line. Reported NPAT of INR17bn fell 1% q-q; adjusting for FX gains
of INR2.5bn, we estimate a 33% q-q drop in underlying NPAT.
􀁤 Revenue/cost differentials between Africa and India …
1) Cost per employee of US$50k/pa in Africa is double that of an
Indian Bharti employee – further outsourcing initiatives may see some
normalisation; 2) subscriber density (subs/cell site metric) is higher
than in India, but usage/utilization is much lower – hence
improvement in voice elasticity bodes well for margins, we believe;
3) there are logistical challenges with network rollout, and Bharti will
likely announce a new vendor arrangement soon; and 4) despite 7-8
African countries implementing subscriber verification laws, Bharti’s
40mn subs are current active users. Other regulatory risks are
relatively benign at this stage, in our view.

􀁥 Near-term overhangs cloud long-term opportunities
This result is unlikely to change the market’s view on either India or
Africa, which is a bigger variable we think. The real assessment of
opportunities and risks is still months away. In our view, near-term
stock sentiment will be driven by domestic overhangs of price
competition, 3G launches and MNP, among others. We maintain
NEUTRAL with a revised PT of INR332.