BHARTI AIRTEL-Focusing away from minutes– Edelweiss

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􀂃 Margin fall despite stable RPM disappointing
Bharti Airtel’s (BHARTI) Q2FY11 performance was below par, in our view,
especially the 120bps Q-o-Q decline in EBIT margin in the mobility business
despite stable RPM. The company’s consolidated IFRS revenue, at INR 152.2 bn,
was higher, but EBITDA, at INR 51.2 bn, was lower than consensus forecast of
INR 52.3 bn. EBITDA margin declined 240bps Q-o-Q to 33.7%, the lowest in six
years, due to higher diesel costs and impact of salary hikes. ARPU, at INR 202,
declined 6.4% Q-o-Q and MOU, at 454, declined 5.5% Q-o-Q, but RPM declined
a meager 0.9% Q-o-Q to INR 0.44. Contribution of non-voice revenues increased
to 12.7% from 11.6% in the previous quarter, which aided stable RPM. BHARTI’s
Africa business demonstrated 100% demand elasticity as RPM decline of 9% Qo-
Q aided MOU growth of 9% Q-o-Q. But, EBITDA margin declined 360bps Q-o-Q
to 23.9%. Its target of raising margins to 40% by FY13 appears challenging,
although the company remained confident of achieving it. It incurred only USD
80 mn of capex in Q2FY11 against a guidance of USD 800 mn p.a.


􀂃 Margins versus growth?
The company’s RPM remained relatively stable, yet its mobility business EBIT
margin declined 120bps Q-o-Q. BHARTI stated that it is focusing on RPM than
chasing minutes growth. The mobile business in India, as per our understanding,
was a ‘minutes factory’, which meant that an operator created capacity and
focused on utilising it up to a level where marginal cost was lower than marginal
revenues. The company’s focus away from minutes leads us to believe the
following: (a) high utilisation is impacting quality of service, which will be risky
given the imminent roll out of Mobile Number Portability (MNP); or (b) it is
refraining from diluting RPMs before the imminent MNP roll out, which anyways
will pressurise RPM; or (c) usage elasticity in the business has become so
minimal that it does not justify diluting RPMs further. In any scenario, it seems
to suggest that incremental growth will come at lower margins. Hence, BHARTI
will have to choose between growth and margins.

􀂃 Outlook and valuations: Too many headwinds; maintain ‘HOLD’
We remain cautious on the mobile business in India. We see headwinds to margins
from MNP implementation and 3G services launch. We believe, MNP provides
existing high margin customers ability to ‘negotiate’ better pricing and also
increase customer acquisition/retention costs. We are cutting our earnings 6% and
9% for FY11E and FY12E, respectively, as we expect growth to slow down and
margins to get impacted. We maintain ‘HOLD/Sector Outperformer’.