Bharti Airtel- Hold: 2Q - Operationally Weak, But Expected:: Citi

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Bharti Airtel (BRTI.BO)
Hold: 2Q - Operationally Weak, But Expected
 Familiar story by now — Consol EBITDA at Rs51.2bn came in slightly below with
1) mobile primarily hit by seasonality/higher network opex and 2) cost pressure in
Zain. Other businesses though registered decent growth aided by cost
optimization. Net profit at Rs16.6bn (flat qoq) included forex gain of Rs2.5bn
(Rs2.2bn loss in 1Q).


 Flat traffic though not all from seasonality — While part of the reason for the flat
traffic growth has been due to seasonality, Bharti’s reluctance to participate in
circle level tariff cuts (highlighted by its decline in monthly net adds and flat
rev/min) would have also impacted growth (Vodafone – 1p rev/min decline = 2%
mins growth, Idea 2p decline = 3% growth). Growth however should revive in 3Q
given seasonal pick up.
 Africa - early days but encouraging signs — Africa revenues grew 4% qoq with
encouraging signs on elasticity – 8% rev/min decline resulted in a 9% MoU
expansion. In addition, Bharti has been making the right moves – sharp tariff cuts
in low rev share markets and implementing cost efficiencies through outsourcing.
Margins however fell 360bps qoq on higher employee cost (+250bps) as well as
access charge (higher on-net traffic) and may come under further pressure in 2H
on increased pace in network roll-out (US$84m capex in 2Q with full year
guidance at US$840m) as well as rebranding costs.
 Infratel delivering, decent performance in non-mobile business— Infratel
registered strong growth led by both increase in tower nos and tenancy. The
removal of the security ban and 3G is likely to result in a sharp run-up in tenancy
in both Infratel/Indus in 2H. Fixed-line and enterprise too witnessed healthy
growth driven in part by cost optimization.