Bharti Airtel - OUTPERFORM Price target: Rs381: Standard Chartered

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Bharti Airtel
OUTPERFORM (unchanged) Price target: Rs381


Summary
Bharti’s 2Q EBITDA was slightly below our estimates due to a seasonal slowdown in traffic growth. However, tariff
stability was a big positive during the quarter. We believe the worst of the rev/min decline is behind and traffic
growth will bounce back in 2H. Standalone PAT was inline and was supported by forex gains and deferred tax
income during the quarter. Africa pulled down consol PAT by 18%, but operational signs with MoU up 9% qoq, flat
ARPU and initial signs of elasticity are encouraging. Reiterate OUTPERFORM.

Results: Key points
Standalone EBITDA below estimates; PAT inline: 2QFY11 revenue for Indian and South Asian
operations was flat sequentially as minutes growth remained flat and was below our lowered
expectation of 2-3% qoq growth post Idea’s quarterly results. Though a seasonal slowdown was
to be expected, growth was at the lower end of the range, in our view.

This coupled with a
100bps qoq increase in network opex primarily due to increase in diesel cost and network
expansion during the quarter led to consolidated EBITDA margin declining 30bps qoq; EBITDA of
Rs42.2bn was thus 3% below expectations. Reported PAT was, however, inline at Rs20.4bn due
to deferred tax credit of Rs1.8bn during the quarter.

Tariff stability is a big positive in 2Q – Rev/min remained flat with a marginal decline of 0.4p
qoq which is a big positive during the quarter. Bharti’s standalone 1H EBITDA is 46% of our full
year estimates and we believe that key to achieving full-year forecasts is (i) relative revenue
stability in 2H and (ii) seasonal bounce back in traffic growth.



Africa continued to drag but operational signs are encouraging – African operations
(including the finance cost of the holding company) pulled down consol PAT by 18%. While
EBITDA (annual run-rate of US$850m) remained stagnant and margins (23.9%) depressed,
lower depreciation offset the impact somewhat despite the tax expenses.
However, with MOUs up 9% and ARPUs remaining flat at US$7.4, management was confident of
price interventions (10 out of 16 countries now) creating sufficient elasticity. We also believe that
the initial success for Bharti might come from increasing the net utilisation of existing network
(through a mix of price cuts and brand repositioning due in few weeks) rather than fruition of low
cost model. Management also hinted that some of the price cuts so far were to bring the existing
premiums down rather than an indication of a "price war".

Consolidated revenue inline; interest and tax drag bottomline – Consolidated revenue at
Rs152bn was inline with Bloomberg consensus estimates. However, consolidated PAT at
Rs16.6bn was 7% below consensus estimates primarily due to interest and finance charges of
Rs2.4bn on the acquisition debt under Africa (others) and higher current tax expense in the
African operations. Net debt to EBITDA remains high at 2.9x.

Valuation: Fair value of Rs381 – It comprises (1) Rs352/sh based on 11% discounting of the
DCF (Rs395) to factor in a Zain-led dilution, and (2) the Indus stake valued at Rs29/sh. Our fair
value estimates value destruction of US$3.5bn at the consolidated level because of Zain
acquisition. We are more confident of an earnings rebound in FY12E (23% yoy) given the stability
in tariffs and visible signs of slowdown in new rollouts. The Mar-11 DCF value imputes FY12E
EV/EBITDA of 7.9x.