Bharti Airtel Results miss estimate, HOLD: Emkay

Visit http://indiaer.blogspot.com/ for complete details �� ��

Bharti Airtel

Results miss estimate, Retain HOLD

HOLD

CMP: Rs328                                        Target Price: Rs345

---

n     Q2FY11 PAT of Rs16.6bn misses estimate of Rs19.2bn on absence in domestic revenue growth owing to seasonality and margin pressure in African operations

n     ARPU fall of 6.4% QoQ led by 5.4% drop in MOU as realization remains largely stable at Rs0.44/ minute.

n     Cut EPS estimate by 8.5% /6.3% to Rs18.3 /21.6 for FY11E/12E due to African margin pressures and higher tax.

n     Valuations at 15.2x EPS and 6.9x EBIDTA provide comfort. Retain HOLD rating with target price Rs345.

Domestic revenues flat, African margins disappoint

Bharti reported Q2FY11 Cons. profit of Rs16.6bn, was below our estimate of Rs19.2bn

due to absence of revenue growth in domestic business and fall of 360bps in EBIDTA

margins in Africa. Although RPAT of Rs16.6bn includes forex gain of Rs2.5bn, the

benefit of the same is largely nullified due to higher tax provision for Africa (despite loss)

resulting in cons. tax rate of 25.5% v/s 15.5% for domestic operations. Revenue at

Rs152bn missed our estimate of Rs156bn and EBIDTA at Rs51.2bn missed our

estimate of Rs55bn.

MOU fall of 5.4% QoQ impacts India revenue performance led by

seasonality

Q2FY11 India mobile revenues grew by just 0.5% post lowest subscriber addition in last

10 quarters coupled with MOU decline of 5.4% QoQ. However the realizations (RPM)

remained largely stable at Rs0.44/ minute. Overall India mobile traffic remained flat QoQ

v/s >10% growth registered in last two quarters.

Medium term issues in Africa remain

Bharti reported the first full quarter of African performance post acquisition with

sequential subscriber growth of 10% to 40.1mn and revenues at Rs38.9bn, largely inline

with estimate. However, tariff cuts, rise in off-net traffic and increased SG &A led to

margin decline of 360bps QoQ to 23.9%. We highlight that Bharti’s recent tariff cuts

across Africa and brand launch scheduled over the next few weeks, would likely provide

margin pressures over the medium term.

EPS Estimates cut by 8.5% / 6.3% for FY11E / 12E

Considering medium-term margin pressures in Africa and higher tax rate due to tax

provisioning on select profit making African countries, we have cut our EBIDTA and

EPS estimate by 3.5% /1.1% and 8.5% / 6.3% for FY11E / 12E respectively.

Valuation at 15.2x EPS & 6.9x EBIDTA comfortable – Retain HOLD

Despite earnings downgrade, we retain HOLD rating with target price Rs345 on the

stock due to valuation comfort. At CMP of Rs328, stock trades at 8.8x and 6.9x

EV/EBIDTA for FY11E and FY12E respectively. Slowdown in domestic revenue growth

on moderation in subscriber addition and improvement in African operations given the

tariff cuts and margin pressures, and introduction of MNP remain key near term

concerns.