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Bharti Airtel
Valuations offer no upside
Maintain Underperform despite likely QoQ recovery post 2Q
Bharti’s 2Q FY11 results were disappointing both for the India & Africa operations.
We expect earnings recovery in 2H FY11 aided by seasonal factors in India and
outsourcing benefits in Africa. However, stock valuations at ~9x FY11E and 7.5x
FY12E on EV/EBITDA are already at 20-30% premium vs GEM wireless; we see
no room for valuations to expand. Regulatory risks & pace of 3G contribution in
India are worries. Re-iterate underperform with PO of Rs310/sh (+9% vs earlier).
FY11-12 estimates cut both for India and Africa
Post 2Q FY11 results, we have cut our consolidated EBITDA forecasts by 8% for
FY11 and 6% for FY12 due to 2 key reasons: 1) lower subscriber additions in
India operations & hence 2-4% lower revenues vs earlier, 2) lower margins for
Africa operations leading to cut in EBITDA forecasts for Bharti Africa by 25% for
FY11 & 12% for FY12. Our LT f’casts are up 6-7% factoring 3G; this has lifted PO
Bharti’s 2Q FY11 EBITDA fell ~3% QoQ and EBIT fell ~8% QoQ assuming prorata
full-quarter Africa operations for 1Q. For the third consecutive quarter,
Bharti’s India operations posted flat EBITDA on a QoQ basis dragged primarily by
a standstill in wireless revenues. EBITDA of the Africa operations fell 14% QoQ in
rupee terms due to sharp margin erosion.
Mgt. highlights stable pricing; Africa costs - a challenge
In its post results call, Bharti’s top management said it was not seeking price wars
in Africa; the Co also foresees stable pricing environment in India. Cost
restructuring in Africa will continue for at least another couple of quarters; the Co
seemed to acknowledge that cost structures in Africa are higher than India.
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