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Bharti Airtel (BHARTI)
Telecom
Volume X pricing = revenues; revenues – costs = EBITDA. Bharti reported a weak
quarter with India wireless performance the key disappointment, even on a seasonalityadjusted
basis. We continue to see competition-led structural pressure sustaining in the
Indian wireless sector and would be wary of extrapolating any short-term trends,
whatsoever. Early days as far as Africa foray and 3G impact are concerned, but Street’s
optimism on these poses downside risks, in our view. Reiterate REDUCE.
Don’t lose the forest for the trees
In an industry still mired with network over-capacity and meaningful capital commitments from at
least 7 large players, it would be wise to look beyond specific quarterly data points and focus on
structural issues, in our view. Before we get into what we believe are the structural challenges
facing the industry, here is why we believe focus on individual data points masks the big picture
Volume X pricing = revenues; revenues – costs = EBITDA; higher volumes = higher costs.
Not attempting to be cheeky, here is how yoy growth numbers for Bharti’s India wireless
business stacked up in 2QFY11 – subscriber base up 30%, network traffic up 33%, revenues up
6.2%, and EBITDA down 7%. Even as it is easy to be excited about the RPM movement
(decline of 1% qoq, lowest in several quarters) in 2QFY11 (as was the case with strong volume
growth in 1QFY11), we believe any movement in individual volume, pricing, and cost metrics is
not positive if it does not deliver the revenue/EBITDA growth one is paying for (at 7.3X FY2012E
EV/EBITDA, Bharti is on the expensive side of global or EM telco valuations).
2QFY11 results – weak on most parameters; see downside risk to Street estimates for FY2012E
Revenues of Rs152 bn were 3% below estimate, EBITDA of Rs51.2 bn fell 7% short, while net
income of Rs16.6 bn missed our estimate by 12%. We note that Bharti benefitted from MTM
forex gains of Rs2.5 bn (versus Rs2.2 bn loss in the previous quarter) for 2QFY11. Also, Bharti’s
2QFY11 results reflect the first quarter of full impact of Zain – despite the low interest cost on
acquisition borrowing, Bharti’s net income for 2QFY11 was 18.7% lower than 4QFY10.
Disappointment was led by weakness in India wireless business. As discussed above, it is easy to
put a positive spin of these numbers by focusing on specific metrics – last quarter, it was minutes
growth and elasticity, and this quarter it is deceleration in RPM fall. To us, the bottom line is that
Bharti has struggled to grow its India wireless revenue or EBITDA base since the rise in competitive
intensity in the sector. We also note that Bharti has been capitalizing 3G-related charges and these
would start impacting the P&L 4QFY11E onwards (3G revenue/ EBITDA kicker will happen, but
with a lag). We see risks to even our lower-than-consensus EPS estimate of Rs20.4 for FY2012E if
India wireless EBITDA trajectory fails to improve or Africa business misses our optimistic estimates.
Competition is a structural issue; be wary of extrapolating short-term trends
Weak volume growth (even seasonality-adjusted) for incumbents in 2QFY11 drives home
another important point – extrapolating short-term trends is fraught with risk. The Rs860
mn absolute incremental revenue add reported by Uninor for the quarter (when the
incumbents Bharti, Vodafone, and Idea reported absolute declines) clearly suggests that
incremental traffic/revenue share trends in the industry are likely to remain volatile till the
industry finds some equilibrium, through consolidation or otherwise (not happening soon, in
our view).
We believe it is critical to appreciate the structural over-capacity issue with the industry. The
Indian wireless market has 7 players with substantial capital committed and reasonable
balance sheets – more importantly, all of these increased their capital commitment
meaningfully in the 3G sweepstakes. Discounting a competition that forced Bharti’s hand on
3G auctions (it had to quash its pan-India 3G ambition) is something we are not ready to do,
yet. We remain Cautious on the sector. Bharti remains the best on execution and market
positioning, but industry challenges and rich valuations keep us negative on the stock.
Reiterate REDUCE.
2QFY11 RESULTS – DETAILED ANALYSIS
Consolidated results – fall short of expectations
Bharti’s reported revenues and EBITDA of Rs152 bn and Rs51 bn fell 2.7% and 7.3% short
of our expectations, respectively. Revenue and EBITDA disappointment at consol level was
lead by India and South Asia wireless business with an absolute decline in revenues (missing
our estimates by 3.8%) and an EBITDA margin decline of 70 bps to 35.2%.
We note that 2QFY11 financials are not strictly comparable on a qoq or yoy basis, as this
was the first full quarter consolidation of Africa operations (versus 23 days for 1QFY11). On
a consolidated basis, EBITDA margin declined 240 bps to 33.7% partially impacted by full
quarter consolidation of Africa business (EBITDA margins of 23.9%). Reported net income of
Rs16.6 bn was aided by a forex gain of Rs2.5 bn (net income, although not comparable, was
flat qoq despite a positive forex swing of Rs4.7 bn at the PBT level).
Wireless (India and South Asia) segment – weak quarter, more than seasonality
Seasonality is only partly to blame for an absolute decline in wireless segment revenues and
flat quarter on volume of minutes carried. Though not a surprise after a weak quarter on
revenues and volumes reported by other incumbents (Vodafone and Idea), volume growth
was weakest for Bharti at 0.2% versus 1.6% for Vodafone and 3.1% for Idea.
Bharti reported India and South Asia wireless revenues of Rs88 bn (-0.2% qoq, 6.2%yoy)
and an EBITDA of Rs31 bn (a decline of 2.4% qoq and 7% yoy). EBITDA margins for the
wireless segment declined by 70 bps to 35.2, impacted by (1) wage revisions and (2)
negative operating leverage as revenues were flat despite a cell site addition of 4,644
(+4.4% qoq).
On operational metrics, RPM declined 0.9% to Rs0.444/ min – versus our estimate of a 2%
decline. Better-than-expected RPM was negated by volume miss, however, and ARPU fell
substantially short of our estimate. ARPU of Rs202/sub/month was down 6.2% qoq and
19.9% yoy while MOU of 454min/sub/month was down 5.4% qoq and up 1% yoy. Bharti’s
results exhibit the volatility of incremental traffic/revenue share trends in the industry,
1QFY11 belonged to the incumbents while in 2QFY11 a new player like Uninor added Rs860
mn of incremental revenues while the incumbents (Bharti, Idea and Vodafone) posted an
absolute decline in wireless revenues.
Non-voice revenues as % of total revenues increased to 12.7% from 11.6% last quarter.
Although subscriber numbers are not of much importance, Bharti’s market share of net adds
was just 12.8%, lowest for the company in several years – an indication of increased market
push by other players. Network expansion was strong this quarter with a capex of Rs15.6bn.
4,644 cell sites were added in 2QFY11 after a few weak quarters of network rollout which
was impacted by network equipment ban.
Telemedia segment – weaker-than-expected revenues but margins improve
Bharti’s Telemedia segment reported revenues of Rs9.1 bn, up 1.8% qoq and 6.7% yoy,
slightly below our estimates. ARPU declined marginally by 0.8% to Rs954. EBITDA margin
improved by 210 bps to 46.1% leading to an EBITDA of Rs4.2 bn (+6.7% qoq, +15.7% yoy),
3.9% higher than our estimate.
Enterprise segment – revenues miss, margins surprise
The company reported revenues of Rs10.4 bn (+2.3% qoq, -8.2% yoy) missing our
estimates by 3.5%. EBTIDA margins improved by 20 bps qoq to 24.7% versus our
expectation of 70 bps decline. EBITDA of Rs2.6 bn was up 3% qoq but down 18% yoy.
Passive infrastructure segment – strong margin performance
With the move to IFRS, Bharti now consolidates Indus line by line on a proportionate basis.
Revenues for this segment (standalone Bharti Infratel plus 42% of Indus) grew 3.7% qoq to
Rs21.2 bn. EBITDA margins for the quarter were up 160 bps to 37.1%. The pace of roll-out
of towers was good with Indus rolling out ~1,500 towers while Bharti Infratel standalone
rolling out ~600 towers. More importantly, rental per tenant for Indus increased 3.3% qoq
to Rs31,389/month – we are slightly surprised with the faster-than-expected increase in this
metric qoq (see Exhibit 3).
Bharti Africa (earlier Zain Africa) – early days, reasonable beginning
2QFY11 was the first full quarter consolidation of Bharti Africa – performance was weaker
than expected with like on like revenue growth of 4%. More importantly, Africa wireless
margins fell 360 bps to 23.9%—clearly impacted by Bharti’s aggressive tariff moves in a few
operating countries in Africa and increased spending on sales and marketing. Tariff moves
did aid Bharti report a sharp 15% qoq minutes growth in Africa. MOU increased to 112
min/sub/month from 103 in 1QFY11 while RPM declined by 8.3% to 6.6 US cents and ARPU
was flat at US$7.4 /sub/month. Recent aggressive tariff moves have helped Bharti to gain
subscribers with net addition of 3.7 mn subs in 2QFY11. Bharti Africa has a network
footprint of 10,998 sites. Net loss for the Africa operations was Rs1.1 bn, an improvement
from the Rs700 mn reported for 23 days in the previous quarter.
Other highlights
Capex for the quarter was Rs33 bn taking 1HFY11 capex to Rs46.7 bn, 35% of the
company’s guided capex of US$3 bn for FY2011E. Even as capex intensity picked up in
the India wireless business (Bharti rolled out 4,644 sites during the quarter), Africa capex
was low at Rs3.8 bn – YTD FY2011 capex has been Rs4.7 bn, 13% of Bharti’s guidance
of US$800 mn Africa capex for FY2011E.
Effective tax rate increased substantially to 25.5% versus 18% in the previous quarter.
The company attributed the same to Zain consolidation – ETR for African operations is
higher on account of losses in certain operating countries. Bharti indicated that as a
prudent accounting policy, it is not creating deferred tax asset in some of these lossmaking
entities and will continue not to, till it is reasonably certain of turning profitable in
these entities.
The company indicated the start of MNP rollout with the Haryana circle this month; new
deadline for pan-India rollout is Jan 19, 2011.
EARNINGS MODEL CHANGES
Exhibit 2 summarizes the key changes to our earnings model. Our revised consolidated
revenues for FY2011E, 12E and 13E stand at Rs608 bn, Rs730 bn, and Rs819 bn,
respectively. Revised EBITDA estimates are Rs208 bn, Rs259 bn, and Rs299 bn for the three
years. We now forecast an EPS of Rs17.3/share for FY2011E, Rs20.4/share for FY2012E, and
Rs24/share for FY2013E.
We note the key drivers for estimate changes –
2QFY11 miss weighs heavy on FY2011E estimate cuts.
For FY2012E, we broadly maintain our revenue and EBITDA estimates for the India
business, while reducing our estimates for the Africa business marginally.
Our medium-term revenue estimates (FY2013-17E) are up a marginal 1-3% as we take a
more positive view on the 3G-led data upside in the India wireless business. This also
drives a modest increase in our EBITDA estimates for these years.
For the India wireless business, we have reduced our SIM-cards-in-use (or subscribers)
estimates by 2-3% across the forecast period to reflect Bharti’s stated focus on reducing
focus on the low end of the market. This also results in an upward revision in subscriberbased
metrics (ARPU and MOU); our long-term ARPU estimates are up ~5% to Rs194
(from Rs186 earlier).
Reiterate REDUCE with end-FY2012E target price of Rs305/share
We maintain our DCF based end-FY2012E target price of Rs305/share on the stock. At our
target price, the stock would trade at 6.9X FY2012E EV/EBITDA – we note that this implies a
~20% premium to average EM wireless valuations. We reiterate our Cautious coverage view
on the sector and REDUCE rating on Bharti.
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