Bharti Airtel One offs dents profitability, HOLD: Target : Rs 345: Emkay

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Bharti Airtel

One offs dents profitability, Retain HOLD

HOLD

CMP: Rs 323                                        Target Price: Rs 345

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n     Q3FY11 PAT of Rs13.0bn below estimate of Rs15.6bn due to forex losses coupled with higher interest cost and one time re-branding exp

n     KPI’s in line with expectation remained stable qoq, led by festive season. APRU at Rs198 down 1.6% qoq, Mou at 449 down 1.1% qoq. ARPM flat at Rs0.44

n     EBITDA margin (ex re-branding) at 33.8% in line with expt. while one time global re-branding cost of Rs3400mn led to compress margin to 31.6%

n     Cut EPS by 10.4% /5.9% for FY11E /12E. Valuations at 14.9x EPS and 6.9x EBIDTA. Retain HOLD rating with target price Rs345

Revenues and EBITDA (ex re-branding) in line, while one offs dents PAT

Bharti reported revenues of Rs 157.6bn up 3.6% v/s our estimates of Rs 158bn, driven

by 4.2% rise in mobility revenues. Cons. profit of Rs13.0bn was below our estimate of

Rs15.6bn, due to re-branding cost coupled with higher interest cost and forex loss.

EBITDA was down 2.7% qoq, however excluding re-branding cost EBITDA grew 3.9%

qoq. Cons. EBITDA margin at 31.6% was down 420bps qoq, ex re-branding cost it was

at 33.8%, in line with estimates.

No surprise in KPI’s unlike its peer (Idea)

Mobility revenue in Q3FY11 was up 4.0%, in line with estimates. ARPU and MoU were

marginally down by 1.6% and 1.1% qoq to Rs198 and 449, respectively. ARPM was flat

at Rs0.44. Nevertheless, traffic on network grew by 4.4% to 199bn minutes, in line with

estimate. Subscriber addition was up 6.4% with total domestic sub base at >152mn.

Gaining traction in African safari

African revenues grew 4.2% qoq led by higher traffic on the network and lower

contraction in the ARPU. ARPU decline marginally 1.4% qoq to $7.3 while MoU was up

7.1% qoq to 120. Bharti took tariff cut in 8 African countries duringQ3FY11 impact of

that has not been seen in ARPU during the quarter, we believe the impact would be

visible in coming quarters. Ex re-branding expenses EBITDA margin improved to 25.1%

v/s 23.7% in the last quarter, improved from 23.7% in Q2FY11.

Other businesses remain fat QoQ

Apart from the passive infra business all the other segments (Telemedia & Enterprise)

reported flat revenues qoq. Cons. Passive infrastructure revenue at 21972mn grew

3.8% qoq with tenancy improving to 1.75x and 1.8x for Bharti infra and Indus towers,

respectively. EBITDA margins also remained under pressure for Telemedia & Enterprise

while it improved for passive to 38.6% v/s 37.1% in Q2FY11.

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

Considering the current regulatory uncertainty in domestic market and unexpected cost

pressures during 3G services launch makes us cautious on the sector for medium term.

We retain HOLD rating with target price Rs345. At CMP of Rs323, stock trades at 8.9x

and 6.9x EV/EBIDTA for FY11E and FY12E respectively.