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India Equity Research Reports, IPO and Stock News
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�� Headline numbers please the Street, but metrics indicate weakness
Bharti Airtel’s (BHARTI) Q3FY11 consolidated revenue, at INR 157.6 bn, was
marginally lower than the Street’s estimates, but EBITDA (excluding one-time
rebranding expense of INR 3.4 bn) was in line. Operating metrics were, however,
weak, with MOU declining 1.1%, RPM down 0.6% and ARPU down 1.6%, Q-o-Q,
in a seasonally strong quarter. The company spent INR 3.4 bn on re-branding
(including INR 1.7 bn apportioned to Africa). In FY10, its advertising and
marketing expense was ~INR 6.4 bn. BHARTI’s Africa business, though,
provided some confidence as margins expanded 110bps Q-o-Q to 25.1%
(excluding re-branding expenses) after declining to 24% from 33% since
acquisition. It continued to report nearly 100% elasticity in Africa, as MoUs rose
7.1% Q-o-Q with 6.8% decline in RPM.
�� Voice RPM slides 1.8% Q-o-Q
BHARTI reported MoU decline of 1.1% Q-o-Q in Q3FY11. We believe, the race for
subscriber market share is back and operators like Bharti are not restraining
from adding lower-end subscribers. The company’s monthly subscriber addition
jumped back to ~3 mn during the quarter after slowing in Q2FY11 to 2.2 mn
from 3.0 mn in the quarter prior to that. While RPM decline of 0.6% Q-o-Q
seemed reasonable, higher revenue share from data masked the 1.8% Q-o-Q
decline in voice RPM (BHARTI divides overall revenues, both voice and data, with
voice minutes for computing RPM). In our Q2FY11 results note, we had indicated
that BHARTI would have to choose between growth and margin. This seems to
have been the case in Q3FY11 as the rapid subscriber growth led to a decline of
30bps Q-o-Q in EBITDA margins in its India and South Asia business.
�� Outlook and valuations: Near-term pressures persist; maintain ‘HOLD’
We remain cautious on the mobile business in India and see headwinds to margin
from MNP implementation and 3G services launch. Our analysis (refer our report,
‘MNP – Not a game changer, but margin dilutor’, dated February 02, 2011) of
the current offers in the market for postpaid customers after MNP
implementation suggests that pressure on ARPU could continue in the near term.
We also note that BHARTI will have to settle with ~35% lower ARPU, if its
current postpaid customers opt for the new scheme it is offering. Valuations, at
6.7x FY12 EV/EBITDA and 14x FY12E earnings seem attractive. However, owing
to uncertainty in the near term from the new telecom policy and impact of MNP
and 3G, we maintain our cautious stance and retain ‘HOLD/Sector
Outperformer’.
�� Company Description
Bharti is India’s largest integrated telecom operator providing mobile, broadband and
telephone services (B&T), and enterprise services. It is India’s largest wireless operator
with a pan-India mobility network spanning all 22 telecom circles; its B&T services are
currently available in 95 cities. BHARTI had a wireless subscriber base of ~127.6 mn in
FY10, implying wireless subscriber market share of ~22%. The enterprise services
division provides carrier (long distance services) and other services to corporates.
BHARTI has recently launched 2G and 3G services as the fifth mobile operator in Sri
Lanka. It has also acquired 70% stake in Warid Telecom, Bangladesh’s 4th largest
telecom operator for USD 300 mn in January 2010. It acquired Zain to operate in the
Africa market.
�� Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. We believe BHARTI is relatively well placed among Indian telecos
given its scale of operations, strong execution capabilities and robust balance sheet. We
expect the tough industry scenario to likely to dampen BHARTI’s growth metrics in the
near-term. The stock has out performed the broad indices over the past three months as
the street has turned optimistic. We have turned cautious on the stock.
�� Key Risks
If operators maintain price discipline then Bharti will not only retain market share but will
also be able to defend margins. Under-ownership of the stock could also lead to
continued stock out performance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Headline numbers please the Street, but metrics indicate weakness
Bharti Airtel’s (BHARTI) Q3FY11 consolidated revenue, at INR 157.6 bn, was
marginally lower than the Street’s estimates, but EBITDA (excluding one-time
rebranding expense of INR 3.4 bn) was in line. Operating metrics were, however,
weak, with MOU declining 1.1%, RPM down 0.6% and ARPU down 1.6%, Q-o-Q,
in a seasonally strong quarter. The company spent INR 3.4 bn on re-branding
(including INR 1.7 bn apportioned to Africa). In FY10, its advertising and
marketing expense was ~INR 6.4 bn. BHARTI’s Africa business, though,
provided some confidence as margins expanded 110bps Q-o-Q to 25.1%
(excluding re-branding expenses) after declining to 24% from 33% since
acquisition. It continued to report nearly 100% elasticity in Africa, as MoUs rose
7.1% Q-o-Q with 6.8% decline in RPM.
�� Voice RPM slides 1.8% Q-o-Q
BHARTI reported MoU decline of 1.1% Q-o-Q in Q3FY11. We believe, the race for
subscriber market share is back and operators like Bharti are not restraining
from adding lower-end subscribers. The company’s monthly subscriber addition
jumped back to ~3 mn during the quarter after slowing in Q2FY11 to 2.2 mn
from 3.0 mn in the quarter prior to that. While RPM decline of 0.6% Q-o-Q
seemed reasonable, higher revenue share from data masked the 1.8% Q-o-Q
decline in voice RPM (BHARTI divides overall revenues, both voice and data, with
voice minutes for computing RPM). In our Q2FY11 results note, we had indicated
that BHARTI would have to choose between growth and margin. This seems to
have been the case in Q3FY11 as the rapid subscriber growth led to a decline of
30bps Q-o-Q in EBITDA margins in its India and South Asia business.
�� Outlook and valuations: Near-term pressures persist; maintain ‘HOLD’
We remain cautious on the mobile business in India and see headwinds to margin
from MNP implementation and 3G services launch. Our analysis (refer our report,
‘MNP – Not a game changer, but margin dilutor’, dated February 02, 2011) of
the current offers in the market for postpaid customers after MNP
implementation suggests that pressure on ARPU could continue in the near term.
We also note that BHARTI will have to settle with ~35% lower ARPU, if its
current postpaid customers opt for the new scheme it is offering. Valuations, at
6.7x FY12 EV/EBITDA and 14x FY12E earnings seem attractive. However, owing
to uncertainty in the near term from the new telecom policy and impact of MNP
and 3G, we maintain our cautious stance and retain ‘HOLD/Sector
Outperformer’.
�� Company Description
Bharti is India’s largest integrated telecom operator providing mobile, broadband and
telephone services (B&T), and enterprise services. It is India’s largest wireless operator
with a pan-India mobility network spanning all 22 telecom circles; its B&T services are
currently available in 95 cities. BHARTI had a wireless subscriber base of ~127.6 mn in
FY10, implying wireless subscriber market share of ~22%. The enterprise services
division provides carrier (long distance services) and other services to corporates.
BHARTI has recently launched 2G and 3G services as the fifth mobile operator in Sri
Lanka. It has also acquired 70% stake in Warid Telecom, Bangladesh’s 4th largest
telecom operator for USD 300 mn in January 2010. It acquired Zain to operate in the
Africa market.
�� Investment Theme
We expect competitive intensity to increase following the implementation of MNP and
launch of 3G services. We believe BHARTI is relatively well placed among Indian telecos
given its scale of operations, strong execution capabilities and robust balance sheet. We
expect the tough industry scenario to likely to dampen BHARTI’s growth metrics in the
near-term. The stock has out performed the broad indices over the past three months as
the street has turned optimistic. We have turned cautious on the stock.
�� Key Risks
If operators maintain price discipline then Bharti will not only retain market share but will
also be able to defend margins. Under-ownership of the stock could also lead to
continued stock out performance.
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