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Bharti Airtel
Not much upside
„Fair valuations, growth surprise unlikely; Underperform
Bharti is trading close to our PO of Rs310/sh. We think positive growth surprise or
valuation expansion is unlikely; maintain underperform. Stock valuations at ~7x
FY12E-EV/EBITDA & 14x FY12-PE place the Co on par with the local mkt. & 20-
25% growth premium relative to GEM wireless majors. Upside seems difficult.
More downside than upside to revenue outlook
We forecast consolidated FY12 revenues to grow ~21% YoY led by ~14% YoY
revenue growth in the India wireless operations and 46% YoY growth (normalized
growth of 22%) from Africa. Our assumption that India traffic will grow in line with
subscriber growth carries downside if multiple-SIM penetration rises. For the
Africa operations, we have built-in steadily improving customer market share but
note that recent net add performance has been sharply volatile.
Tight-rope walk on India margins; Africa should improve
On a recurring basis (excluding re-branding etc), we expect India & SE-Asia
margins for FY12E to stabilize at current levels of ~35% but note that this requires
continued tight cost control in India and revenue ramp-up in SE-Asia. We are
relatively bullish on margin improvement in Africa as outsourcing and integration
benefits should accelerate.
3Q FY11 results tad disappointing; estimates trimmed
3Q FY11 EBITDA grew ~4% QoQ excluding one-time re-branding costs; core
performance was a tad disappointing due to lower than expected Africa margins,
weak India traffic growth & margin weakness in the India enterprise business.
Stable QoQ revenue per minute & stable wireless margins in India were the silver
lining. Factoring 3Q, we have trimmed EBITDA by 5% for FY11E & 1% for FY12E.
3Q FY11 highlights
Headline profit hit by re-branding, but helped by minority interests:
Bharti reported 3Q FY11 net profit at Rs13bn, down 41% YoY and down 22%
QoQ. On a QoQ basis, headline profits were hurt by re-branding expenses of
~Rs3.4bn but helped somewhat by higher share of losses attributed to minorities
(up from Rs23mn in 2Q to Rs904mn in 3Q FY11).
Core EBITDA performance tad disappointing owing to Africa: Excluding
rebranding charges, overall EBITDA grew 4% QoQ in line with overall revenue
growth; overall EBITDA margin stayed flat at 33.8%. EBITDA from the India
operations grew 4% QoQ largely as expected. EBITDA from Africa grew 5%
QoQ, below expectations due to weaker than expected margins.
Africa net adds slow sharply, margins disappoint: In 3Q FY11, Bharti’s net
adds in Africa fell 45% QoQ to 2mn vs 3.7mn in 2Q. Revenue grew 4% QoQ on
the back of 5% growth in sub base and 1% decline in ARPU. Overall Africa
margin (excluding re-branding) stayed flat QoQ at 23.3% (vs 23.1% in 2Q).
Operating-Africa margins improved ~120bps QoQ but Others-Africa losses
expanded. On its earnings call post results, Bharti said the expansion in OtherAfrica losses reflects one-time legal charges and costs related to the Zambia
open offer.
India wireless margins flattish on stable rpm, traffic growth disappoints,
churn up: Wireless operations in India posted flat (-1%) revenue per minute
(rpm) at 44paise, and margins for India and Southeast Asia were down 30bps
QoQ to 34.9%. India-traffic grew 5% QoQ marginally lagging subscriber growth of
6% QoQ; MoU/sub fell 1% QoQ. The weakness in Bharti’s usage trend contrasts
with the seasonal improvement highlighted by Idea Cellular that posted 2% QoQ
growth in MoU/sub. In line with a sharp rise in subscriber churn witnessed in
Idea’s results, Bharti also posted a sharp rise in churn from ~6% in 2Q to ~8% in
3Q FY11.
Enterprise business – sharp margin decline despite flat topline: In 3Q
FY11, Bharti’s enterprise business in India posted ~320bps QoQ decline in
EBITDA margin despite flat topline. For 9M FY11, enterprise revenues are down
9% YoY and enterprise-EBITDA is down 22% YoY.
Tower-sharing continues to be a bright spot: Bharti’s passive infrastructure
business posted 4% QoQ topline growth and 8% QoQ EBITDA growth; EBITDA
margin expanded ~150bps QoQ likely led by cost savings. Sharing factor in the
business improved from ~1.73x in 2Q to 1.75x in 3Q FY11.
Capex accelerates led by Africa: Bharti’s capex in 3Q FY11 jumped 31% QoQ
to US$964mn. India capex was flat at ~US$653mn but Africa capex jumped from
US$84mn in 2Q FY11 to US$311mn in 3Q FY11.
Net debt flat at Rs600bn; net debt/recurring-EBITDA at ~2.8x: Bharti’s net
debt as of 3Q FY11 stood at ~Rs60bn (US$13.4bn) largely flat QoQ. Net
debt/EBITDA was also largely unchanged ~2.8x.
Mgt. call highlights
„ Bharti expects to launch 3G across its licensed footprint in India, by Mar ‘11.
„ Mobile number portability (MNP) is seen as a net accretive opportunity for
Bharti’s operations in India owing to strong brand, network and distribution.
„ In India, the multi-SIM phenomenon could drag traffic growth relative to
subscriber growth but overall quality of rural subscribers remains strong.
„ The Co declined to comment on regulatory expectations especially with
regard to payout for spectrum beyond 6.2MHz.
„ In Africa, logistics are a key challenge but the Co is investing in automation
to deal with the issue. Despite higher cost structures, Bharti believes the
market opportunity in Africa will outweigh risks over the long-term.
„ For the Africa operations, mgt. aspiration of US$5bn in revenues and
US$2bn in EBITDA by FY13 stays intact.
„ Bharti has initiated the process of forming tower companies for its Africa
operations.
„ FY11 capex guidance for Africa is maintained ~US$800mn. In the short-term,
capex will be towards capacity augmentation. Over the medium term, capex
on coverage will rise to ~70% of total.
Price objective basis & risk
Bharti (BHTIF)
Our PO of Rs310/sh values Bharti at a FY12E-EV/EBITDA of around 6.5x-7x
post-Zain. The consolidated valuation places Bharti at nearly 20-25% premium vs
GEM wireless majors. Normalised EBITDA growth for Bharti is estimated at
around 15% vs growth of GEM majors at around 10%. Upside risks to our PO
could stem from 1) stronger than expected profit contribution from Bharti-Africa,
2) sooner than expected industry consolidation in India, and 3) unforeseen 3G
adoption in India. Weaker than expected subscriber quality and renewed
competitive intensity in India, weak 3G impact, dramatic regulatory changes and
poor execution in Africa pose downside risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel
Not much upside
„Fair valuations, growth surprise unlikely; Underperform
Bharti is trading close to our PO of Rs310/sh. We think positive growth surprise or
valuation expansion is unlikely; maintain underperform. Stock valuations at ~7x
FY12E-EV/EBITDA & 14x FY12-PE place the Co on par with the local mkt. & 20-
25% growth premium relative to GEM wireless majors. Upside seems difficult.
More downside than upside to revenue outlook
We forecast consolidated FY12 revenues to grow ~21% YoY led by ~14% YoY
revenue growth in the India wireless operations and 46% YoY growth (normalized
growth of 22%) from Africa. Our assumption that India traffic will grow in line with
subscriber growth carries downside if multiple-SIM penetration rises. For the
Africa operations, we have built-in steadily improving customer market share but
note that recent net add performance has been sharply volatile.
Tight-rope walk on India margins; Africa should improve
On a recurring basis (excluding re-branding etc), we expect India & SE-Asia
margins for FY12E to stabilize at current levels of ~35% but note that this requires
continued tight cost control in India and revenue ramp-up in SE-Asia. We are
relatively bullish on margin improvement in Africa as outsourcing and integration
benefits should accelerate.
3Q FY11 results tad disappointing; estimates trimmed
3Q FY11 EBITDA grew ~4% QoQ excluding one-time re-branding costs; core
performance was a tad disappointing due to lower than expected Africa margins,
weak India traffic growth & margin weakness in the India enterprise business.
Stable QoQ revenue per minute & stable wireless margins in India were the silver
lining. Factoring 3Q, we have trimmed EBITDA by 5% for FY11E & 1% for FY12E.
3Q FY11 highlights
Headline profit hit by re-branding, but helped by minority interests:
Bharti reported 3Q FY11 net profit at Rs13bn, down 41% YoY and down 22%
QoQ. On a QoQ basis, headline profits were hurt by re-branding expenses of
~Rs3.4bn but helped somewhat by higher share of losses attributed to minorities
(up from Rs23mn in 2Q to Rs904mn in 3Q FY11).
Core EBITDA performance tad disappointing owing to Africa: Excluding
rebranding charges, overall EBITDA grew 4% QoQ in line with overall revenue
growth; overall EBITDA margin stayed flat at 33.8%. EBITDA from the India
operations grew 4% QoQ largely as expected. EBITDA from Africa grew 5%
QoQ, below expectations due to weaker than expected margins.
Africa net adds slow sharply, margins disappoint: In 3Q FY11, Bharti’s net
adds in Africa fell 45% QoQ to 2mn vs 3.7mn in 2Q. Revenue grew 4% QoQ on
the back of 5% growth in sub base and 1% decline in ARPU. Overall Africa
margin (excluding re-branding) stayed flat QoQ at 23.3% (vs 23.1% in 2Q).
Operating-Africa margins improved ~120bps QoQ but Others-Africa losses
expanded. On its earnings call post results, Bharti said the expansion in OtherAfrica losses reflects one-time legal charges and costs related to the Zambia
open offer.
India wireless margins flattish on stable rpm, traffic growth disappoints,
churn up: Wireless operations in India posted flat (-1%) revenue per minute
(rpm) at 44paise, and margins for India and Southeast Asia were down 30bps
QoQ to 34.9%. India-traffic grew 5% QoQ marginally lagging subscriber growth of
6% QoQ; MoU/sub fell 1% QoQ. The weakness in Bharti’s usage trend contrasts
with the seasonal improvement highlighted by Idea Cellular that posted 2% QoQ
growth in MoU/sub. In line with a sharp rise in subscriber churn witnessed in
Idea’s results, Bharti also posted a sharp rise in churn from ~6% in 2Q to ~8% in
3Q FY11.
Enterprise business – sharp margin decline despite flat topline: In 3Q
FY11, Bharti’s enterprise business in India posted ~320bps QoQ decline in
EBITDA margin despite flat topline. For 9M FY11, enterprise revenues are down
9% YoY and enterprise-EBITDA is down 22% YoY.
Tower-sharing continues to be a bright spot: Bharti’s passive infrastructure
business posted 4% QoQ topline growth and 8% QoQ EBITDA growth; EBITDA
margin expanded ~150bps QoQ likely led by cost savings. Sharing factor in the
business improved from ~1.73x in 2Q to 1.75x in 3Q FY11.
Capex accelerates led by Africa: Bharti’s capex in 3Q FY11 jumped 31% QoQ
to US$964mn. India capex was flat at ~US$653mn but Africa capex jumped from
US$84mn in 2Q FY11 to US$311mn in 3Q FY11.
Net debt flat at Rs600bn; net debt/recurring-EBITDA at ~2.8x: Bharti’s net
debt as of 3Q FY11 stood at ~Rs60bn (US$13.4bn) largely flat QoQ. Net
debt/EBITDA was also largely unchanged ~2.8x.
Mgt. call highlights
„ Bharti expects to launch 3G across its licensed footprint in India, by Mar ‘11.
„ Mobile number portability (MNP) is seen as a net accretive opportunity for
Bharti’s operations in India owing to strong brand, network and distribution.
„ In India, the multi-SIM phenomenon could drag traffic growth relative to
subscriber growth but overall quality of rural subscribers remains strong.
„ The Co declined to comment on regulatory expectations especially with
regard to payout for spectrum beyond 6.2MHz.
„ In Africa, logistics are a key challenge but the Co is investing in automation
to deal with the issue. Despite higher cost structures, Bharti believes the
market opportunity in Africa will outweigh risks over the long-term.
„ For the Africa operations, mgt. aspiration of US$5bn in revenues and
US$2bn in EBITDA by FY13 stays intact.
„ Bharti has initiated the process of forming tower companies for its Africa
operations.
„ FY11 capex guidance for Africa is maintained ~US$800mn. In the short-term,
capex will be towards capacity augmentation. Over the medium term, capex
on coverage will rise to ~70% of total.
Price objective basis & risk
Bharti (BHTIF)
Our PO of Rs310/sh values Bharti at a FY12E-EV/EBITDA of around 6.5x-7x
post-Zain. The consolidated valuation places Bharti at nearly 20-25% premium vs
GEM wireless majors. Normalised EBITDA growth for Bharti is estimated at
around 15% vs growth of GEM majors at around 10%. Upside risks to our PO
could stem from 1) stronger than expected profit contribution from Bharti-Africa,
2) sooner than expected industry consolidation in India, and 3) unforeseen 3G
adoption in India. Weaker than expected subscriber quality and renewed
competitive intensity in India, weak 3G impact, dramatic regulatory changes and
poor execution in Africa pose downside risks.
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