Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Limited
Neutral; BRTI.BO, BHARTI IN
Near-term concerns remain
Bharti’s India and South Asia business disappointed in a seasonally strong
Q3, with the 3.9% Q/Q growth in wireless revenue missing expectations.
In Africa, operational trends appear on track and the underlying margin
improved 1pp Q/Q. We would look for evidence of a sustained turnaround
in Africa and MNP not impacting post-paid pricing before turning more
positive. We expect the stock to remain range-bound as noise around MNP
and a potential payment for “excess” spectrum sustains. We note that no
provisions for payouts have been taken. We maintain our Neutral rating on
Bharti within a cautious sector stance.
• India: expect usage and rate pressures ahead: We expect the muted
usage trend in Q3 to continue into the next quarter with a higher share of
net adds from low-usage groups and a capped elasticity within the
existing base. We are not convinced that ARPM declines have bottomed
out just yet, as we expect MNP to drive competitive pressures in the
post-paid segment. We note that in Bharti’s Top 3 markets, its ARPUs
are at a 60-100% premium to the circle average, making its customers:
[1] attractive targets for others but also [2] potential price seekers if
Bharti would like to retain them.
• Africa shows encouraging trends; looking for sustainability:
Elasticity was maintained at around 1 and tariff restructuring is largely
done, both of which bode well for revenue growth. With restructuring
activities at their peak, high opex in Q4 cannot be ruled out. We forecast
25.9% margin for Q4 or an 80bp Q/Q expansion on a like-for-like basis
and 27.6% for FY12. We expect continued investment requirements in
Africa and with 70% of capex directed toward expansion plans, we
expect network opex pressure to sustain.
• Our Dec-11 SOTP-based price target is Rs370. Key upside risks are
better performance in Africa and ARPM improvements, while downside
risks include higher-post paid competition and the regulatory overhang.
Key takeaways from results and conf call
India
Wireless volumes disappoint, expect flattish MOUs for Q4 and FY12
Bharti delivered modest 4% Q/Q minute growth in India to 199bn minutes coming in
below our expected 7% growth and Idea’s 10% growth delivered. We note that MOU
at 449 minutes is down 1.1% Q/Q. Despite the festive season and the subscriber base
growing 6.4%, minutes growth was only 4.4%.
We believe this was driven by a high share (30-60%) of net adds from rural India,
where usage is lower and importantly a capped elasticity benefit from the existing
base. We believe this implies continued MOU pressure and we forecast MOU of 447
for Q4FY11 and 450 for FY12 (-1.4% Y/Y).
MNP still not a "game changer" but watch post-paid pricing
According to management, the market response has been positive from Haryana. The
company hopes to leverage its integrated player status and bundled services offered
as a tool to mitigate the impact from MNP. We didn’t get a clear sense from
management commentary that post-paid pricing pressure was unlikely to impact
Bharti. We note that even among the larger players, we have seen on-the-ground
evidence of pricing-based competition to attract customers away from others.
Repayment of a portion of debt: The company repaid a portion of its debt related to
3G loan raised in India. This reduced the total debt from INR175bn to INR153bn.
Net debt/EBITDA at Q3 was 2.9x, flat Q/Q.
Capex guidance reiterated
Bharti's Q3 capex was INR29.3bn, flat Q/Q and 25% of sales. Management reiterated
its guidance of $1.8-2.0bn (including 3G services) and INR300-350m for passive
infrastructure for the year. This implies Q4 capex of ~US$550-600m. We forecast
INR29bn (24% of sales) for Q4 and INR102bn (19% of sales) for FY12.
India/South Asia operational trends mixed
Total wireless minutes increased 4% Q/Q vs. the very modest 0.2% increase in Q2
FY11, but missed JPMe of 6.8% and were below the +10.2% reported by Idea. This,
we believe, was driven by a 1.1% decline in MOU to 449 despite strong net adds,
which on a monthly run rate basis, are up 38%. Positively, ARPM declined by only
0.2 paisa to 44.2 paisa (Idea: 0.5 paisa decline to INR 0.42), better than JPMe of a
0.7paisa decline to INR 0.44. ARPU was INR 197 (-3% Q/Q, -2% vs. JPMe). Churn
remained high at 5.9% vs. 5.8% in Q2FY11. We like the ARPM stability, however,
we are concerned that this may not be sustainable as post-paid competition starts
kicking off.
3G in 13 circles by March 2011, in talks with others for a pan-India presence
Bharti launched 3G in Karnataka on January 12, 2011. It has plans to launch 3G
services in all its licensed 13 circles by March 2011 and pan-India coverage by
March 2012. With rural teledensity still at 24.8%, the company sees growth
opportunities for its 3G services in rural areas. The company also has plans to launch
3G services at 2G prices.
Non-voice as a % of total revenue increased 1.1pp Q/Q to 13.8%
This was driven by management’s focus on services beyond SMS. We are
encouraged to see this growth and note that management highlighted efforts in
mobile payments, tie-ups with Nokia, RIM and ZTE. The company has also
partnered with SBI for its m-commerce utilities. Recently, they launched their Airtel
Money application in Gurgaon. Stripping out non-voice revenue, we estimate that
voice ARPM declined 0.7 paisa or 1.7% Q/Q vs. a 0.2 paisa decline reported on
blended ARPM.
Africa
Tariff rebalancing largely done, elasticity holding strong
Management re-balanced tariffs in the remaining 7-8 countries in Q3, having done 7-
8 in Q2. Tariffs had become stale with some at a 30-40% premiums to the market.
We believe this bodes well for ARPM declines, which have declined 8% in Q3 and
Q2. We forecast a 5% decline for Q4 and on a quarterly basis in FY12. Elasticity in
the quarter held up at 0.9 as per our estimates and this is expected to remain robust
going forward.
3G present in 9 markets already; cost of licenses not expected to be high
In addition to the seven countries where Zain already had 3G licenses, Bharti
acquired two more – in Kenya and Sierra Leone and plans to launch 3G services
there shortly. Management commented that they are in talks with the government and
regulatory bodies in the other countries and believes that the cost of spectrum will be
reasonable.
MNP in Africa
Bharti sees MNP in Africa as an opportunity. The Kenyan government has
announced an April 1, 2011 launch for MNP. Nigeria, Uganda and Ghana too are
seriously considering MNP. We don’t believe that Bharti can be a net beneficiary of
MNP in both India and Africa as in the former it is an incumbent while it stands as a
challenger in most of the African markets. We look for more clarity on this issue
from management.
Mr. Manoj Kohli reiterated his “personal aspirations”
These are $5B in revenue, $2B EBITDA (40% margin), and 100MM subs by FY13.
He stated that management remains committed to it commitments. Challenges such
as logistics and the higher cost structure of Africa vs. India were highlighted but
juxtaposed with commentary that the opportunities far outpace the challenges.
$408m of $800m capex budget spent so far; Q4 could see a high spend
We estimate that the capex in Africa is only $408m YTD FY11 vs. guidance of
$800m for the year (which management reiterated). In Q3 alone Bharti spent $306m,
driving a negative operating FCF of $117m. We forecast $314m for Q4 and therefore
$717m for FY11. Management expects to invest 70% of the capex for coverage and
30% for capacity. Coverage spends tend to imply higher network opex so we will be
watching that cost going forward.
Progress on passive infrastructure
Management stated that passive infrastructure sharing is progressing well, with
several operators in the region understanding the benefits of the strategy. They have
also started fibre sharing. We believe network sharing is positive for capex but can
add some opex pressure. Bharti has also started the process of de-merging the tower
companies with registrations currently ongoing.
Minority interest
The company has minority interest arrangements in eight countries of Africa. The
one in Zambia is highly profitable, which has resulted in positive minority interest.
The Zambian company has also come up with an open offer. The legal fees
associated with the open offer was one of the primary reasons for the increase in
expenses for Africa Other.
Other highlights
In Africa, the company has captured ~1pp of revenue market share and in Nigeria
specifically they have launched new schemes recently which have gotten good
reception. Mr. Kohli commented that Africa markets are growing well and the
integration is now complete. Restructuring activity is at its peak – IT, hardware,
software, call centres, etc. and regulatory relationships are being established. We
could see some margin pressure in Q4.
Consolidated highlights
Consolidated revenue was INR 157.6 bn (+3.6% Q/Q) missing JPMe of INR
160.5bn by 2% and 1% below consensus of INR 158.3bn: Within the mix, India
wireless revenue increased only 3.9% Q/Q, which we view as disappointing – JPMe
+4.8%, Idea established circle +7.3%. Africa revenue was 4.2% higher Q/Q.
Interestingly, passive infrastructure grew 3.8% Q/Q (beat JPMe by 1%) helped by
higher tenancies here (1.75 in Q3 vs. 1.73 in Q2).
EBITDA misses our below consensus estimates, Q/Q trends show slight
improvement: Consolidated EBITDA margin was 31.6%, -1.3pp vs. JPMe of 32.9%
and missing cons 33.4% by 1.8pp. Absolute EBITDA was INR 49,813m, vs. JPMe
of INR 52,895m and consensus of INR 52,965m. India and South Asia EBITDA
margin was 35.9%, weaker than JPMe of 36.7%. On a sequential basis, we note that
excluding the INR 3.4bn of re-branding expenses, EBITDA margin improved 10bp
to 33.8%, within which India improved 10bp and Africa (including Africa Others)
improved 20bp. Africa operational EBITDA margin (excluding rebranding)
improved 1.2pp Q/Q.
Net profit was INR 13.0bn, 22% below JPMe of INR 16.7bn and 21% below
consensus of INR 16.4bn. Consolidated EPS were INR 3.4, vs. JPMe of INR 4.4 and
consensus estimate of INR 4.3.
Capex in the quarter was INR 43.2bn (27.4% of sales). Within this, wireless capex
was INR 16.9bn (18% of sales), Africa capex was INR 13.96bn (34x% of sales).
YTD capex is INR 18.7bn (~US$415m vs. guidance of US$800m) – we continue to
expect spillover of capex from FY11 to FY12
Valuation and rating analysis
Our December 2011 price target is INR 370 (vs. INR 380 earlier). This is based on
our sum-of-the-parts valuation of each business segment for Bharti. Our lower
estimates on the India wireless business drive our valuation of Bharti's core business
of INR 320 (INR 339 earlier) while we have increased estimates for passive
infrastructure to INR 33 (INR 25 earlier). With better trends shown in Q3 in Africa,
we reduce the drag on valuations from this business and value Africa at -INR 13
(from -INR 17 earlier).
Risks to our view
We highlight the following risks to our rating and price target:
Upside risks: [1] A better-than-expected performance in Africa, especially in the near
term; [2] rational competition when MNP is introduced; [3] market consolidation;
and [4] 3G data take-up and pricing better than we forecast
Downside risks: [1] High-end competition impact on Bharti more than expected; [2]
regulatory environment being less benign than we think.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Limited
Neutral; BRTI.BO, BHARTI IN
Near-term concerns remain
Bharti’s India and South Asia business disappointed in a seasonally strong
Q3, with the 3.9% Q/Q growth in wireless revenue missing expectations.
In Africa, operational trends appear on track and the underlying margin
improved 1pp Q/Q. We would look for evidence of a sustained turnaround
in Africa and MNP not impacting post-paid pricing before turning more
positive. We expect the stock to remain range-bound as noise around MNP
and a potential payment for “excess” spectrum sustains. We note that no
provisions for payouts have been taken. We maintain our Neutral rating on
Bharti within a cautious sector stance.
• India: expect usage and rate pressures ahead: We expect the muted
usage trend in Q3 to continue into the next quarter with a higher share of
net adds from low-usage groups and a capped elasticity within the
existing base. We are not convinced that ARPM declines have bottomed
out just yet, as we expect MNP to drive competitive pressures in the
post-paid segment. We note that in Bharti’s Top 3 markets, its ARPUs
are at a 60-100% premium to the circle average, making its customers:
[1] attractive targets for others but also [2] potential price seekers if
Bharti would like to retain them.
• Africa shows encouraging trends; looking for sustainability:
Elasticity was maintained at around 1 and tariff restructuring is largely
done, both of which bode well for revenue growth. With restructuring
activities at their peak, high opex in Q4 cannot be ruled out. We forecast
25.9% margin for Q4 or an 80bp Q/Q expansion on a like-for-like basis
and 27.6% for FY12. We expect continued investment requirements in
Africa and with 70% of capex directed toward expansion plans, we
expect network opex pressure to sustain.
• Our Dec-11 SOTP-based price target is Rs370. Key upside risks are
better performance in Africa and ARPM improvements, while downside
risks include higher-post paid competition and the regulatory overhang.
Key takeaways from results and conf call
India
Wireless volumes disappoint, expect flattish MOUs for Q4 and FY12
Bharti delivered modest 4% Q/Q minute growth in India to 199bn minutes coming in
below our expected 7% growth and Idea’s 10% growth delivered. We note that MOU
at 449 minutes is down 1.1% Q/Q. Despite the festive season and the subscriber base
growing 6.4%, minutes growth was only 4.4%.
We believe this was driven by a high share (30-60%) of net adds from rural India,
where usage is lower and importantly a capped elasticity benefit from the existing
base. We believe this implies continued MOU pressure and we forecast MOU of 447
for Q4FY11 and 450 for FY12 (-1.4% Y/Y).
MNP still not a "game changer" but watch post-paid pricing
According to management, the market response has been positive from Haryana. The
company hopes to leverage its integrated player status and bundled services offered
as a tool to mitigate the impact from MNP. We didn’t get a clear sense from
management commentary that post-paid pricing pressure was unlikely to impact
Bharti. We note that even among the larger players, we have seen on-the-ground
evidence of pricing-based competition to attract customers away from others.
Repayment of a portion of debt: The company repaid a portion of its debt related to
3G loan raised in India. This reduced the total debt from INR175bn to INR153bn.
Net debt/EBITDA at Q3 was 2.9x, flat Q/Q.
Capex guidance reiterated
Bharti's Q3 capex was INR29.3bn, flat Q/Q and 25% of sales. Management reiterated
its guidance of $1.8-2.0bn (including 3G services) and INR300-350m for passive
infrastructure for the year. This implies Q4 capex of ~US$550-600m. We forecast
INR29bn (24% of sales) for Q4 and INR102bn (19% of sales) for FY12.
India/South Asia operational trends mixed
Total wireless minutes increased 4% Q/Q vs. the very modest 0.2% increase in Q2
FY11, but missed JPMe of 6.8% and were below the +10.2% reported by Idea. This,
we believe, was driven by a 1.1% decline in MOU to 449 despite strong net adds,
which on a monthly run rate basis, are up 38%. Positively, ARPM declined by only
0.2 paisa to 44.2 paisa (Idea: 0.5 paisa decline to INR 0.42), better than JPMe of a
0.7paisa decline to INR 0.44. ARPU was INR 197 (-3% Q/Q, -2% vs. JPMe). Churn
remained high at 5.9% vs. 5.8% in Q2FY11. We like the ARPM stability, however,
we are concerned that this may not be sustainable as post-paid competition starts
kicking off.
3G in 13 circles by March 2011, in talks with others for a pan-India presence
Bharti launched 3G in Karnataka on January 12, 2011. It has plans to launch 3G
services in all its licensed 13 circles by March 2011 and pan-India coverage by
March 2012. With rural teledensity still at 24.8%, the company sees growth
opportunities for its 3G services in rural areas. The company also has plans to launch
3G services at 2G prices.
Non-voice as a % of total revenue increased 1.1pp Q/Q to 13.8%
This was driven by management’s focus on services beyond SMS. We are
encouraged to see this growth and note that management highlighted efforts in
mobile payments, tie-ups with Nokia, RIM and ZTE. The company has also
partnered with SBI for its m-commerce utilities. Recently, they launched their Airtel
Money application in Gurgaon. Stripping out non-voice revenue, we estimate that
voice ARPM declined 0.7 paisa or 1.7% Q/Q vs. a 0.2 paisa decline reported on
blended ARPM.
Africa
Tariff rebalancing largely done, elasticity holding strong
Management re-balanced tariffs in the remaining 7-8 countries in Q3, having done 7-
8 in Q2. Tariffs had become stale with some at a 30-40% premiums to the market.
We believe this bodes well for ARPM declines, which have declined 8% in Q3 and
Q2. We forecast a 5% decline for Q4 and on a quarterly basis in FY12. Elasticity in
the quarter held up at 0.9 as per our estimates and this is expected to remain robust
going forward.
3G present in 9 markets already; cost of licenses not expected to be high
In addition to the seven countries where Zain already had 3G licenses, Bharti
acquired two more – in Kenya and Sierra Leone and plans to launch 3G services
there shortly. Management commented that they are in talks with the government and
regulatory bodies in the other countries and believes that the cost of spectrum will be
reasonable.
MNP in Africa
Bharti sees MNP in Africa as an opportunity. The Kenyan government has
announced an April 1, 2011 launch for MNP. Nigeria, Uganda and Ghana too are
seriously considering MNP. We don’t believe that Bharti can be a net beneficiary of
MNP in both India and Africa as in the former it is an incumbent while it stands as a
challenger in most of the African markets. We look for more clarity on this issue
from management.
Mr. Manoj Kohli reiterated his “personal aspirations”
These are $5B in revenue, $2B EBITDA (40% margin), and 100MM subs by FY13.
He stated that management remains committed to it commitments. Challenges such
as logistics and the higher cost structure of Africa vs. India were highlighted but
juxtaposed with commentary that the opportunities far outpace the challenges.
$408m of $800m capex budget spent so far; Q4 could see a high spend
We estimate that the capex in Africa is only $408m YTD FY11 vs. guidance of
$800m for the year (which management reiterated). In Q3 alone Bharti spent $306m,
driving a negative operating FCF of $117m. We forecast $314m for Q4 and therefore
$717m for FY11. Management expects to invest 70% of the capex for coverage and
30% for capacity. Coverage spends tend to imply higher network opex so we will be
watching that cost going forward.
Progress on passive infrastructure
Management stated that passive infrastructure sharing is progressing well, with
several operators in the region understanding the benefits of the strategy. They have
also started fibre sharing. We believe network sharing is positive for capex but can
add some opex pressure. Bharti has also started the process of de-merging the tower
companies with registrations currently ongoing.
Minority interest
The company has minority interest arrangements in eight countries of Africa. The
one in Zambia is highly profitable, which has resulted in positive minority interest.
The Zambian company has also come up with an open offer. The legal fees
associated with the open offer was one of the primary reasons for the increase in
expenses for Africa Other.
Other highlights
In Africa, the company has captured ~1pp of revenue market share and in Nigeria
specifically they have launched new schemes recently which have gotten good
reception. Mr. Kohli commented that Africa markets are growing well and the
integration is now complete. Restructuring activity is at its peak – IT, hardware,
software, call centres, etc. and regulatory relationships are being established. We
could see some margin pressure in Q4.
Consolidated highlights
Consolidated revenue was INR 157.6 bn (+3.6% Q/Q) missing JPMe of INR
160.5bn by 2% and 1% below consensus of INR 158.3bn: Within the mix, India
wireless revenue increased only 3.9% Q/Q, which we view as disappointing – JPMe
+4.8%, Idea established circle +7.3%. Africa revenue was 4.2% higher Q/Q.
Interestingly, passive infrastructure grew 3.8% Q/Q (beat JPMe by 1%) helped by
higher tenancies here (1.75 in Q3 vs. 1.73 in Q2).
EBITDA misses our below consensus estimates, Q/Q trends show slight
improvement: Consolidated EBITDA margin was 31.6%, -1.3pp vs. JPMe of 32.9%
and missing cons 33.4% by 1.8pp. Absolute EBITDA was INR 49,813m, vs. JPMe
of INR 52,895m and consensus of INR 52,965m. India and South Asia EBITDA
margin was 35.9%, weaker than JPMe of 36.7%. On a sequential basis, we note that
excluding the INR 3.4bn of re-branding expenses, EBITDA margin improved 10bp
to 33.8%, within which India improved 10bp and Africa (including Africa Others)
improved 20bp. Africa operational EBITDA margin (excluding rebranding)
improved 1.2pp Q/Q.
Net profit was INR 13.0bn, 22% below JPMe of INR 16.7bn and 21% below
consensus of INR 16.4bn. Consolidated EPS were INR 3.4, vs. JPMe of INR 4.4 and
consensus estimate of INR 4.3.
Capex in the quarter was INR 43.2bn (27.4% of sales). Within this, wireless capex
was INR 16.9bn (18% of sales), Africa capex was INR 13.96bn (34x% of sales).
YTD capex is INR 18.7bn (~US$415m vs. guidance of US$800m) – we continue to
expect spillover of capex from FY11 to FY12
Our December 2011 price target is INR 370 (vs. INR 380 earlier). This is based on
our sum-of-the-parts valuation of each business segment for Bharti. Our lower
estimates on the India wireless business drive our valuation of Bharti's core business
of INR 320 (INR 339 earlier) while we have increased estimates for passive
infrastructure to INR 33 (INR 25 earlier). With better trends shown in Q3 in Africa,
we reduce the drag on valuations from this business and value Africa at -INR 13
(from -INR 17 earlier).
Risks to our view
We highlight the following risks to our rating and price target:
Upside risks: [1] A better-than-expected performance in Africa, especially in the near
term; [2] rational competition when MNP is introduced; [3] market consolidation;
and [4] 3G data take-up and pricing better than we forecast
Downside risks: [1] High-end competition impact on Bharti more than expected; [2]
regulatory environment being less benign than we think.
No comments:
Post a Comment