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Bharti Airtel (BHARTI)
Telecom
3QFY11 results weak; valuations rich despite benign assumptions. REDUCE. Rich
valuations and aggressive EBITDA growth estimates for FY2012/13E continue to seek
comfort in a fab quarter – 3QFY11 was not one, with the company missing estimates
on revenues, EBITDA and net income. Sub-par Indian wireless traffic growth served the
key disappointment, even as market share gains and visible signs of elasticity in Africa
are encouraging. We maintain revenue/EBITDA estimates and TP. REDUCE.
Piecemeal positives not enough in the backdrop of rich valuation and aggressive forecasts
Bharti’s rich valuation (adjusted EV/EBITDA of 7.6X FY2012E at a 30-50% premium to other EM
telcos) on top of reasonably aggressive EBITDA growth forecasts (26/17% for FY2012/13E)
continue to keep us on the cautious side even as we share comfort on Bharti’s execution
capabilities and (to an extent) market growth potential in Africa (penetration/elasticity led) as well
as India (data led). Bharti continues to report reasonable performance (in the context of market
challenges), but fails to provide comfort to the twin combination of aggressive forecasts and rich
valuations. Piecemeal positives (it was India wireless RPM and robust Africa business performance
in 3QFY11) are not enough, in our view, and we do not share Street’s optimistic view on the stock
based on these.
3QFY11 results weak on balance
Bharti reported consolidated revenues of Rs158 bn (+3.6% qoq, yoy comp. not meaningful), 2.8%
lower than our estimate. Reported EBITDA of Rs49.8 bn (down 2.7% qoq) was 8.3% lower than
our expectation. EBITDA was impacted by one-time re-branding expense of Rs3.4 bn. Note that
we had built in Rs3 bn of re-branding related costs in our EBITDA forecasts (and so had the Street,
we presume) and hence we would refrain from adjusting reported EBITDA for comparison versus
the estimated number. Net income of Rs13 bn (down 21.5% qoq, 41% yoy) was also impacted by
a swing in forex gains/losses – Bharti had a forex loss of Rs1.5 bn in 3QFY11 versus a gain of Rs2.5
bn in 2QFY11. We discuss segmental performance below.
India wireless business the key source of disappointment
Earnings disappointment was led by a weak quarter for all the India businesses. India (and South
Asia) wireless revenues grew 4% qoq to Rs91.5 bn, 3% lower than estimate. Wireless minutes
grew a modest 4.4% qoq (versus ~10% for Idea), providing little evidence of seasonality. HoH
minutes growth is just 4.6% for 2HCY10 versus 24% for 1HCY10 – clearly, the strategy to hold
on to RPMs has an associated trade-off. To us, focusing on RPM/traffic/ARPU/MOU granularities
(while important) misses the broader point – India (& SA) wireless revenues have grown a meager
8.5% from June 2009 quarter levels, while EBITDA is 7% lower.
A closer look at the FY2012E ‘ask rate’ challenge or why we believe our
forecasts are not conservative; sections of the Street are more optimistic than us
Assuming Bharti meets our 4QFY11 EPS estimate of Rs4.9/share (a qoq growth of 9%+ on
3QFY11 EPS adjusted for re-branding costs and forex losses), the company enters FY2012E
with an FY2011E EPS base of Rs17. Now, the company faces EPS pressure in FY2012E from
incremental 3G spectrum fee amortization and interest expenses related to the same (note
that we are ignoring BWA spectrum payout and incremental 3G capex for this exercise).
Assuming a 13% per annum charge on the total 3G payout of Rs122 bn (5% towards
amortization and 8% towards interest) and taking only 12% charge as incremental (as there
would be some 3G related expensing in 4QFY11E), the company faces a Rs3/share EPS
headwind on this front. Essentially, the company needs to deliver 50%+ EPS growth on the
3G-expense-adjusted EPS of Rs14/share to meet our FY2012E EPS forecast of Rs21.3/share.
Now, some portion of this upside could come from non-recurrence of re-branding/
acquisition expenses (~Rs1/share or 7% on a tax-adjusted basis). The residual portion of
growth needs to be delivered through estimated core EBITDA growth. We estimate an
absolute EBITDA of Rs255 bn for FY2012E (growth of 26% yoy). Even assuming a 4%
EBITDA CQGR for the India business for the next 5 quarters (on pre re-branding EBITDA for
3QFY11), Bharti needs to deliver a 10.4% EBITDA CQGR in its Africa business to meet our
EBITDA forecast for FY2012E. Note that Bharti’s India business has grown at a CQGR of
0.8% in FY2011E YTD and hence, 4% CQGR over the next 5 quarters is a reasonably
aggressive estimate.
Detailed segmental results analysis
Wireless (India and South Asia) segment – weak quarter
Bharti’s India wireless business financials for 3QFY11 failed to reflect the expected festive
season and seasonality benefits. Minutes growth was a muted 4.4% on the back of a lowbase
Sep quarter, when minutes were flat qoq; to put the minutes growth in perspective,
Idea reported 10% minutes growth for 3QFY11, and Bharti itself had reported a 6.7% qoq
growth in the Dec 2009 quarter, at the height of competitive pressure from the challengers.
Bharti reported India and South Asia wireless revenues of Rs91.5 bn (+3.9% qoq, +13%yoy)
and an EBITDA of Rs31.7 bn (+2.3% qoq, +4.2% yoy). EBITDA margins, adjusted for Rs265
mn of brand re-launch one-time costs, were down 30 bps qoq. We find the lack of
operating leverage surprising given that minutes carried per cell site increased 0.6% qoq.
On operational metrics, RPM declined 0.6% to Rs0.442/ min – in line with our estimates.
Better-than-expected RPM was negated by volume miss, however, and ARPU fell
substantially short of our estimate. ARPU of Rs198/sub/month was down 1.8% qoq and
14% yoy while MOU of 449min/sub/month was down 1.2% qoq and up 0.8% yoy.
Non-voice revenues as % of total revenues increased further to 13.8% from 12.7% last
quarter. Note that voice revenue growth at 2.5% qoq for the India wireless business was
lower than the overall 3.8%; voice RPM fell 1.8% qoq with strong non-voice growth
supporting a lower blended RPM drop. Worryingly, wireless churn (monthly) increased
meaningfully to 7.8% from 5.9% in the previous quarter.
Network expansion was strong this quarter with a capex of Rs16.9 bn; 3,549 cell sites were
added in 3QFY11.
Telemedia segment – revenues and EBITDA decline
Bharti’s Telemedia segment reported revenues of Rs9.1 bn (down 0.5% qoq and up just 6%
yoy), 3.4% below our estimates. ARPU declined a sharp 2.1% qoq to Rs934. EBITDA margin
declined 150 bps qoq to 44.6% leading to an EBITDA of Rs4 bn (down 3.7% qoq, +2.8%
yoy), 4.3% lower than our estimate.
Enterprise segment – revenues miss, margins decline sharply
The company reported revenues of Rs10.5 bn (+0.8% qoq, -5% yoy) for the Enterprise
segment, missing our estimates by 15%. EBTIDA margins fell sharply, down 320 bps qoq.
EBITDA of Rs2.3 bn was down 12% qoq and 31% yoy.
Passive infrastructure segment – strong margin performance
Revenues for this segment (standalone Bharti Infratel plus 42% of Indus) grew 3.8% qoq to
Rs22 bn. EBITDA margins for the quarter were up 150 bps to 38.6%. The pace of roll-out of
towers was good with Indus rolling out ~1,350 towers while Bharti Infratel standalone
rolling out ~600 towers.
Africa wireless – good showing
Bharti’s Africa performance, adjusted for the one-time re-branding expenses, exceeded our
expectation on EBITDA, despite in-line revenues. Bharti reported an 8.7% qoq growth in
Africa revenues in US$ terms to US$911 mn. In Re terms, revenue growth was 3.7% qoq.
Adjusted EBITDA margin expanded 120 bps qoq to 25.1%. Net loss for the Africa
operations was Rs2.2 bn, versus Rs1.1 bn in 2QFY11.
Bharti’s revenue growth was supported by a strong 17% qoq minutes growth, even as RPM
dropped 6.8% qoq to US6.1 cents/min. Subs base expanded 5% qoq to 42 mn, ARPU was
stable at US$7.3, while MOU increased 7% qoq to 120. Initial signs of elasticity are clearly
positive. Bharti Africa had a network footprint of 11,338 sites at end-Dec 2010, an increase
of 340 sites qoq. Africa capex for the quarter was US$306 mn, a sharp increase from US$81
mn in 2QFY11. A high per-cell-site-added capex (nearly US$900,000 per cell site added)
suggests that Bharti incurred a bulk this capex on capacity expansion in the access network
and on the core/transport network. This is in line with Bharti’s guidance of focusing on
capacity enhancement in FY2011E and coverage expansion only beginning April 2011.
Other results and earnings call highlights
Reported net income was aided to the tune of 7% (Rs881 mn) by increased losses in sub-
100% subsidiaries; minorities’ share of losses increased to Rs904 mn from Rs23 mn in
2QFY11. This indicates increased losses in the Africa business as well as a possible change
in the mix of net income across opcos at Africa (more losses in sub-100% ownership
opcos). Interestingly, the company also indicated charging African opcos with – (1) a
management fee payable to the parent, and (2) interest on shareholder loan.
Capex for the quarter was Rs42.8 bn taking YTD FY2011 capex to Rs94.2 bn. Bharti
reiterated its India business capex guidance of US$1.8-2 bn and attributable passive infra
capex guidance of US$500 mn for FY2011E. On Africa, the company stood by its capex
guidance of US$800 mn FY2011E and US$2.5 bn from FY2011-13E.
Effective tax rate for the quarter was 21.7%, down from 2QFY11’s 25.5%.
Bharti indicated a strong quarter for the DTH business; its DTH subs base increased ~29%
qoq to 4.9 mn. This was also reflected in a strong 24% qoq revenue growth reported in
the others segment.
Net debt at end-Dec 2010 stood at Rs600 bn, down from Rs602 bn at end-Sep 2010.
The company paid Rs5.77 bn to increase its stake in Zambia to 79% from 97% in an
open offer.
Earnings model changes – broadly maintain estimates
Exhibit 2 summarizes the key changes to our earnings model. Our revised consolidated
revenues for FY2011E, 12E and 13E stand at Rs597 bn, Rs728 bn, and Rs824 bn,
respectively. Revised EBITDA estimates are Rs202 bn, Rs255 bn, and Rs298 bn for the three
years. We now forecast an EPS of Rs17.1/share for FY2011E, Rs21.3/share for FY2012E, and
Rs24.9/share for FY2013E.
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 7X FY2012E EV/EBITDA – we note that this implies a
~20-40% premium to average EM wireless valuations. We reiterate our Cautious coverage
view on the sector and REDUCE rating on Bharti.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI)
Telecom
3QFY11 results weak; valuations rich despite benign assumptions. REDUCE. Rich
valuations and aggressive EBITDA growth estimates for FY2012/13E continue to seek
comfort in a fab quarter – 3QFY11 was not one, with the company missing estimates
on revenues, EBITDA and net income. Sub-par Indian wireless traffic growth served the
key disappointment, even as market share gains and visible signs of elasticity in Africa
are encouraging. We maintain revenue/EBITDA estimates and TP. REDUCE.
Piecemeal positives not enough in the backdrop of rich valuation and aggressive forecasts
Bharti’s rich valuation (adjusted EV/EBITDA of 7.6X FY2012E at a 30-50% premium to other EM
telcos) on top of reasonably aggressive EBITDA growth forecasts (26/17% for FY2012/13E)
continue to keep us on the cautious side even as we share comfort on Bharti’s execution
capabilities and (to an extent) market growth potential in Africa (penetration/elasticity led) as well
as India (data led). Bharti continues to report reasonable performance (in the context of market
challenges), but fails to provide comfort to the twin combination of aggressive forecasts and rich
valuations. Piecemeal positives (it was India wireless RPM and robust Africa business performance
in 3QFY11) are not enough, in our view, and we do not share Street’s optimistic view on the stock
based on these.
3QFY11 results weak on balance
Bharti reported consolidated revenues of Rs158 bn (+3.6% qoq, yoy comp. not meaningful), 2.8%
lower than our estimate. Reported EBITDA of Rs49.8 bn (down 2.7% qoq) was 8.3% lower than
our expectation. EBITDA was impacted by one-time re-branding expense of Rs3.4 bn. Note that
we had built in Rs3 bn of re-branding related costs in our EBITDA forecasts (and so had the Street,
we presume) and hence we would refrain from adjusting reported EBITDA for comparison versus
the estimated number. Net income of Rs13 bn (down 21.5% qoq, 41% yoy) was also impacted by
a swing in forex gains/losses – Bharti had a forex loss of Rs1.5 bn in 3QFY11 versus a gain of Rs2.5
bn in 2QFY11. We discuss segmental performance below.
India wireless business the key source of disappointment
Earnings disappointment was led by a weak quarter for all the India businesses. India (and South
Asia) wireless revenues grew 4% qoq to Rs91.5 bn, 3% lower than estimate. Wireless minutes
grew a modest 4.4% qoq (versus ~10% for Idea), providing little evidence of seasonality. HoH
minutes growth is just 4.6% for 2HCY10 versus 24% for 1HCY10 – clearly, the strategy to hold
on to RPMs has an associated trade-off. To us, focusing on RPM/traffic/ARPU/MOU granularities
(while important) misses the broader point – India (& SA) wireless revenues have grown a meager
8.5% from June 2009 quarter levels, while EBITDA is 7% lower.
A closer look at the FY2012E ‘ask rate’ challenge or why we believe our
forecasts are not conservative; sections of the Street are more optimistic than us
Assuming Bharti meets our 4QFY11 EPS estimate of Rs4.9/share (a qoq growth of 9%+ on
3QFY11 EPS adjusted for re-branding costs and forex losses), the company enters FY2012E
with an FY2011E EPS base of Rs17. Now, the company faces EPS pressure in FY2012E from
incremental 3G spectrum fee amortization and interest expenses related to the same (note
that we are ignoring BWA spectrum payout and incremental 3G capex for this exercise).
Assuming a 13% per annum charge on the total 3G payout of Rs122 bn (5% towards
amortization and 8% towards interest) and taking only 12% charge as incremental (as there
would be some 3G related expensing in 4QFY11E), the company faces a Rs3/share EPS
headwind on this front. Essentially, the company needs to deliver 50%+ EPS growth on the
3G-expense-adjusted EPS of Rs14/share to meet our FY2012E EPS forecast of Rs21.3/share.
Now, some portion of this upside could come from non-recurrence of re-branding/
acquisition expenses (~Rs1/share or 7% on a tax-adjusted basis). The residual portion of
growth needs to be delivered through estimated core EBITDA growth. We estimate an
absolute EBITDA of Rs255 bn for FY2012E (growth of 26% yoy). Even assuming a 4%
EBITDA CQGR for the India business for the next 5 quarters (on pre re-branding EBITDA for
3QFY11), Bharti needs to deliver a 10.4% EBITDA CQGR in its Africa business to meet our
EBITDA forecast for FY2012E. Note that Bharti’s India business has grown at a CQGR of
0.8% in FY2011E YTD and hence, 4% CQGR over the next 5 quarters is a reasonably
aggressive estimate.
Detailed segmental results analysis
Wireless (India and South Asia) segment – weak quarter
Bharti’s India wireless business financials for 3QFY11 failed to reflect the expected festive
season and seasonality benefits. Minutes growth was a muted 4.4% on the back of a lowbase
Sep quarter, when minutes were flat qoq; to put the minutes growth in perspective,
Idea reported 10% minutes growth for 3QFY11, and Bharti itself had reported a 6.7% qoq
growth in the Dec 2009 quarter, at the height of competitive pressure from the challengers.
Bharti reported India and South Asia wireless revenues of Rs91.5 bn (+3.9% qoq, +13%yoy)
and an EBITDA of Rs31.7 bn (+2.3% qoq, +4.2% yoy). EBITDA margins, adjusted for Rs265
mn of brand re-launch one-time costs, were down 30 bps qoq. We find the lack of
operating leverage surprising given that minutes carried per cell site increased 0.6% qoq.
On operational metrics, RPM declined 0.6% to Rs0.442/ min – in line with our estimates.
Better-than-expected RPM was negated by volume miss, however, and ARPU fell
substantially short of our estimate. ARPU of Rs198/sub/month was down 1.8% qoq and
14% yoy while MOU of 449min/sub/month was down 1.2% qoq and up 0.8% yoy.
Non-voice revenues as % of total revenues increased further to 13.8% from 12.7% last
quarter. Note that voice revenue growth at 2.5% qoq for the India wireless business was
lower than the overall 3.8%; voice RPM fell 1.8% qoq with strong non-voice growth
supporting a lower blended RPM drop. Worryingly, wireless churn (monthly) increased
meaningfully to 7.8% from 5.9% in the previous quarter.
Network expansion was strong this quarter with a capex of Rs16.9 bn; 3,549 cell sites were
added in 3QFY11.
Telemedia segment – revenues and EBITDA decline
Bharti’s Telemedia segment reported revenues of Rs9.1 bn (down 0.5% qoq and up just 6%
yoy), 3.4% below our estimates. ARPU declined a sharp 2.1% qoq to Rs934. EBITDA margin
declined 150 bps qoq to 44.6% leading to an EBITDA of Rs4 bn (down 3.7% qoq, +2.8%
yoy), 4.3% lower than our estimate.
Enterprise segment – revenues miss, margins decline sharply
The company reported revenues of Rs10.5 bn (+0.8% qoq, -5% yoy) for the Enterprise
segment, missing our estimates by 15%. EBTIDA margins fell sharply, down 320 bps qoq.
EBITDA of Rs2.3 bn was down 12% qoq and 31% yoy.
Passive infrastructure segment – strong margin performance
Revenues for this segment (standalone Bharti Infratel plus 42% of Indus) grew 3.8% qoq to
Rs22 bn. EBITDA margins for the quarter were up 150 bps to 38.6%. The pace of roll-out of
towers was good with Indus rolling out ~1,350 towers while Bharti Infratel standalone
rolling out ~600 towers.
Africa wireless – good showing
Bharti’s Africa performance, adjusted for the one-time re-branding expenses, exceeded our
expectation on EBITDA, despite in-line revenues. Bharti reported an 8.7% qoq growth in
Africa revenues in US$ terms to US$911 mn. In Re terms, revenue growth was 3.7% qoq.
Adjusted EBITDA margin expanded 120 bps qoq to 25.1%. Net loss for the Africa
operations was Rs2.2 bn, versus Rs1.1 bn in 2QFY11.
Bharti’s revenue growth was supported by a strong 17% qoq minutes growth, even as RPM
dropped 6.8% qoq to US6.1 cents/min. Subs base expanded 5% qoq to 42 mn, ARPU was
stable at US$7.3, while MOU increased 7% qoq to 120. Initial signs of elasticity are clearly
positive. Bharti Africa had a network footprint of 11,338 sites at end-Dec 2010, an increase
of 340 sites qoq. Africa capex for the quarter was US$306 mn, a sharp increase from US$81
mn in 2QFY11. A high per-cell-site-added capex (nearly US$900,000 per cell site added)
suggests that Bharti incurred a bulk this capex on capacity expansion in the access network
and on the core/transport network. This is in line with Bharti’s guidance of focusing on
capacity enhancement in FY2011E and coverage expansion only beginning April 2011.
Other results and earnings call highlights
Reported net income was aided to the tune of 7% (Rs881 mn) by increased losses in sub-
100% subsidiaries; minorities’ share of losses increased to Rs904 mn from Rs23 mn in
2QFY11. This indicates increased losses in the Africa business as well as a possible change
in the mix of net income across opcos at Africa (more losses in sub-100% ownership
opcos). Interestingly, the company also indicated charging African opcos with – (1) a
management fee payable to the parent, and (2) interest on shareholder loan.
Capex for the quarter was Rs42.8 bn taking YTD FY2011 capex to Rs94.2 bn. Bharti
reiterated its India business capex guidance of US$1.8-2 bn and attributable passive infra
capex guidance of US$500 mn for FY2011E. On Africa, the company stood by its capex
guidance of US$800 mn FY2011E and US$2.5 bn from FY2011-13E.
Effective tax rate for the quarter was 21.7%, down from 2QFY11’s 25.5%.
Bharti indicated a strong quarter for the DTH business; its DTH subs base increased ~29%
qoq to 4.9 mn. This was also reflected in a strong 24% qoq revenue growth reported in
the others segment.
Net debt at end-Dec 2010 stood at Rs600 bn, down from Rs602 bn at end-Sep 2010.
The company paid Rs5.77 bn to increase its stake in Zambia to 79% from 97% in an
open offer.
Earnings model changes – broadly maintain estimates
Exhibit 2 summarizes the key changes to our earnings model. Our revised consolidated
revenues for FY2011E, 12E and 13E stand at Rs597 bn, Rs728 bn, and Rs824 bn,
respectively. Revised EBITDA estimates are Rs202 bn, Rs255 bn, and Rs298 bn for the three
years. We now forecast an EPS of Rs17.1/share for FY2011E, Rs21.3/share for FY2012E, and
Rs24.9/share for FY2013E.
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 7X FY2012E EV/EBITDA – we note that this implies a
~20-40% premium to average EM wireless valuations. We reiterate our Cautious coverage
view on the sector and REDUCE rating on Bharti.
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