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Bharti Airtel (BHARTI IN)
OW: 4Q results below consensus; Africa margins rebound
4Q FY11 results disappoint; however, no directional negatives
Africa margins rebound; slower rate of MOU growth negative
OW and SOTP-based target price of INR425 unchanged
4QFY11 EPS was c13% below consensus estimates; primarily driven by a decline in
the India wireless business and higher-than-estimated depreciation charges in India.
However, on a q-o-q basis, net income grew by c7.5%, revenues improved by c3.2% and
EBITDA rose by c9%. Key positives during the quarter were the margin rebound in
Africa (from c20% to c26%) and India enterprise business (from 21.5% to 25.7%). Key
negatives during the quarter were the decline in India wireless margins by 130bp and
growth in Africa MOU per subscriber at the lower rate of c3%. Management suggested a
focus on cost structures before getting aggressive with tariffs in Africa and dismissed
mobile number portability (MNP) concerns.
No directional negatives from India, we expect pricing power to return. While the
decline in wireless margins and fall in revenue per minute by c2% this quarter are
negative (highest in the past three quarters), 4Q numbers do not suggest any structural
concerns to us. If adjusted for two fewer days during this quarter, the decline in revenue
per minute was c1%, in line with the recent quarter trends. Further, management
dismissed any meaningful impact from retention pressures driven by MNP. We retain our
positive view on the Indian wireless space, given the apparent weakening of competition
and possibility of improvement in voice realisation. We believe incumbents will benefit
from pricing power and expect the discounts on the various voice plans to come down.
Moreover, we expect Bharti to benefit from 3G given its subscriber quality.
Africa shows recovery in margin, but slow MOU growth is a negative. The rebound in
Africa margins is positive and management suggested that with the business restructuring
in place, the trend should continue, and the increase in scale ought to aid the improvement
further. On an adjusted basis, MOUs increased by c3% sequentially, lower than the
average of c8% growth seen in the past two quarters; however, adjusted traffic growth of
c9% suggests no major concerns. Key drivers for growth in Africa will be market share
and usage ramp-up as Bharti, with its present networks, may not benefit from 3G services
meaningfully, in our view.
OW and SOTP-based target price of INR425. We value Bharti using a SOTP-based
approach; we value its Indian operations at INR458 and assign a negative value of INR33
for the African operations. We estimate FY12e earnings growth of c27% and FY13e at
c37% (versus c18% for Sensex over the next two fiscal years). Key downside risks for the
stock would be acceptance of TRAI recommendations in the current format and a
significant tariff disruption in Africa.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel (BHARTI IN)
OW: 4Q results below consensus; Africa margins rebound
4Q FY11 results disappoint; however, no directional negatives
Africa margins rebound; slower rate of MOU growth negative
OW and SOTP-based target price of INR425 unchanged
4QFY11 EPS was c13% below consensus estimates; primarily driven by a decline in
the India wireless business and higher-than-estimated depreciation charges in India.
However, on a q-o-q basis, net income grew by c7.5%, revenues improved by c3.2% and
EBITDA rose by c9%. Key positives during the quarter were the margin rebound in
Africa (from c20% to c26%) and India enterprise business (from 21.5% to 25.7%). Key
negatives during the quarter were the decline in India wireless margins by 130bp and
growth in Africa MOU per subscriber at the lower rate of c3%. Management suggested a
focus on cost structures before getting aggressive with tariffs in Africa and dismissed
mobile number portability (MNP) concerns.
No directional negatives from India, we expect pricing power to return. While the
decline in wireless margins and fall in revenue per minute by c2% this quarter are
negative (highest in the past three quarters), 4Q numbers do not suggest any structural
concerns to us. If adjusted for two fewer days during this quarter, the decline in revenue
per minute was c1%, in line with the recent quarter trends. Further, management
dismissed any meaningful impact from retention pressures driven by MNP. We retain our
positive view on the Indian wireless space, given the apparent weakening of competition
and possibility of improvement in voice realisation. We believe incumbents will benefit
from pricing power and expect the discounts on the various voice plans to come down.
Moreover, we expect Bharti to benefit from 3G given its subscriber quality.
Africa shows recovery in margin, but slow MOU growth is a negative. The rebound in
Africa margins is positive and management suggested that with the business restructuring
in place, the trend should continue, and the increase in scale ought to aid the improvement
further. On an adjusted basis, MOUs increased by c3% sequentially, lower than the
average of c8% growth seen in the past two quarters; however, adjusted traffic growth of
c9% suggests no major concerns. Key drivers for growth in Africa will be market share
and usage ramp-up as Bharti, with its present networks, may not benefit from 3G services
meaningfully, in our view.
OW and SOTP-based target price of INR425. We value Bharti using a SOTP-based
approach; we value its Indian operations at INR458 and assign a negative value of INR33
for the African operations. We estimate FY12e earnings growth of c27% and FY13e at
c37% (versus c18% for Sensex over the next two fiscal years). Key downside risks for the
stock would be acceptance of TRAI recommendations in the current format and a
significant tariff disruption in Africa.
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