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Divergent trends in traffic growth
Bharti Airtel’s 4QFY11 revenue was up 3% QoQ, 1% ahead of expectations,
with 6% QoQ growth in India network traffic but disappointing flat minutes
and falling MoU in Africa. Competition is easing in India 2G, and Bharti is
ramping up its 3G rollout. With the negative surprise in Africa operations we
are now 33% lower than management target for the region and also factor in
higher 22-24% tax in FY12-13CL. However 3G upside moderates the earnings
cut to 1-7% in FY12-13CL.Bharti faces a possible Rs25/share net impact of
regulatory steps, but gearing is comfortable. We have cut our forecasts, but
with 26% FY12-13CL earnings growth, we reiterate our O-PF call
Strong traffic in India, weak in Africa.
Bharti’s 4QFY11 consolidated revenue at Rs162.7bn was up 3%QoQ, 1% above expectations.
This reflected higher-than-expected 6.4% QoQ growth in India mobile traffic and total
minutes on the network up 6% QoQ (4QFY11 up 23% YoY to 212bn minutes). However in a
disappointing trend, Bharti’s Africa network traffic growth was flat QoQ and MoU were down
4% QoQ to 115 minutes versus India stable at 449 minutes. Bharti’s consolidated Ebitda
margin was down 30bps to 33.5% (including Africa and passive infrastructure business)
mainly with the phased India 3G services launch: this is now live in nine of the 13 licensed
circles. Consolidated profit of Rs14bn was below our expectations, also due to a higher 27%
tax provision (13% in FY10). Coupled with debt funding for Africa, this caused FY11 earnings
to decline 34% YoY. FY11 capex was Rs143bn (US$3.2bn) including Africa (but excl. 3G
spectrum fees) and the company increased guidance for Africa market capex 20% to US$1-
1.2bn, with FY12 consolidated capex guidance at US$2.9-3.1bn.
India 2G competition easing, 3G subs ramp up.
The improvement in Bharti’s India mobile operations reflects a continued easing of 2G
competition and growth in the lower 33% penetration rural areas. Alongside these, Bharti’s
ongoing 3G rollouts will help market share gains and drive newer value-added services (VAS).
Bharti’s VAS revenue grew from 13.8% in the previous quarter to 15% of mobile revenue. Our
FY12-13CL Bharti estimates now factor in 10-19m 3G subscribers against an estimated
20-22m of its own India 2G subscribers with 3G handsets (total India 2G subs: 162m; total
subs across regions and services: 208m). While our own user experience of recently launched
3G services was mixed, faster download speed, new content and aggressive promotions will
result in migration to 3G, enabling Bharti to cushion Arpu and even gain market share.
Gearing comfortable, regulatory risks.
Despite all-debt financing for the Africa deal, Bharti gearing is comfortable at 2.8x net debt to
Ebitda. Current consolidated net debt is US$13.3bn and deleveraging is likely, but may be
impacted by the risk of additional spectrum and licence renewal payments. Bharti faces the
risk of a Rs35.8bn (US$800m) additional one-time payment for 2G spectrum beyond 6.2MHz
plus an NPV of Rs123.3bn (US$2.7bn) for renewing 2G licences - steps the industry strongly
opposes. Although a potential (300bp phased) reduction in licence fees could offset the total
liability to Rs97bn (US$2.1bn), this is a net impact of Rs25/share.
Lowered earnings but 26% FY12-13CL growth.
With the negative surprise in Africa operations we are now 33% lower than management
target for the region and also factor in higher 22-24% tax in FY12-13CL. However the 3G
upside moderates the earnings cut to 1-7% in FY12-13CL. India mobile remains the key driver
of forecast 26% earnings growth in FY12-13CL and we maintain our O-PF call with a rolled
over Rs395 target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Divergent trends in traffic growth
Bharti Airtel’s 4QFY11 revenue was up 3% QoQ, 1% ahead of expectations,
with 6% QoQ growth in India network traffic but disappointing flat minutes
and falling MoU in Africa. Competition is easing in India 2G, and Bharti is
ramping up its 3G rollout. With the negative surprise in Africa operations we
are now 33% lower than management target for the region and also factor in
higher 22-24% tax in FY12-13CL. However 3G upside moderates the earnings
cut to 1-7% in FY12-13CL.Bharti faces a possible Rs25/share net impact of
regulatory steps, but gearing is comfortable. We have cut our forecasts, but
with 26% FY12-13CL earnings growth, we reiterate our O-PF call
Strong traffic in India, weak in Africa.
Bharti’s 4QFY11 consolidated revenue at Rs162.7bn was up 3%QoQ, 1% above expectations.
This reflected higher-than-expected 6.4% QoQ growth in India mobile traffic and total
minutes on the network up 6% QoQ (4QFY11 up 23% YoY to 212bn minutes). However in a
disappointing trend, Bharti’s Africa network traffic growth was flat QoQ and MoU were down
4% QoQ to 115 minutes versus India stable at 449 minutes. Bharti’s consolidated Ebitda
margin was down 30bps to 33.5% (including Africa and passive infrastructure business)
mainly with the phased India 3G services launch: this is now live in nine of the 13 licensed
circles. Consolidated profit of Rs14bn was below our expectations, also due to a higher 27%
tax provision (13% in FY10). Coupled with debt funding for Africa, this caused FY11 earnings
to decline 34% YoY. FY11 capex was Rs143bn (US$3.2bn) including Africa (but excl. 3G
spectrum fees) and the company increased guidance for Africa market capex 20% to US$1-
1.2bn, with FY12 consolidated capex guidance at US$2.9-3.1bn.
India 2G competition easing, 3G subs ramp up.
The improvement in Bharti’s India mobile operations reflects a continued easing of 2G
competition and growth in the lower 33% penetration rural areas. Alongside these, Bharti’s
ongoing 3G rollouts will help market share gains and drive newer value-added services (VAS).
Bharti’s VAS revenue grew from 13.8% in the previous quarter to 15% of mobile revenue. Our
FY12-13CL Bharti estimates now factor in 10-19m 3G subscribers against an estimated
20-22m of its own India 2G subscribers with 3G handsets (total India 2G subs: 162m; total
subs across regions and services: 208m). While our own user experience of recently launched
3G services was mixed, faster download speed, new content and aggressive promotions will
result in migration to 3G, enabling Bharti to cushion Arpu and even gain market share.
Gearing comfortable, regulatory risks.
Despite all-debt financing for the Africa deal, Bharti gearing is comfortable at 2.8x net debt to
Ebitda. Current consolidated net debt is US$13.3bn and deleveraging is likely, but may be
impacted by the risk of additional spectrum and licence renewal payments. Bharti faces the
risk of a Rs35.8bn (US$800m) additional one-time payment for 2G spectrum beyond 6.2MHz
plus an NPV of Rs123.3bn (US$2.7bn) for renewing 2G licences - steps the industry strongly
opposes. Although a potential (300bp phased) reduction in licence fees could offset the total
liability to Rs97bn (US$2.1bn), this is a net impact of Rs25/share.
Lowered earnings but 26% FY12-13CL growth.
With the negative surprise in Africa operations we are now 33% lower than management
target for the region and also factor in higher 22-24% tax in FY12-13CL. However the 3G
upside moderates the earnings cut to 1-7% in FY12-13CL. India mobile remains the key driver
of forecast 26% earnings growth in FY12-13CL and we maintain our O-PF call with a rolled
over Rs395 target price.
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