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Bharti Airtel
Earnings cut; risk-reward still
weak
�� Risk-reward appears weak; maintain underperform
Post disappointing 4Q, we have cut consol. EBITDA by 5% for FY12 & 10% for
FY13. Risk-reward remains weak in our view. Over next 6-12 mths margin outlook
for India & SE Asia operations still carries downside risk, and visible shift in mgt.
posture on Africa makes topline growth appear more difficult than before.
Valuations are rich at 30-50% premium vs GEM wireless on PE & EV/EBITDA.
Topline cut for Africa; margin upside to slow beyond FY12
In 4Q FY11, Bharti’s Africa topline grew only 1% QoQ. On its post results call,
Bharti’s Africa mgt. emphasized that it was not ready for any major affordability
drive in the near term and the Co wishes to utilize the industry’ pricing power. We
think mgt. target of US$5bn in topline by FY13 will be difficult to achieve with a
passive tariff strategy for the markets. We have cut FY12-13 topline estimates by
~7%. Productivity improvements will lift FY12 margins but coverage expansion
should slow further margin upside beyond FY12.
India wireless margin cut; we see further near-term risks
Wireless EBITDA margin for India & SE Asia in 4Q fell unexpectedly by ~160bps
QoQ to 33.3% mostly led by slippage in tariffs. We have built the same into our
FY12 outlook as margin pressures seem unlikely to lift in next 6-months. Still high
subscriber churn (~7.6% per month), need for attractive on-net plans, opex
pressure of 3G rollout, pot’l hike in diesel prices by the govt., possible cut in
mobile termination charges and falling tariffs in SE Asia present downside risks.
Valuation premium offsets strong earnings growth
We forecast Bharti’s earnings to grow 15-20% YoY over next 2 years but worry
that there is still risk of downgrades. Stock valuations at 30-50% premium versus
GEM wireless leave no room for upside in our view.
Result highlights
4Q FY11 net profit disappoints: Bharti’s recurring net profit for 4Q FY11
stood at Rs14bn, down 35% YoY and down 15% QoQ (normalized for
rebranding expenses in 3Q). Results were below consensus & our
expectations primarily due to 1) lower margins in the wireless business for
India & SE Asia, 2) disappointing topline performance in Africa.
Consolidated EBITDA growth remains tepid; 3G rollout drags PAT: In
4Q FY11, Bharti’s consolidated revenues grew 3% QoQ and consolidated
EBITDA grew 2% QoQ (adjusting for re-branding expenses in 3Q).
Normalized EBITDA from India operations grew 1% QoQ while Africa-
EBITDA grew 7% QoQ in rupee terms. The 15% QoQ drop in consolidated
net profit was largely owing to higher depreciation and amortization expenses
in India partly due to 3G rollout.
India + SE Asia operations disappoint on wireless margins: Margins for
India & SE Asia fell 160bps QoQ to 33.3% in 4Q FY11 vs 34.9% in 3Q FY11.
This likely reflects a combination of 1) price drainage (lower tariffs) in India,
2) higher network costs in India due to 3G rollout and in Bangladesh due to
coverage expansion, & 3) sharp (-13% QoQ) fall in implied revenue per
minute for SE Asia (excluding India).
Africa traffic disappoints – topline flat; margins improve as
expected: In 4Q FY11, Bharti’s Africa EBITDA grew 6% QoQ to US$224mn
led by ~130bps QoQ improvement in core operating margins but dragged by
flat topline at ~US$924mn. Total traffic minutes in Africa were flat QoQ as
Africa MoU/sub fell 4% QoQ and sub base grew 5% QoQ.
Traffic & non-voice growth – key positives for India wireless biz: On
the positive side, Bharti’s wireless traffic in India grew 6% QoQ in line with
subscriber growth and MoU/sub was stable QoQ. Also, non-voice revenue
grew strongly to ~15% of mobile revenue in 4Q vs ~14% in 3Q FY11.
Overall, wireless revenues for India grew 4% QoQ.
High churn, slipping rpm and capped margins – key concerns for
India wireless biz: In 4Q FY11, monthly subscriber churn stayed high at
~7.6% (7.8% in 3Q). Revenue per minute fell 2% QoQ to ~43p despite the
rise in data (non-voice) revenues. Also, margins for the India wireless
business failed to rise despite nearly flat selling expenses on a QoQ basis.
Non-wireless businesses – no growth, but stable: Bharti’s non-wireless
revenues and EBITDA stayed flat QoQ. EBITDA improvement in the
enterprise business was offset by slippage in the passive infrastructure
business.
FY11 capex totaled ~US$3.2bn; net debt/EBITDA was ~2.8x: For
FY11, capex in India totaled ~US$2.4bn and Africa capex was ~US$791mn,
largely in line with the company’s guidance
Mgt. call highlights - Africa
Tariff correction process in Africa complete; looking to utilize
pricing power: Bharti emphasized that tariffs in Africa are now stable and
the process of tariff correction has been completed for now. The company
said that “affordability” is a long-term ethos for Bharti that can be followed
only as cost per minute falls. Going forward, any tariff modifications will have
to be systematic and the Co is not ready for any major affordability drive at
this point.
Growth in Africa dragged by regulatory intervention & capacity
constraints: Bharti attributed the flat traffic performance in Africa to
regulatory intervention (introduction of floor tariffs) in DRC (Democratic
Republic of Congo). The Co said its Africa traffic grew 3.5% QoQ, excluding
DRC. The Co also pointed towards network capacity constraints due to
supply bottlenecks faced by its strategic network partners. Additionally, Bharti
said that subscriber additions were impacted by stringent implementation of
KYC (Know your customer) norms.
Africa margin trajectory to remain positive; churn management – a
focus: Bharti expects further productivity and margin improvement over next
4-6 quarters. The company has started transitioning employees to its
outsourcing partners and the managed capacity contracts are also being
implemented. Bharti acknowledged rising subscriber churn as an area of
concern and said they are working to lower the same.
FY12-capex for Africa pegged at US$1-1.2bn: Bharti plans to spend
~US$1-1.2bn in Africa during FY12 for both coverage and quality
enhancement. This compares with ~US$791mn spent in FY11.
Mgt. call highlights – India
Margin decline reflects a combination of factors: Bharti said the
310bps YoY drop in wireless margins of the India & SE Asia business
reflects a combination of factors like higher spectrum charges, drainage of
pricing, deeper site rollout in both India and Bangladesh, and incremental
opex of 3G rollout.
Tariff drop has decelerated: Bharti said that tariff drop has decelerated on
a YoY basis due to rationalization of competition over last 2-3 quarters. The
company said mobile number portability is not having any material impact on
tariffs and the 2% QoQ drop in revenue per minute during 4Q FY11 reflects
the company’s customer life-cycle management efforts (we interpret this as
cheaper on-net pricing).
3G rollout underway: Bharti has launched 3G in 9 out of the 13 circles
where it owns 3G spectrum and has so far covered ~43 cities. The Co is in
full readiness to launch 3G in remaining circles and also expects to finalise
3G roaming arrangements for circles where it does not own 3G spectrum.
Regulatory expectations from NTP 2011: Bharti is hopeful that the new
telecom policy expected in 2H CY11 will create a fair and level playing field
vis-a-vis competition.
Capex guidance for India pegged at ~US$1.9bn: Bharti plans to spend
~US$1.5bn on its India operations excluding towers and an additional
US$400mn towards the tower business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel
Earnings cut; risk-reward still
weak
�� Risk-reward appears weak; maintain underperform
Post disappointing 4Q, we have cut consol. EBITDA by 5% for FY12 & 10% for
FY13. Risk-reward remains weak in our view. Over next 6-12 mths margin outlook
for India & SE Asia operations still carries downside risk, and visible shift in mgt.
posture on Africa makes topline growth appear more difficult than before.
Valuations are rich at 30-50% premium vs GEM wireless on PE & EV/EBITDA.
Topline cut for Africa; margin upside to slow beyond FY12
In 4Q FY11, Bharti’s Africa topline grew only 1% QoQ. On its post results call,
Bharti’s Africa mgt. emphasized that it was not ready for any major affordability
drive in the near term and the Co wishes to utilize the industry’ pricing power. We
think mgt. target of US$5bn in topline by FY13 will be difficult to achieve with a
passive tariff strategy for the markets. We have cut FY12-13 topline estimates by
~7%. Productivity improvements will lift FY12 margins but coverage expansion
should slow further margin upside beyond FY12.
India wireless margin cut; we see further near-term risks
Wireless EBITDA margin for India & SE Asia in 4Q fell unexpectedly by ~160bps
QoQ to 33.3% mostly led by slippage in tariffs. We have built the same into our
FY12 outlook as margin pressures seem unlikely to lift in next 6-months. Still high
subscriber churn (~7.6% per month), need for attractive on-net plans, opex
pressure of 3G rollout, pot’l hike in diesel prices by the govt., possible cut in
mobile termination charges and falling tariffs in SE Asia present downside risks.
Valuation premium offsets strong earnings growth
We forecast Bharti’s earnings to grow 15-20% YoY over next 2 years but worry
that there is still risk of downgrades. Stock valuations at 30-50% premium versus
GEM wireless leave no room for upside in our view.
Result highlights
4Q FY11 net profit disappoints: Bharti’s recurring net profit for 4Q FY11
stood at Rs14bn, down 35% YoY and down 15% QoQ (normalized for
rebranding expenses in 3Q). Results were below consensus & our
expectations primarily due to 1) lower margins in the wireless business for
India & SE Asia, 2) disappointing topline performance in Africa.
Consolidated EBITDA growth remains tepid; 3G rollout drags PAT: In
4Q FY11, Bharti’s consolidated revenues grew 3% QoQ and consolidated
EBITDA grew 2% QoQ (adjusting for re-branding expenses in 3Q).
Normalized EBITDA from India operations grew 1% QoQ while Africa-
EBITDA grew 7% QoQ in rupee terms. The 15% QoQ drop in consolidated
net profit was largely owing to higher depreciation and amortization expenses
in India partly due to 3G rollout.
India + SE Asia operations disappoint on wireless margins: Margins for
India & SE Asia fell 160bps QoQ to 33.3% in 4Q FY11 vs 34.9% in 3Q FY11.
This likely reflects a combination of 1) price drainage (lower tariffs) in India,
2) higher network costs in India due to 3G rollout and in Bangladesh due to
coverage expansion, & 3) sharp (-13% QoQ) fall in implied revenue per
minute for SE Asia (excluding India).
Africa traffic disappoints – topline flat; margins improve as
expected: In 4Q FY11, Bharti’s Africa EBITDA grew 6% QoQ to US$224mn
led by ~130bps QoQ improvement in core operating margins but dragged by
flat topline at ~US$924mn. Total traffic minutes in Africa were flat QoQ as
Africa MoU/sub fell 4% QoQ and sub base grew 5% QoQ.
Traffic & non-voice growth – key positives for India wireless biz: On
the positive side, Bharti’s wireless traffic in India grew 6% QoQ in line with
subscriber growth and MoU/sub was stable QoQ. Also, non-voice revenue
grew strongly to ~15% of mobile revenue in 4Q vs ~14% in 3Q FY11.
Overall, wireless revenues for India grew 4% QoQ.
High churn, slipping rpm and capped margins – key concerns for
India wireless biz: In 4Q FY11, monthly subscriber churn stayed high at
~7.6% (7.8% in 3Q). Revenue per minute fell 2% QoQ to ~43p despite the
rise in data (non-voice) revenues. Also, margins for the India wireless
business failed to rise despite nearly flat selling expenses on a QoQ basis.
Non-wireless businesses – no growth, but stable: Bharti’s non-wireless
revenues and EBITDA stayed flat QoQ. EBITDA improvement in the
enterprise business was offset by slippage in the passive infrastructure
business.
FY11 capex totaled ~US$3.2bn; net debt/EBITDA was ~2.8x: For
FY11, capex in India totaled ~US$2.4bn and Africa capex was ~US$791mn,
largely in line with the company’s guidance
Mgt. call highlights - Africa
Tariff correction process in Africa complete; looking to utilize
pricing power: Bharti emphasized that tariffs in Africa are now stable and
the process of tariff correction has been completed for now. The company
said that “affordability” is a long-term ethos for Bharti that can be followed
only as cost per minute falls. Going forward, any tariff modifications will have
to be systematic and the Co is not ready for any major affordability drive at
this point.
Growth in Africa dragged by regulatory intervention & capacity
constraints: Bharti attributed the flat traffic performance in Africa to
regulatory intervention (introduction of floor tariffs) in DRC (Democratic
Republic of Congo). The Co said its Africa traffic grew 3.5% QoQ, excluding
DRC. The Co also pointed towards network capacity constraints due to
supply bottlenecks faced by its strategic network partners. Additionally, Bharti
said that subscriber additions were impacted by stringent implementation of
KYC (Know your customer) norms.
Africa margin trajectory to remain positive; churn management – a
focus: Bharti expects further productivity and margin improvement over next
4-6 quarters. The company has started transitioning employees to its
outsourcing partners and the managed capacity contracts are also being
implemented. Bharti acknowledged rising subscriber churn as an area of
concern and said they are working to lower the same.
FY12-capex for Africa pegged at US$1-1.2bn: Bharti plans to spend
~US$1-1.2bn in Africa during FY12 for both coverage and quality
enhancement. This compares with ~US$791mn spent in FY11.
Mgt. call highlights – India
Margin decline reflects a combination of factors: Bharti said the
310bps YoY drop in wireless margins of the India & SE Asia business
reflects a combination of factors like higher spectrum charges, drainage of
pricing, deeper site rollout in both India and Bangladesh, and incremental
opex of 3G rollout.
Tariff drop has decelerated: Bharti said that tariff drop has decelerated on
a YoY basis due to rationalization of competition over last 2-3 quarters. The
company said mobile number portability is not having any material impact on
tariffs and the 2% QoQ drop in revenue per minute during 4Q FY11 reflects
the company’s customer life-cycle management efforts (we interpret this as
cheaper on-net pricing).
3G rollout underway: Bharti has launched 3G in 9 out of the 13 circles
where it owns 3G spectrum and has so far covered ~43 cities. The Co is in
full readiness to launch 3G in remaining circles and also expects to finalise
3G roaming arrangements for circles where it does not own 3G spectrum.
Regulatory expectations from NTP 2011: Bharti is hopeful that the new
telecom policy expected in 2H CY11 will create a fair and level playing field
vis-a-vis competition.
Capex guidance for India pegged at ~US$1.9bn: Bharti plans to spend
~US$1.5bn on its India operations excluding towers and an additional
US$400mn towards the tower business.
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