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Bharti Airtel Ltd.-------------------------------------------------------------- Maintain OUTPERFORM
Management visit note: Competitive environment continues to improve
● We recently met Bharti Airtel management to get an update on the
business. Management reiterated its belief that pricing power
should return to the sector and RPMs could start increasing.
Recent tariff action by Tata Docomo supports this belief, in our
view. Overall, competitors have been withdrawing promotional
offers from the market, explained management.
● With increasing industry focus on revenue earning customers
(versus SIM card sales), the overall industry net adds could
become muted in the near term. However, this may not affect the
reported revenue growth for the industry.
● While recent quarters saw a number of margin depressants for the
company that prevented margin expansion from scale, these are
now largely behind us.
● Response to 3G continues to remain strong, and we remain
comfortable with our estimate of 9 mn 3G subs with Rs120 ARPU
for FY3/12. We reiterate our OUTPERFORM rating on Bharti.
We recently met Mr Harjeet Kohli, Group Treasurer and IR Head at
Bharti Airtel.
Expect industry net adds to slow, no impact on revenue
growth
Management indicated that the industry has been changing focus
from sales of SIM cards to revenue earning customers (RECs),
especially after TRAI started regularly reporting VLR subscribers. As a
result, the industry could start showing muted net adds now (due to
lower gross adds). Management stated that Bharti has already been
focussing on RECs for long. Since the reduction is focused on nonRECs, the impact on revenue growth for the industry could be
negligible.
We note here that this is already evident in Bharti’s net adds, which
have declined to an average of 2.4 mn per month for April and May,
compared to 3.2 mn in the preceding six months. We believe the rest
of the industry could follow suit (rest of GSM industry showed a slowdown in net-adds to 7 mn in May versus earlier run-rate of 12 mn+).
Explaining the drop in the TRAI reported market share numbers for
Bharti in the March 2011 quarter (120 bp QoQ decline, see our note
dated 19 June 2011), management indicated that the reported
numbers have many distortions due to (1) intra-circle roaming
revenues for some operators and/or (2) AGR related reporting
between operators. Bharti management focuses on internally
calculated core revenue market share, which remains robust.
Reiterated positive outlook on pricing
Management reiterated its earlier view (please see our note Bharti
Airtel Notes from the AIC: pricing power to return soon dated 28
March 2011) that pricing power should return to the industry leading to
RPM increase. We highlight recent pricing improvement by a key
competitor – Tata Docomo – in this context (please see our note
Indian telecom Sector: Nationwide tariff increase by Tata Docomo
could signal end to competition dated 19 June 2011). Overall,
management hinted at slow but steady removal of promotional tariffs
by competition in the market.
Even without building RPM increase, management explained the pace
of RPM decline has declined to a manageable level where scale
benefits should drive margin improvement. The recent quarters have
not seen margin improvement due to factors such as surge in network
rollout (after government cleared equipment imports), rebranding and
higher churn. These impacts are largely behind us and hence margin
pressure should abate, explained management.
Response to 3G continues to be promising
Bharti’s 3G network is currently present in 50+ cities, with a target of
reaching 400 cities by September 2011. We note here that the
company seems to be exceeding its earlier schedule, as management
had given a target of 400 cities only by March 2012 during our AIC
(see the 28 March report mentioned above).
While these are still early days on 3G uptake, Bharti’s 3G subscriber
base has crossed 3 mn. The incremental ARPU’s remain high as
earlier indicated (management had indicated US$3-4 incremental
ARPU during our AIC). Bharti also has a good proportion of prepaid
customers in the 3G subscriber base.
While management acknowledged that backhaul investments need to
be made to meet 3G data demands, this is already built into the
guidance of US$1.9bn for India (+South Asia) for the year.
Repayments on acquisition debt to continue
Management is confident of continuing to pay down the acquisition
debt since the consolidated business is generating free cash flow. The
repayments on the acquisition debt are due between two-to-four years
from now, with the bulk of prepayment taking place in later years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Ltd.-------------------------------------------------------------- Maintain OUTPERFORM
Management visit note: Competitive environment continues to improve
● We recently met Bharti Airtel management to get an update on the
business. Management reiterated its belief that pricing power
should return to the sector and RPMs could start increasing.
Recent tariff action by Tata Docomo supports this belief, in our
view. Overall, competitors have been withdrawing promotional
offers from the market, explained management.
● With increasing industry focus on revenue earning customers
(versus SIM card sales), the overall industry net adds could
become muted in the near term. However, this may not affect the
reported revenue growth for the industry.
● While recent quarters saw a number of margin depressants for the
company that prevented margin expansion from scale, these are
now largely behind us.
● Response to 3G continues to remain strong, and we remain
comfortable with our estimate of 9 mn 3G subs with Rs120 ARPU
for FY3/12. We reiterate our OUTPERFORM rating on Bharti.
We recently met Mr Harjeet Kohli, Group Treasurer and IR Head at
Bharti Airtel.
Expect industry net adds to slow, no impact on revenue
growth
Management indicated that the industry has been changing focus
from sales of SIM cards to revenue earning customers (RECs),
especially after TRAI started regularly reporting VLR subscribers. As a
result, the industry could start showing muted net adds now (due to
lower gross adds). Management stated that Bharti has already been
focussing on RECs for long. Since the reduction is focused on nonRECs, the impact on revenue growth for the industry could be
negligible.
We note here that this is already evident in Bharti’s net adds, which
have declined to an average of 2.4 mn per month for April and May,
compared to 3.2 mn in the preceding six months. We believe the rest
of the industry could follow suit (rest of GSM industry showed a slowdown in net-adds to 7 mn in May versus earlier run-rate of 12 mn+).
Explaining the drop in the TRAI reported market share numbers for
Bharti in the March 2011 quarter (120 bp QoQ decline, see our note
dated 19 June 2011), management indicated that the reported
numbers have many distortions due to (1) intra-circle roaming
revenues for some operators and/or (2) AGR related reporting
between operators. Bharti management focuses on internally
calculated core revenue market share, which remains robust.
Reiterated positive outlook on pricing
Management reiterated its earlier view (please see our note Bharti
Airtel Notes from the AIC: pricing power to return soon dated 28
March 2011) that pricing power should return to the industry leading to
RPM increase. We highlight recent pricing improvement by a key
competitor – Tata Docomo – in this context (please see our note
Indian telecom Sector: Nationwide tariff increase by Tata Docomo
could signal end to competition dated 19 June 2011). Overall,
management hinted at slow but steady removal of promotional tariffs
by competition in the market.
Even without building RPM increase, management explained the pace
of RPM decline has declined to a manageable level where scale
benefits should drive margin improvement. The recent quarters have
not seen margin improvement due to factors such as surge in network
rollout (after government cleared equipment imports), rebranding and
higher churn. These impacts are largely behind us and hence margin
pressure should abate, explained management.
Response to 3G continues to be promising
Bharti’s 3G network is currently present in 50+ cities, with a target of
reaching 400 cities by September 2011. We note here that the
company seems to be exceeding its earlier schedule, as management
had given a target of 400 cities only by March 2012 during our AIC
(see the 28 March report mentioned above).
While these are still early days on 3G uptake, Bharti’s 3G subscriber
base has crossed 3 mn. The incremental ARPU’s remain high as
earlier indicated (management had indicated US$3-4 incremental
ARPU during our AIC). Bharti also has a good proportion of prepaid
customers in the 3G subscriber base.
While management acknowledged that backhaul investments need to
be made to meet 3G data demands, this is already built into the
guidance of US$1.9bn for India (+South Asia) for the year.
Repayments on acquisition debt to continue
Management is confident of continuing to pay down the acquisition
debt since the consolidated business is generating free cash flow. The
repayments on the acquisition debt are due between two-to-four years
from now, with the bulk of prepayment taking place in later years.
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