Bharti Airtel- Jun-11 results: Operating metrics in line; non-operating items impact profits:: Credit Suisse,

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● Bharti’s 1Q FY3/12 operating numbers were in line, with revenues
and EBITDA growing 4% QoQ. Impressive India margin
performance (+90 bps QoQ) was offset by lacklustre Africa
margins (+40bps QoQ).
● A couple of one-off items impacted profits, which came in 21%
below estimates: 1) higher tax rates (to trend down in coming
quarters) and 2) forex translation losses in Africa. Profits were in
line after adjusting for these.
● Mobile operating metrics were stable, with a 1% RPM decline
QoQ (similar to Vodafone but lower than Idea’s +1% QoQ).
However, management indications of tariff hikes across the
country indicate that the RPM decline could reverse soon.
● Following the results, we: 1) build higher RPMs in India in coming
years (+2% YoY each year) 2) push back a margin recovery in
Africa and 3) adjust for the quarter’s one-offs. Our EPS changes -
7%/1%/6% for FY12E/FY13E/FY14E. Our DCF-based target price
increases to Rs500. We believe that the stock looks attractive at
6x FY3/13 EV/EBITDA, and reiterate our OUTPERFORM rating.
Operating results in line
Bharti’s Jun-11 operating results came in line with CS expectations,
with revenues 1% ahead and EBITDA 0.6% below estimates,
respectively. The India mobile segment showed impressive margin
expansion of 90 bps QoQ (versus our 50 bps QoQ). However, this
was offset by rather weak margin performance in Africa (+40 bps QoQ
versus our 130 bp estimate and 250 bps in the past two quarters).
A couple of one-offs below EBITDA resulted in profit missing
estimates by 21%: 1) A higher tax rate of 30% (management
explained that ETR would come down in the coming quarters for a FY
ETR of 23-24%) and 2) forex translation losses on African operations
(non-cash). Adjusted for these, profits were in line with expectations.
Near-nationwide tariff increase
During the earnings call, management explained that over the past
few weeks, Bharti has hiked base tariffs in 19 of its 22 circles. It
indicated an easing in competitive intensity on the ground which gave
confidence behind the hikes. We note that in addition to Bharti,
Vodafone, Idea and Aircel have also hiked base tariffs.
However, 1Q RPM continues to trend down (1% QoQ, in line with
estimates). We believe that a meaningful RPM increase could start
showing up in quarterly numbers by the Dec-11 quarter.
Reiterating our OUTPERFORM
While we leave our current year RPM numbers are largely unchanged,
we raise our RPM estimates for the next two years, building in a 2%
YoY increase in RPM each year. On the other hand, we build in a
slower ramp-up in margins in Africa and expect the company to settle
at a FY3/13E EBITDA of US$1.8 bn versus our earlier estimate of
US$2 bn. We also adjust for the one-off surprise in 1Q results. As a
result, our EPS estimates change by -7%/1%/6% for FY12E/
FY13E/FY14E. Our DCF-based target price rises 10% to Rs500.
We believe that the Indian telecom sector is undergoing a structural
change with rapidly abating competitive intensity. At 6.3x FY3/13E
EV/EBITDA on an 18%-plus three-year EBITDA CAGR, we find Bharti
attractive and reiterate our OUTPERFORM rating. We would see the
softness in the share price after the results as a buying opportunity.