Bharti Airtel Operations intact; hit by fx pendulum :: Macquarie Research,

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Bharti Airtel
Operations intact; hit by fx pendulum
Event
 Bharti reported decent results above the EBITDA line. EBITDA was 0.4%
ahead of our estimate. The bottom line was however impacted by exchange
rate fluctuation, which led to a negative surprise in interest rates. But
encouraging commentary on the results conference call reinforces our
fundamental view on Bharti. We maintain our Outperform recommendation
and raise our earnings estimates and target price, reflecting the impact of
recent tariff hikes.
Impact
 Decent performance on operating parameters: MOUs increased 5% QoQ
and ARPM declined 1.2% to 42.8p – both matching our estimates. As a result,
revenues and EBITDA were in line with our forecast. PAT however missed the
Street and our estimates by ~15%. This was driven by ‘below the line’ items –
higher than expected interest cost (currency fluctuation in Africa) and higher
tax rate. This “tax holiday benefit reduction“ was already built into our
forecasts. We have now made some adjustments as to the timing.
 ARPM upgrades driven by tariff hikes: We expect Bharti’s headline (on-net)
tariff increases, lower trade margins and tactical withdrawal of discounted
packages in 19 circles currently (and all 22 circles eventually) to drive ARPM
growth. We now expect ARPMs to remain flat (+/- 0.5p) in the next couple of
quarters. We then expect them to rise gradually and end up around 7.5%
higher at the end of 8 quarters from now. It is likely to take that long for the full
impact to be felt as pre-paid subscribers recharge plans over the next four
quarters. In addition, the hikes are likely to be rolled out and absorbed at a
slower rate into geographies with lower income levels.
Earnings and target price revision
 We have brought down our FY12 earnings by 10.9% but increased our FY13
and FY14 earnings by 3.3% and 13.0%, respectively. This is based on factors
discussed above. As such, we increase our target price from Rs388 to Rs483.
Price catalyst
 12-month price target: Rs483.00 based on a Sum of Parts methodology.
 Catalyst: News on operating metrics (ARPM/ tariffs/ 3G), new telecom policy
Action and recommendation
 Maintain Outperform on Bharti, our top sector pick and a good defensive play.
We believe its balance sheet has the capacity to absorb the hit of excess
spectrum charges. The stock is trading at 25x FY12E and 15x FY13E PER. This
is more attractive post today’s upgrades, but still above the historical (5- yr) avg.
 The sector continues to face uncertainty due to policy (M&A rules and
spectrum payment) overhang, the details of which are currently unknown.
However, we expect the broad outcome to favour incumbents such as Bharti
due to sector consolidation and increased pricing power. If this is indeed the
case, we expect further earnings upgrades.