India Equity Research: BHARTI AIRTEL 3QFY12: Disappointing traffic growth and non-mobile margins drag earnings; downgrading EBITDA by 4-7% / Motilal Oswal

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BHARTI AIRTEL 3QFY12: Disappointing traffic growth and non-mobile margins drag earnings; downgrading EBITDA by 4-7%

- Bharti’s (BHARTI IN, Mkt Cap USD27.3b, CMP INR354, Buy) 3QFY12 PAT declined 22.4% YoY and 1.5% QoQ to INR10.1b, significantly below our estimate of INR14.7b.

- While consolidated revenue of INR 184.8b (up 7% QoQ) was broadly in-line, earnings were dragged by higher opex (sponsorship and other expenses of ~INR1.2b) and depreciation (one-time adjustment of ~INR0.75b in Africa segment).

- Revenue for India and South Asia (SA) segment grew 12.3% YoY and 3.8% QoQ to INR131.6b (1% below est). EBIDTA declined 1% QoQ largely due to 15-16% QoQ EBITDA decline for Telemedia and Enterprise businesses. India & SA mobile revenue and EBITDA grew 4-5% QoQ.

- India mobile traffic grew ~1% QoQ, 3% below est. India mobile RPM grew 3.3% QoQ to 44.6p (1% above est) largely due to tariff hikes undertaken. Churn levels remain elevated at ~8% per month.

- Bharti likely continued to lose mobile revenue market share due to its strategy of holding on to tariff levels and not competing in the “discount market segment”. Management mentioned that Bharti held on to effective tariff hikes across all 22 circles as it wanted the markets to fully absorb the hikes and is now ready for any required tariff intervention to protect revenue market share.

- Africa business EBIDTA grew 4.4% QoQ to USD282m (1% below est), driven by ~3% QoQ revenue growth (~3% traffic growth, flat RPM) and ~50bp EBITDA margin expansion. Our FY12/13 EBIDTA estimate for Africa business are USD1.1/1.4b.

- Telemedia revenue remained largely flat YoY but declined 4% QoQ to INR9.1b due to 1) seasonality in 3Q due to holidays, 2) Do-Not-Call guidelines which impacted business coming from tele-marketers, and 3) migration to a new composite billing system. Enterprise business was also likely impacted by some of these issues.

- Bharti incurred consolidated capex of USD2.5b in 9MFY12, broadly in line with full year guidance of USD3.2b. Management expects FY13 capex to be similar to FY12 levels.

- We are downgrading our FY12/13 revenue estimates by 0.5/1%, EBITDA by 4/7% and PAT by 20% largely driven by 2-3% downgrade in traffic and lower margins in non-mobile business.

- We model 17% EBITDA CAGR and 50% PAT CAGR over FY12-14E driven by RPM inflection, moderate traffic growth and turnaround in Africa business.

- At CMP of INR354, the stock trades at EV/EBITDA of 8.4x FY12E and 6.7x FY13E.

- Maintain Buy with a revised target price of INR410/sh (INR465/sh earlier) based on 8.5x FY13 EV/EBITDA (7x FY14 EV/EBITDA) for India & SA business and 6x FY13 EV/EBITDA (5x FY14 EV/EBITDA) for Africa business. Our target incorporates INR67b (INR18/sh) outlay for regulatory risks (~50% of potential liability based on TRAI expert committee valuation).

Bharti Airtel: Financial and valuation summary

3QFY12 result highlights

- Traffic for India mobile business grew 0.9% QoQ to 219b mins (3% below our estimate). MOU per sub declined 1% QoQ to 419min (v/s est of 432 min)

- Bharti India mobile RPM grew 3.3% QoQ to 44.6p, 1.3% above our estimate.

- Traffic in Africa grew 3% QoQ to 18.5b minutes.

- Margin improvement of ~50bp in Africa to 26.7%, below our estimate of 27.1%.

- Bharti Africa added 2.5m subscribers in 3QFY12, (v/s 2.1m in 2QFY12).

- Management has mentioned that FY12 capex guidance for Africa operations stands at USD1.3-1.4b (USD1.2-1.3b earlier). Consolidated capex guidance for FY12 is USD3.2b.

- Bharti’s net debt increased 5% QoQ to INR678b, largely on account of forex impact.

India and South Asia revenue and EBITDA below estimates

- India and South Asia revenue grew 12.3% YoY and 3.8% QoQ to INR131.6b (v/s estimate of INR133.1b).

- EBITDA grew 7.4% YoY but declined 1% QoQ to INR45.2b (v/s estimate of INR49.5b) largely due to poor performance in the Telemedia and Enterprise business segments.

- EBITDA margin declined ~160bp YoY and ~170bp QoQ to 34.4% (v/s our estimate of 37.2%).

- PAT of INR12.7b was significantly below our estimate of INR17.6b.

- Mobile traffic (India) grew 10% YoY and 1% QoQ to 219b minutes (3% below est).

- MOU per subscriber declined 1% QoQ to 419 mins (3% below est).

- RPM grew 3.3% QoQ to 44.6p (1% above est).

- Mobile ARPU grew 2.3% QoQ to INR187 (2% below est).

- Blended monthly churn increased to 7.9% (v/s 7.2% during 2QFY12).

KPI performance: MOU and ARPU below estimates Monthly churn continues to inch up (%)

Bharti v/s Idea: QoQ traffic growth (%) Bharti v/s Idea: QoQ mobile revenue growth (%)

Mobile traffic 3% below estimates (b min) Mobile EBITDA per minute improves QoQ (INR)

Mobile services (India and South Asia): Revenue and EBITDA grew 4-5% QoQ

- Mobile revenue increased 11% YoY and 4% QoQ to INR101.8b (2% below est).

- EBITDA increased 8.7% YoY and 4.6% QoQ to INR34.4b (6% below est).

- EBITDA margin grew 20bp QoQ to 33.8% (v/s est of 35.3%).

- Non-voice business contributed 14.3% to mobile revenue in 3QFY12 (v/s 14.5% in 2QFY12).

- The decline in VAS contribution has largely been due to TRAI’s stringent guidelines on maximum SMS limit.

- However with the revised order increasing the maximum limit from 100 to 200, we expect VAS contribution to pick up going forward.

- Bharti has launched 3G services covering 945 cities with a 3G subscriber base of ~8m.

Non-voice revenue (% of mobile revenue) declined for third straight quarter (%)

15-16% QoQ decline in EBITDA for Telemedia and Enterprise business

- Telemedia revenue remained largely flat YoY but declined 4% QoQ to INR9.1b largely due to 1) seasonality in 3Q due to holidays, 2) DND guidelines which led to decline in tele-marketers, and 3) migration to a new composite billing system.

- Telemedia EBITDA declined 12% YoY and 16% QoQ to INR3.5b. ARPU declined 4% QoQ to INR916.

- Enterprise revenue grew 13% YoY and 7.6% QoQ to INR11.9b; EBITDA stood at INR2b, down 11% YoY and 15% QoQ.

Passive infrastructure: 2-3% QoQ revenue and EBITDA growth

- Passive infrastructure segment revenue and EBITDA includes standalone operations of Bharti Infratel and proportionate consolidation of 42% stake in Indus Towers.

- Revenue increased 11% YoY and 2.6% QoQ to INR24.4b; EBITDA increased 7.4% YoY and 2.3% QoQ at INR9.1b.

- Bharti Infratel has a portfolio of ~33,200 towers with a tenancy ratio of 1.82x.

- Indus Towers has a portfolio of ~109,100 towers with a tenancy ratio of 1.93x.

- Indus Towers has sharing revenue per operator per month (SRPO) of ~INR32,300 (~14% discount compared to Bharti Infratel).

Africa: Margin improvement continues; RPM stable

- Africa revenue grew ~3% QoQ to USD1,057m (v/s est of USD1053m).

- EBITDA increased ~4.4% QoQ to USD282m implying EBITDA margin of 26.7% (v/s 26.2% in 2QFY12), ~45bp below estimate.

- Net loss declined from USD93m in 2QFY12 to USD52m in 3QFY12 (v/s our estimate of USD59m net loss).

- Total minutes grew ~3% QoQ to 18.5b.

- RPM remained flat QoQ at 5.7 US cents.

- ARPU declined 2.6% QoQ to USD7.1.

- Total subscriber base increased to 50.9m in 3QFY12 (v/s 48.4m in 2QFY12).

Net debt at INR678b; capex guidance at USD3.2b

- Bharti’s net debt increased 5% QoQ to INR678b, implying net debt/ annualised EBITDA of 2.84x.

- During the quarter, Bharti reported a forex gain of ~INR80m v/s INR2.5b loss in 2QFY12.

- FY12 consolidated capex guidance for Bharti remains at USD3.2b.

- Bharti added 1,033 cell-sites during the quarter v/s 867 in the previous quarter.

Site roll-outs have picked up after four quarters of decline

Downgrading EBITDA by 4-7%; PAT by ~20%

- We are downgrading our FY12/13 revenue estimates by 0.5/1%, EBITDA by 4/7% and PAT by 20% largely driven by 2-3% downgrade in traffic and lower margins in non-mobile business.

- We model 17% EBITDA CAGR and 50% PAT CAGR over FY12-14E driven by RPM inflection, moderate traffic growth and turnaround in Africa business.

- At CMP of INR354, the stock trades at EV/EBITDA of 8.4x FY12E and 6.7x FY13E.