Bharti Airtel (Maintain BUY) - 3QFY12 Result Update - 10 Feb 2012(IFIN)

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Realisations improve, Maintain BUY

3QFY12 results mixed: Bharti Airtel (Bharti) reported in-line revenue. However the bottom line came in lower dragged by lower operating margin and higher depreciation and tax expenses. Consolidated revenue increased 7.1% QoQ to Rs 185.1 bn driven by higher wireless revenue in India and positive currency impact for the African operation. Lower operating margin for the Telemedia and Enterprise businesses (constitute ~10% of gross revenue) impacted consolidated EBITDA margin in 3QFY12.Bharti reported net income and EPS of Rs 10.1 bn and Rs 2.7 respectively for 3QFY12.

India and SA Wireless – growth led by stable margins: Wireless revenue increased 4% QoQ to Rs 101.8 bn driven mainly by higher realisations in 3QFY12. Revenue per Minute (RPM) at Rs 0.446 (increase of 3.2% QoQ) was better than our estimate of Rs 0.440. Scalability owing to improved realisations and higher volumes boosted EBITDA margin by 10 bps QoQ to 33.8% in 3QFY12.

Telemedia and Enterprise businesses impact margin:  Despite increase in top line for the Telemedia and Enterprise businesses in 3QFY12, lower margin from these services negatively impacted overall EBITDA margin. Consolidated EBITDA margin declined 147 bps QoQ to 32.2% in 3QFY12. EBITDA margin for these businesses declined 541 bps and 457 bps QoQ to 38.8% and 16.9% respectively in 3QFY12.

Africa volume growth lower; RPM stable: Africa revenue increased 2.6% QoQ to US$1,057 mn, volume increased 3.0% QoQ and realisation remained stable in 3QFY12. On a constant currency basis, revenue grew 4.9% QoQ. EBITDA margin improved 50 bps to 26.7% in 3QFY12.

Valuation: Factoring in higher access and SG&A expenses has led to downward revision in EBITDA margin for FY12 and FY13. This will impact our free cash flow estimate despite stable revenue forecast over the same period. Hence, we have reduced our target price to Rs 458 from Rs 478. We believe reduced capex over the next two years and positive free cash flow from the African operations are likely to drive return ratios going forward. Maintain BUY.