Q2 result in line; business under pressure -- Bharti Airtel :: Centrum

Q2 result in line; business under pressure
While Bharti Airtel’s (Bharti) Q2FY13 reported result was better than our
estimates, operating financial performance was in line. The company recognized
revenues of Rs5.9 bn based on a TDSAT order which related to the previous period
and this inflated PBT. Net profit was down 40% QoQ to Rs7.2bn due to higher
interest and tax expenses. We revise our estimates downwards to capture the slow
net adds and 1HFY13 financial performance. We believe the business would
remain under pressure till there is visible improvement in revenue per minute and
regulatory pressures are addressed. Accordingly, we downgrade our rating to
Neutral and the target price to Rs253 (from Rs288) considering 1) declining
minutes of usage Q2 and 2) the absence of near term triggers as there is no near
term visibility on tariff hike and regulatory pressure in 2HFY13.
Q2 performance in line with expectations: Adjusting to prior period revenue
recognition of Rs5.9bn, net sales were in line with our estimates at Rs196.9bn;
operating margin was a tad better than our estimate. Operating margin improved
by of ~75bp QoQ to 30.9% after adjusting to one-offs. However, net profit declined
by 40% on higher interest and tax outgo.
Africa business too sees margin coming back in Q2: Revenue was up 2.8% QoQ
to US$1.1bn (growth of 5.1% QoQ to Rs60.5bn due to exchange benefit).
Operating profit margin bounced back during the quarter by 120bps to 27.1%
during Q2. Subscriber net add run rate went up this quarter to 2.8mn and minutes
of usage (MoU) grew by 20.3% QoQ.
Minutes of usage (MoU) growth slipping: Subscriber declined by of 1.4mn in
Q2FY13 after consistent addition for long. Bharti has adopted an aggressive
approach to gain market share since Q1. Minutes of usage declined by 1.3% QoQ
to 265bn min on the back of decline in subs during the quarter.

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Concall highlights: The management reiterated the concern on business model
considering current tariffs and regulatory pressure. Reduction in discounts and
schemes would to initial step to improve revenue per minute and this is possible
once the industry together works towards withdrawing schemes. In Africa, the
company is experimenting with elasticity by sacrificing tariffs. This has resulted in
some minutes gain during Q2. No change in capex plans.
Earnings revision: We have revised our earnings estimate to factor in change in
lowering minutes of usage growth. We have downgraded our margin assumption
by 166bps to factor in lower minutes growth and flat revenue per minutes going
forward.
Downgrade rating to neutral: The stock witnessed improvement during Q2 after
the weak Q1 result and the current valuation is at 6.5x FY13E and 5.3x FY14E
EV/EBITDA. We do not see an immediate trigger for the stock despite this correction
as the company is trying to sustain its market share in an intensely competitive
scenario and regulatory environment is also likely to put further pressure going
forward. Further, we do not foresee tariff hike in the near term as Q3 would see
spectrum auction. Hence, we downgrade our target price to Rs253 per share and our
rating to Neutral as we changed our earning forecast. We believe that the stock
would continue to trade in a narrow range of 5% as we do not expect revenue per
minute to improve in the near term and Bharti would be aggressive enough to save
its market share.