Bharti Airtel - "India shines, Africa whines!" -LKP

Q3 results disappoint on higher costs below operating levels in Africa business

Bharti’s Q3 FY13 results were below our expectations due to lower than expected African metrics. On revenue front, the company reported numbers which were inline with our expectations. Consolidated revenues grew by 10% yoy, while remaining flattish qoq at Rs202 bn, while at EBITDA levels, margins declined by 80 bps qoq to 30.5% as network costs expanded to 23.9% of sales from 22.8% qoq, while SG&A expenses showed an improvement to 17.8% from 18.3%. Access charges also went down to 14.4% from 14.6% qoq. However, below the operating levels, depreciation and amortization costs went up by 9% yoy and 1% qoq as the company is expanding its network in Africa. Interest expenses also plummeted to Rs13.3bn, a growth of 30% qoq mainly driven by a derivative loss of Rs2.47 bn. Excluding this charge, interest expenses remained flattish qoq. Tax expenses also showed lumpiness as it included a one-time expense of Rs600 mn associated with tax credits recognized earlier. Excluding this charge as well, adjusted PAT came in at Rs 5.91bn, which was 18% down qoq and 41.5% yoy. Reported PAT came in at Rs2.84 bn which was grossly below our as well as market expectations.

Consol margins to improve

Domestic margins in the quarter came in at 30.3%, while African margins were 26.5%. All the other businesses showed a strong improvement in margins taking the consol margins at 30.5%. Management also mentioned that their Bangladesh business turned break even this quarter. Going forward, in India, tariff hikes and reduced competition will led to an improvement in margins. Lower SG&A along with control in network opex will led to margin improvement from next quarter. However, the extent of participation in upcoming 2G auctions remains a key to assumption. Africa may also post an improvement in profitability but at a lower pace than India as the business and the brand is still at a nascent stage. We also believe that reduction in capex outlay from US$2.5 bn this year to US$2.2 bnin FY 14 will improve the cash flow and ease pressure on the bottomline. Also the company has reduced its debt this quarter as net debt/EBITDA now stands at 2.58x from 2.71x qoq. This will also have a slight positive impact on interest costs.

Outlook and valuation

In line with improvement in regulatory scenario and competitive environment in India, we continue our positive stance on Bharti. Africa business reported a disappointing quarter in Q3while we believe the broad mid-long term picture to be strong. In line with a weak Q3, and pressure on bottomline via higher depreciation, interest expenses and tax rates in Africa, we have cut our estimates for Bharti below the operating levels. Above operating levels our estimates remain broadly constant. We therefore cut the target price on Bharti from Rs380 to Rs371. We maintain BUY on the stock factoring in the regulatory outgo of Rs32 in case Bharti participates in the upcoming 2G auctions.

LKP Research

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