Bharti Airtel - Robust India business offsets Africa weakness :LKP

Pricing power and overall operational mix improves in Q1

Bharti’s Q1 FY14 results were strong, driven by Indian operations, where we saw tariff increase coming in with improvement in RPM.  Africa revenues went down sequentially as traffic growth was more than offset by tariff de-growth as there was a cut in interconnection rates and select markets like Nigeria faced socio-political issues where revenues went down. However, on a consolidated level, the underperformance in Africa was more than offset by superior performance in India. Consolidated revenues grew by 9.3% yoy and 3.6% qoq at Rs203 bn, while at EBITDA levels, margins grew by 120 bps qoq to 32.2% as SG&A expenses showed an improvement to 17% from 17.9% qoq as a % of sales. Access charges also went down to 13.3% from to 14% qoq. This improvement in margins were purely driven by Indian business where pricing power was seen returning to the market leader and cost control measures provided the benefits. Competition also slackened in the quarter and there was an overall improvement in the operating metrics. Even below EBITDA levels, costs remained under control. Depreciation expenses as a % of sales declined qoq from 19.4% to 19%, while tax zoomed up as African operations posted mix results with losses widening in some countries. Hence, at PBT levels, profits grew by 31% qoq at Rs 16.12 bn, while PAT came in at Rs6.4 bn which was a 26% qoq growth, which was still robust.

Outlook and valuation

In line with improvement in regulatory scenario and competitive environment in India, we continue our positive stance on Bharti’s domestic operations. The structural improvement in pricing and proliferation of data services is boosting Bharti’s performance to the core. Overall improvement in subscribers and total MOUs coupled with ARPU improvement remains the key going forward.  Africa business reported a disappointing quarter in Q1, however better than Q4 as the business showed a margin improvement sequentially. We believe African operations will show a sequential improvement as the socio-political situation in Nigeria, the largest market for Bharti will help to boost the performance. Also, expansion of 3G services in most of the countries in Africa will somewhat offset the weakness over there and alsdo reduce the tax rate with countries narrowing their losses gradually. In line with a strong Q1 from India, we have raised our estimates for Bharti by 3%/5% at earnings level in FY14E/15E. We therefore raise the target price for Bharti from Rs360 to Rs398. We maintain BUY on the stock factoring in the regulatory outgo of Rs32 in case associated with spectrum renewal in the metro circles coming up shortly.

LKP Research

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