Bharti Airtel: 2QFY11: Africa revenues ring in but margins slip

Visit http://indiaer.blogspot.com/ for complete details �� ��



2QFY11: Africa revenues ring in but margins slip
􀂄 A flat quarter for India & SA: Ex-Africa revenues of `131bn and EBITDA of
`42bn came in flat QoQ and inline with JMFe. Amongst segments enterprise
+2.3% and passive infrastructure +3.7% grew revenues ahead of expectations,
while Telemedia reported strong margins 46% (+211bps) as focus on
broadband in key identified markets yielded results. EBITDA margin at 23.2%
was down 42bps QoQ on the back of increased network expenses (diesel
prices) and employee costs (annual increments). Wireless Traffic at 196b mins
was flat (avg subscribers +6%, mou -6%) and ARPM at 0.44p was down a mere
1.7% (reaffirming our view on stable domestic tariffs).


􀂄 Africa revenues ahead of expectations but margins disappointed: Revenue
of `39bn (+2.6% on a like-for-like [LFL] basis) was 11% ahead of expectations
whilst EBITDA of `9bn (-13.4% on a LFL basis) was lower by 13%. EBITDA
margin declined 420bps QoQ (we expected +180bps improvement) as
interconnect charges increased 160bps (higher off-net traffic, high IUC rates)
and license & spectrum charges increased another 260bps (1QFY11 had Nil
license & spectrum charges). Wireless traffic of 12.8bn mins increased 13% on
a LFL basis (subscribers +10%, mou +9%) and ARPM at $0.66 was down 11%
as price premiums were rationalised in 10 of 16 countries.

􀂄 Net profit of `16.6bn inline as forex gains reduce financing cost: Bharti
recorded derivative & forex gain of `2.5bn (`2.8bn loss in 1QFY11). As a
result net finance charges of `3.3bn declined 21% QoQ enabling the company
to contain the net profit decline to 5.1%, largely inline with our expectations.

􀂄 Revise estimates and reiterate BUY with a Sep’11 TP of `422: We change
our estimates incorporating current results. We increase Africa revenue
estimates and postpone margin improvements. Our revised FY12-13e
numbers imply a 3-4% increase in consolidated revenues, 100bps decline in
EBITDA margins and a negligible change in consolidated EBITDA. We reiterate
our positive view on the stock with a Sep’11 target price of `422 using a 8x
EV/EBITDA on a blended FY12/13 basis and a BUY rating.

􀂄 Other key takeaways: 1) Capex `33bn (+80% QoQ) easing equipment import
restrictions & 3G capex 2) Effective tax rate at 26% (18% in 1QFY11) primarily
due to Africa 3) Africa net-adds of 3.7mn higher than Zain 4) Outsourcing of
network management and BPO (call-centre) to deliver cost efficiencies 5)
Management indicated that it did not intend to engage in tariff wars in Africa.