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RESULT UPDATE
Bharti Airtel — African safari yet to start
Bharti Airtel — African safari yet to start
Domestic operations faring well…
Bharti's 2QFY11 revenue of Rs152bn came in higher than our as well as consensus expectations on the back of stable standalone revenue and better than expected revenue from Africa. Network minutes of Indian business remained flat QoQ, owing to seasonality and company’s conscious decision of not dropping tariffs further. ARPM declined by only 0.9% QoQ, one of the lowest for the company. This reflects stability in the tariffs, which is a good sign. Employee cost and NOC went up by 7.8% and 2.9% QoQ respectively. Standalone EBITDA margin stood at 37.3% Vs our estimate of 37.4%.
..Africa turnaround remains to be seen
Key highlights of the Africa operations during the quarter were strong growth in subscriber net adds and stable ARPU. The company added 3.7mn subscribers during the quarter after writing off ~5.8mn subscribers in 1QFY11. ARPU remained flat at $7.4 whereas MoU grew by 8.7% QoQ resulting in ARPM drop of 8%. Higher access charges and licensing fees led to drop in EBITDA margins, which stood at 23.9% in 2QFY11 Vs 27.5% in 1QFY11. Consolidated EBITDA margin came in at 33.7% Vs36.1% in 1QFY11. The company reported consolidated PAT of Rs16.6bn below our as well as consensus estimate.
Where do we go from here?
We remain positive on the Standalone business and its growth prospects. Launch of 3G services and delay in MNP will help Bharti to consolidate its position further. Benign tariff drop and potential upside from data services on 3G platform are expected to lend further revenue traction. Zain reported better revenue but disappointed on the margins front. Going ahead, the key challenge for Bharti will be to maintain the momentum in subscriber net additions and fuel revenue growth further and simultaneously managing the cost structure better. We believe that network outsourcing measures undertaken by the company will reap benefit in the coming quarters.
Valuation and recommendation
We reiterate BUY on the stock and believe that Bharti is the best play in the domestic telecom market. Better quality of subscribers is expected to increase the adoption of 3G services on its network, leading to higher revenue. Further, we expect turnaround in the African operations. We revise Bharti standalone (incl Infratel) valuation to Rs390/ share (Rs355 earlier), maintain value erosion from Zain at Rs33/share and from TRAI’s reco at Rs23/share. We continue to assign Rs46/ share for Indus towers. As a result, our revised SOTP based TP stands at Rs380 (Rs346 earlier). The stock is currently trading at 6.6x FY12E EV/ EBITDA and our target price implies 7.5x FY12E EV/EBITDA.
Bharti's 2QFY11 revenue of Rs152bn came in higher than our as well as consensus expectations on the back of stable standalone revenue and better than expected revenue from Africa. Network minutes of Indian business remained flat QoQ, owing to seasonality and company’s conscious decision of not dropping tariffs further. ARPM declined by only 0.9% QoQ, one of the lowest for the company. This reflects stability in the tariffs, which is a good sign. Employee cost and NOC went up by 7.8% and 2.9% QoQ respectively. Standalone EBITDA margin stood at 37.3% Vs our estimate of 37.4%.
..Africa turnaround remains to be seen
Key highlights of the Africa operations during the quarter were strong growth in subscriber net adds and stable ARPU. The company added 3.7mn subscribers during the quarter after writing off ~5.8mn subscribers in 1QFY11. ARPU remained flat at $7.4 whereas MoU grew by 8.7% QoQ resulting in ARPM drop of 8%. Higher access charges and licensing fees led to drop in EBITDA margins, which stood at 23.9% in 2QFY11 Vs 27.5% in 1QFY11. Consolidated EBITDA margin came in at 33.7% Vs36.1% in 1QFY11. The company reported consolidated PAT of Rs16.6bn below our as well as consensus estimate.
Where do we go from here?
We remain positive on the Standalone business and its growth prospects. Launch of 3G services and delay in MNP will help Bharti to consolidate its position further. Benign tariff drop and potential upside from data services on 3G platform are expected to lend further revenue traction. Zain reported better revenue but disappointed on the margins front. Going ahead, the key challenge for Bharti will be to maintain the momentum in subscriber net additions and fuel revenue growth further and simultaneously managing the cost structure better. We believe that network outsourcing measures undertaken by the company will reap benefit in the coming quarters.
Valuation and recommendation
We reiterate BUY on the stock and believe that Bharti is the best play in the domestic telecom market. Better quality of subscribers is expected to increase the adoption of 3G services on its network, leading to higher revenue. Further, we expect turnaround in the African operations. We revise Bharti standalone (incl Infratel) valuation to Rs390/ share (Rs355 earlier), maintain value erosion from Zain at Rs33/share and from TRAI’s reco at Rs23/share. We continue to assign Rs46/ share for Indus towers. As a result, our revised SOTP based TP stands at Rs380 (Rs346 earlier). The stock is currently trading at 6.6x FY12E EV/ EBITDA and our target price implies 7.5x FY12E EV/EBITDA.
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