Bharti Airtel-Below expectations on seasonality/Africa: Goldman Sachs

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EARNINGS REVIEW
Bharti Airtel (BRTI.BO)
Neutral
Below expectations on seasonality/disappointing Africa numbers
What surprised us
Bharti reported 2QFY11 net revenues/EBITDA/net profit of Rs152.2bn/
Rs51.2bn/Rs16.6bn which were +1.1%/-4.8%/-1.5% vs. our estimates (and
+1.3%/-2.1%/-6.9% vs Bloomberg consensus). EBITDA/net profit missed our
estimates largely due to higher than expected opex and taxes from the
African operations.


Key positives: 1) India RPM at Rs0.44/min was flat qoq
(vs. our estimate of Rs0.43/min and a 3.4% decline for Idea) as the
competitive environment remained stable, 2) Revenues from enterprise
services/passive infra grew 2.3%/3.7% qoq and the respective EBITDA
margins improved 211bp/167bps qoq, as EBITDA showed 6.7%/8.5% qoq
growth, 3) D&A expenses for the quarter were 7.2% below our estimates
as Bharti did not charge 3G spectrum amortization in the quarter.

Key negatives: 1) MOU declined 5% qoq (similar to Idea) and was 4% below
our estimates, mainly due to more pronounced impact of seasonality, 2)
EBITDA margin was down 323 bp qoq and was 206 bp lower than our
estimate due to higher than expected access charges/SG&A expenses
(11.4%/18.8% above our estimates) driven by full impact from African
operations. These were partially offset by lower than expected license
fees/network opex (which were 13.2%/2% below our estimates), 3) Income
tax was Rs5.7bn (vs. Rs3.5bn in 1Q and our estimate of Rs4bn) largely due to
country-specific deferred tax accounting for the African operations.

What to do with the stock
We reiterate our Neutral rating and 12-month SOTP-based TP of Rs345.
Bharti is trading at a FY11E proportionate EV/EBITDA and P/E of 8.8X /18.2X
(vs. Asian telco average of 6.7X and 16.8X, respectively). Key risks—upside:
Faster growth from wireless division; downside: Price wars re-emerging.