Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Limited
First Full Quarter of African
Operations Leads to Hiccup
Bharti reported its F2Q11 results: Revenues were in
line with expectations, but EBITDA was 5% below our
estimate. The main reason was lower EBITDA from the
African and domestic wireless business. Higher than
estimated tax and lower depreciation balanced each
other. Overall this led to profits being 14% below our
expectations. This is the first full quarter with Zain;
hence revenue growth was higher at 47% YoY and 24%
QoQ, along with absolute EBITDA growth of 19% YoY
and 16% QoQ. Ex-Zain revenue and EBITDA would
have shown a marginal but positive direction. Overall
EBITDA margins fell 243bps QoQ, 133 bps below
expectations. They stand at 33.7%, down 780bps YoY.
Key Positives
1) Passive Division better than expected: Revenues
and EBITDA from this division grew 4% and 9% QoQ.
EBITDA margins rose 167bps during the quarter and
now stand at an impressive 37.1%.
2) Focus on Average Revenue Per Minute (ARPM):
Bharti reported the lowest fall in ARPM in seven quarters,
just 0.7% to Rs0.445/min. It has not been part of the
industry phenomenon of free minutes, which generates
low return. In turn it has increased network efficiency.
3) Despite stiff competition, EBITDA margins for
India & South Asia fell by only 30bps: They now
stand at 37.3%.
4) Maintained net debt at Rs601bn: There was Rs4bn
payout for dividend and changes in working capital,
mainly due to African rollouts. We believe the company
could generate Rs10-15bn cash flows per quarter in the
future, which could help reduce its net debt.
Key Negatives
1) EBITDA margins fell 243bps: The main factor was
inclusion of African assets acquired from Zain, which
has lower margins than the other businesses (24% vs.
37%). Also note full-quarter impact of salary hikes;
salaries increased 120bps to 5.8% of revenues.
1% and EBITDA margins fell 356bps to 23.9%: With the
company adding 10% more subscribers each quarter, we
expect revenue growth rates to be higher than the 4% seen in
the current quarter. Also, we believe EBITDA margins could
go up from these levels since sales and marketing costs for
the segment are a high 30% of revenues vs. 13-14% for the
India & South Asia segment. We attribute this to the launch in
the African continent and believe these could trend lower once
rollout is complete.
3) Minutes of Use (MOUs) fell 5.4% QoQ to
454/sub/month: This led Average Revenue Per User (ARPU)
to fall 6% QoQ to Rs202/month, almost twice what we
expected. However, management suggested this is largely
due to seasonal weakness in F2Q11. With stability in ARPMs
and improving traffic, we believe the worst quarter could be
behind the company.
What does this do to our earnings? The EBITDA miss
relating to Zain could lead to a 7-8% impact on profits in the
near term and 2-3% longer term; however, we await
discussions with management and maintain our estimates
currently.
Other Highlights
Zain operational data: ARPMs were US cents 6.6, down 8%
QoQ, while MoUs grew 9% to 112/sub/month leading to 1%
ARPU dip which were at US$7.4/month. The revenues were in
line with expectations, but EBITDA was 13% below our
expectation due to lower margins of 23.9%, down 356bps vs.
our assumption of 27.5%.
Capex was at 22% of sales; similar to last year: The
company spent Rs33 bn in F2Q11, 65% of EBITDA. With
peak capex behind, net debt to EBITDA stands at 2.9x. The
company had previously given guidance of ~US$ 2 bn for
capex for F2011 in the domestic business and ~US$ 800mn
for investments in Africa. It has spent US$1.1bn YTD.
Valuation Methodology
We set our price target at our base case value of
Rs423/share: For our bear-, base-, and bull-case scenarios,
we use a sum-of-the-parts methodology, which adds
discounted cash flow (DCF) value for Bharti’s core business,
3G book value and value derived from its tower business and
net accrual from Zain acquisition.
Bharti’s core business value remains at the midpoint of the
value derived from our DCF calculation on a one-year forward
basis, assuming a terminal growth rate of 3% and cost of
capital of 12%. Our core business enterprise value is
Rs369/share.
Since in our base case we do not include any revenue upside
due to 3G, we add back the book value of the 3G license to the
net debt for the company. This equates to Rs41/share.
of the company’s seven circles as well as its ownership in
Indus to arrive at a value of US$91k per usable tower.
We value Bharti’s tower business at Rs73/based on our DCF
model and add this to our core business equity value.
Our valuation methodology for Zain’s assets is DCF. Since our
analysis suggests Bharti has acquired these assets at a
premium by taking on higher debt, the net accrued value has a
negative Rs28/share impact
Downside risks to our price target
• Higher-than-expected drop in tariffs due to aggressive
pricing by new operators to gain subscribers.
• Regulatory uncertainty regarding spectrum and Bharti’s
need to pay additional spectrum charges. In our bear
case, we estimate US$1bn for the company based on
Trai’s recommendations.
Catalysts include:
• Unlocking value in the tower business through listing or
strategic sales;
• Economies of scale due to being the leading wireless
player; and
• License fee reduction for the industry as a whole.
No comments:
Post a Comment