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Bharti Airtel Ltd. ---------------------------------------------------------------Maintain OUTPERFORM
Decent quarter; potential change in Africa strategy is not worrying
● Bharti’s Mar-11 revenue came in line with expectations. Margins
were weak primarily due to a decline in India mobile margins.
Profits were 6% below due to higher depreciation and taxes.
● India mobile’s margin miss was driven by an aggressive network
rollout (3G launched in the quarter). We expect this margin
depression to be short-lived on encouraging signs of 3G uptake.
● While Africa revenues were in line, margins surprised positively by
expanding 130 bps QoQ. A 250 bp margin improvement over two
quarters gives comfort on the long-term targets of management.
● Although management hinted at delays to its minute factory model
in Africa, we are not overly worried about this. We believe that
management targets for FY3/13 should be achieved even without
following this model aggressively.
● Our EPS numbers are trimmed 4% for the next two years as we
incorporate higher taxes, lower margins and higher depreciation.
We believe the underlying fundamentals remain sound and we
retain our OUTPERFORM rating with a Rs415 target price.
Good results, barring India margins
Bharti’s Mar-11 quarter revenue came in line with our estimates.
(+3% QoQ). However, a miss on India mobile margins, along with
higher depreciation and taxes led profits being 6% below estimates.
A margin decline of 130 bps in the mobile segment was due to higher
network opex. We note that 3G rollout has been earlier and more
aggressive than our expectation. At the same time, initial datapoints
on uptake (2 mn subs with US$3-4 ARPU) are encouraging.
Africa continued to deliver good numbers, with 3% revenue growth (in
line with estimates) and a 130 bp like-for-like margin improvement
(30 bps above estimates). We have thus seen a 250 bp margin
improvement in Africa over the last two quarters. Interestingly, traffic in
Africa remained flat QoQ – as prices were raised in the DRC leading
to a fall in MoU. Margin improvement in a quarter of zero volume
growth indicates potential margin gains by pure internal cost cutting.
Change in Africa strategy?
Adjusting for the tariff change in the DRC, management indicated that
the overall traffic growth was ~3% QoQ – still a far cry from the 17%
seen in the previous quarter. However, we note the following
comments made during the call: 1) that most of the tariff interventions
are over for now, and any further tariff changes will be revisited after a
few quarters’ time; 2) an increase in the FY3/12 capex target from
US$800-1 bn to US$1-1.2 bn. It is likely that the ‘low price, high
volume’ model will be delayed until the network can handle the model.
Is this a cause for worry? We think not. As we showed in our 2 March
-2011 report, Fortune favours the bold, Bharti does not have to chase
market share aggressively to meet management’s target of US$5 bn
(by FY3/13) – it only needs to grow in line with the industry. At the
same time, our analysis in the report highlighted various inefficiencies
in the operations, providing an opportunity to improve margins just on
internal cost controls. This also ties in with management comments
yesterday that margin gains will continue even without strong volume
growth (as was evident in the Mar-11 quarter).
Retaining our Outperform
Following the results, our EPS estimates are trimmed ~4% for FY12
and FY13, driven by a reduction in near-term mobile margins, higher
depreciation and tax rates. The underlying fundamentals continue to
look good, with growth in a stable competitive environment in India
and strong margin upside in Africa. We continue to rate the stock an
OUTPERFORM with a Rs415 target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel Ltd. ---------------------------------------------------------------Maintain OUTPERFORM
Decent quarter; potential change in Africa strategy is not worrying
● Bharti’s Mar-11 revenue came in line with expectations. Margins
were weak primarily due to a decline in India mobile margins.
Profits were 6% below due to higher depreciation and taxes.
● India mobile’s margin miss was driven by an aggressive network
rollout (3G launched in the quarter). We expect this margin
depression to be short-lived on encouraging signs of 3G uptake.
● While Africa revenues were in line, margins surprised positively by
expanding 130 bps QoQ. A 250 bp margin improvement over two
quarters gives comfort on the long-term targets of management.
● Although management hinted at delays to its minute factory model
in Africa, we are not overly worried about this. We believe that
management targets for FY3/13 should be achieved even without
following this model aggressively.
● Our EPS numbers are trimmed 4% for the next two years as we
incorporate higher taxes, lower margins and higher depreciation.
We believe the underlying fundamentals remain sound and we
retain our OUTPERFORM rating with a Rs415 target price.
Good results, barring India margins
Bharti’s Mar-11 quarter revenue came in line with our estimates.
(+3% QoQ). However, a miss on India mobile margins, along with
higher depreciation and taxes led profits being 6% below estimates.
A margin decline of 130 bps in the mobile segment was due to higher
network opex. We note that 3G rollout has been earlier and more
aggressive than our expectation. At the same time, initial datapoints
on uptake (2 mn subs with US$3-4 ARPU) are encouraging.
Africa continued to deliver good numbers, with 3% revenue growth (in
line with estimates) and a 130 bp like-for-like margin improvement
(30 bps above estimates). We have thus seen a 250 bp margin
improvement in Africa over the last two quarters. Interestingly, traffic in
Africa remained flat QoQ – as prices were raised in the DRC leading
to a fall in MoU. Margin improvement in a quarter of zero volume
growth indicates potential margin gains by pure internal cost cutting.
Change in Africa strategy?
Adjusting for the tariff change in the DRC, management indicated that
the overall traffic growth was ~3% QoQ – still a far cry from the 17%
seen in the previous quarter. However, we note the following
comments made during the call: 1) that most of the tariff interventions
are over for now, and any further tariff changes will be revisited after a
few quarters’ time; 2) an increase in the FY3/12 capex target from
US$800-1 bn to US$1-1.2 bn. It is likely that the ‘low price, high
volume’ model will be delayed until the network can handle the model.
Is this a cause for worry? We think not. As we showed in our 2 March
-2011 report, Fortune favours the bold, Bharti does not have to chase
market share aggressively to meet management’s target of US$5 bn
(by FY3/13) – it only needs to grow in line with the industry. At the
same time, our analysis in the report highlighted various inefficiencies
in the operations, providing an opportunity to improve margins just on
internal cost controls. This also ties in with management comments
yesterday that margin gains will continue even without strong volume
growth (as was evident in the Mar-11 quarter).
Retaining our Outperform
Following the results, our EPS estimates are trimmed ~4% for FY12
and FY13, driven by a reduction in near-term mobile margins, higher
depreciation and tax rates. The underlying fundamentals continue to
look good, with growth in a stable competitive environment in India
and strong margin upside in Africa. We continue to rate the stock an
OUTPERFORM with a Rs415 target price.
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