Bharti Airtel Two cheers - hold one for next quarter:: Macquarie Research

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Bharti Airtel
Two cheers - hold one for next quarter
Event
 Bharti delivered a mixed bag in its results release today; higher than expected
interest/ amortisation related to the 3G rollout and a slight miss on EBITDA,
albeit still within our comfort zone. Signals from Africa were encouraging. We
cut our profit estimate for FY12 by ~10%, bringing forward rollout costs below
the EBITDA line. Our outlook on cash flows remains broadly unchanged. We
therefore see no reason to change our target price or Outperform rating.

Impact
 Nothing to get excited about in the results: Sales were exactly in line with
estimate. EBITDA missed our estimate by 4% but most KPIs (MoU/ RPM/
APRU) were exactly in line. The miss can be attributed to rebranding
expenses, which spilled over from last quarter, and 3G related network costs.
We are impressed by RPM resilience despite implementation of MNP.
 Faster 3G rollout is a good thing: The 15% miss on our PAT estimate was
due to higher than expected rollout of 3G (in 9 circles, versus our estimate of
5-6). We are not concerned about this. In fact, we would put a positive spin on
this since the rollout (and accounting treatment) is better than our forecast.
 Africa - time to blow the vuvuzelas? No significant deviation from
expectations - in fact, better than expected margins, a slight sequential drop in
ARPU and a pickup in ARPM. This was offset by increased capex guidance
(from US$800mn to US$1-1.2bn, as forecast by us last quarter). Sceptics
keep looking for negative surprises and haven’t found any yet. It may be too
early to get excited but we are relieved at the steady progress.
 1QFY12 should be similarly mixed: 3G rollout costs below the EBITDA line
will be higher than our current estimate due to rollout in the remaining circles.
We are cutting our PAT estimate for 1QFY12 by 15% as a result.
Earnings and target price revision
 Our revenue forecasts are broadly unchanged. We bring forward the 3G
rollout schedule and cut our FY12 EPS estimate by 10%. Our estimates from
FY13 onwards see only minor changes (+/- 2-3%) due to stabilisation of KPIs
post rollout of 3G and minor upgrades to our Africa business forecasts. No
change to our cash flow estimates and hence target price.
Price catalyst
 12-month price target: Rs384.00 based on a Sum of Parts methodology.
 Catalyst: News flow regarding new telecom policy/ regulatory payments,
trends for 2G RPMs, 3G offtake and African business
Action and recommendation
 Maintain Outperform on Bharti, our top pick in the telecom sector in India
and a good defensive play. We expect some EPS downgrades on the street
for the reasons discussed above. The next 1-2 quarters could see similarly
mixed results. However there is no change to our long-term thesis on Bharti.