Data aids revenues; African margins a drag • Bharti Airtel :: ICICI Securities, report

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Data aids revenues; African margins a drag • Bharti Airtel reported its Q3FY15 numbers with revenues at | 23228.1 crore, up 1.6% QoQ (5.8% YoY), in line with our expectation of a topline of | 23413.4 crore. The enterprise segment reported sequential de-growth of 5.0% largely contributing to the miss. Voice growth fell short of expectations with only 1.3% QoQ growth vs. estimate of 3.0%. Robust data growth offset the impact of lower voice revenues. Data revenues grew 16.6% QoQ to | 2108.2 crore, aided by robust growth in data volumes to 77.2 billion MB, up 14.2% QoQ. African revenues were flat QoQ at | 6827.7 crore • EBITDA margins in Indian operations were better-than-expected at 38.9%, expanding 60 bps QoQ. African EBITDA margins, however, declined to 21.9% from 23.6% in the previous quarter • PAT came in at | 1436.5 crore (vs. expectation of | 1040.4 crore), up 3.9%. The PAT came in higher on account of lower depreciation, which came in at | 3801.5 crore vs. expectation of | 4268.4 crore Pricing power still exists… The telecom sector saw two or three years of cut-throat competition and rock bottom voice tariffs. Airtel had a 1.1% reduction in voice ARPMs over FY11-13 to 35 paisa. However, with consolidation in the sector as the licenses were quashed and smaller operators scaled down or exited the business, we can see pricing discipline back in the sector. Airtel has raised voice ARPM by about 3 paisa from 35.3 in FY13 to 37.6 in Q3FY15. Incremental realisations have had a magnified impact on Mobility operating margins, which increased from 30.1% to 37.1% over the same period. This quarter voice ARPM has remained flat but the company took hikes in several data related packs, which led to 2.6% QoQ hike in data realisation to 27.6 paisa. We expect voice realisations and total voice traffic to reach 38.5 paisa and 1111 billion minutes by FY17E from 36.8 paisa and 1029 billion minutes in FY14, respectively. Data to be volume game but tariffs to decline Data contribution to revenue has increased from 4.1% in Q4FY12 to 16.2% in Q3FY15, indicating an expansion in the data segment. Overall data consumption increased from 10000 million MB to over 77280 million MB over the same period. Though ARMB increased in the quarter, we expect realisations to decline and data to be a volume game, going ahead. Even in the coming years, we expect ARMBs to further decline. Bharti has a data spectrum portfolio with a 3G or LTE capability in 20 circles. We expect data to grow at 54.3% CAGR in FY14-17E to | 16013.8 crore forming 25.9% of the data revenue by FY17E. Africa remains below par The African business continues to remain below par with EBITDA margin contraction to 21.9% from 23.6% in the last quarter. Margins continue to remain subdued as the company faces intense competition. EBITDA margins are expected to hover around 23% in FY17E. The tower selling activities in Africa will help it pare down its debt levels. It would lease the same towers, which would impact margins but lead to subsequent saving on employee cost and depreciation. Maintain BUY; belief in sustainable growth story; target price of | 480 Considering the ability to deliver superior data services with a rich spectrum portfolio, we believe Airtel will grow its revenue and PAT at 7.4% and 42.8% CAGR (FY14-17E), respectively. We maintain BUY recommendation with a target price of | 480.

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