>INDIA WIRELESS (MACQUARIE RESEARCH)

Taking stock of results from the trio

Event
■ There is a lot of investor anxiety, in our view, over the slowdown recorded in sector top-line growth in 1Q results (of Bharti, Idea and Vodafone Essar, which reported key 1Q metrics on Friday). We believe that the street has not been able to gauge the strong underlying trends, however we adjust reported numbers for the termination rate cut and give you a low down of the key underlying trends and compare and contrast the results of three of the largest wireless telco-s in India (See Figure 1 on page 2 for detailed comps).

Impact
■ April – June 2009 quarter was the first quarter after the termination rate cut. TRAI had reduced termination charges for all domestic calls by 33% to Rs0.20 per minute from Rs.30, effective 1 April 2009. As a result, all the reported top lines and gross realisation metrics were under visible pressure.

■ However, one needs to look at adjusted metrics for gross realisations, along with metrics at the EBITDA level, to really gather the true underlying operational trends.

■ Bharti delivered strong 4% QoQ top-line growth in 1Q FY3/10E. Bharti reported 1Q wireless revenues of Rs82.3bn (up 19% YoY, flat QoQ). The “muted” sequential growth in revenues is due to reduced termination receipts. If we were to adjust for that, wireless revenue growth was 3.9% QoQ.

■ Vodafone reported 1Q results, wireless metrics similar to Bharti. The termination rate cut has had a maximum impact on Idea (Rs15), followed by Bharti (Rs12) and Vodafone Essar (Rs11). Adjusted ARPU for Vodafone in 1Q was Rs258 (down 22.4% YoY and 6% QoQ). This compares with Bharti’s adjusted ARPU of Rs290 (down 17.0% YoY and 14.9% QoQ).

■ Investors should focus on wireless EBITDA metrics to measure growth in 1Q. We believe that given the dislocation caused due to the termination rate cut in 1Q, it is imperative to look at EBITDA-related metrics. Bharti delivered EBITDA per minute of Rs0.19 (+0.1% vs our estimate) beating consensus of Rs0.18 by ~5%. EBITDA per minute for Idea was Rs0.16 (2.3% below our estimate).

■ Two very significant points a lot of people may have missed in Bharti’s results: impressive free cash generation and substantial debt repayment – Free cash generated in the quarter was Rs15bn (US$310m), stacking up at 6.6% of Bharti’s 1Q revenues. Bharti also repaid Rs22bn (US$ 457m) of debt this quarter. We believe the pace of Bharti’s free cash generation will stun the market in a span of just 3–4 quarters. We forecast Bharti’s free cashflow to be Rs92.67bn in FY3/11E (20% of revenues, 7% free cashflow yield) and Rs113.9bn in FY3/12E (21% of revenues, 8% free cashflow yield).

Outlook
■ Reiterate Outperform on Bharti after 1Q results. Bharti is our key Outperform in the MacqTel Asia Pac Telecoms Portfolio and is among the cheapest among the Indian big caps, at a PER of 14x FY3/10E. We note that Bharti is among the two fastest growing Asia Pac Telcos on EBITDA and EPS CAGR.

To see full report: INDIA WIRELESS