>BHARTI AIRTEL: Read through MTN results for Bharti

Over the last two days, two developments pertaining to Bharti Airtel (Bharti) have taken place- (1) MTN’s results were declared which provided some understanding on the competitive scenario in Bharti’s major African regions of operation and (2)the Telecom Regulatory Authority of India (TRAI) issuing a consultation paper on auction of spectrum. We present below the analysis of the same and their likely implication on Bharti Airtel.


MTN results- Read through for Bharti Africa
MTN declared its full year FY2011 results on March 7, 2011. Bharti Africa competes with MTN in six countries (which are Nigeria, Ghana, Uganda, Rwanda, Zambia and CongoB) of its 16 African countries. In these countries MTN enjoys either the leadership position or a second spot. Hence we analyze MTN’s results in these countries to get a read through in terms of competitive landscape and market analysis for Bharti Africa.


MTN’s top line showed a high single to double digit growth in Nigeria as well as Ghana on a constant currency basis (achieved on back of falling tariff rates and high traffic growth). Further the EBITDA margin in Nigeria as well as Ghana showed a dip (Nigeria by 120bps from 62.9% to 61.7%, while Ghana’s margin showed a sharp 380bps contraction from 43.9% to 38.9%). The contraction in the margin was a result of increased fuel cost coupled with increase in the interconnect charges. It is worthy to note here that like the market leader MTN, Bharti too is exposed to these competitive forces and the cost structure. Further MTN’s standing in both the markets is very strong with its market share at 50% and 52% in Nigeria and
Ghana respectively, and thus is in a very comfortable position in defending its growth and market share.


Bharti’s African capex intensity to remain high
MTN in its annual release has guided for an aggressive capital expenditure (capex) in both Nigeria as well as Ghana (+45% and 16% respectively over FY2011 levels). Its guidance for Nigeria for CY2012 capex stands at $1.4 billion, while for Ghana, the company has guided for a capex of $146 million. MTN in its release, further indicated the need to build more capacity and improve network quality and these would be the key capex drivers. Thus in such a scenario where the leader is getting aggressive on capex and network building, we think that Bharti will have to show the same speed and aggression in terms of capex if it wants to continue its journey of market share gain. In our results update note dated February 8, 2012, we had mentioned that sustaining low capex for Africa remains a question mark. An extract from our report dated February 8, 2012 goes as follows - “The capex for the quarter came significantly lower at Rs2,123 crore (approximately 50% of the regular capex), resulting in a sharp improvement in the free cash position. Though we acknowledge the company’s view of peak capex being behind it [in India as well as Africa], we believe that sustaining such low capex is difficult.” MTN’s move further provides impetus to our doubt and hence we believe Bharti will have to up its ante on capex.


Stated objective of 40% margin by FY2013 will be dragged ahead
■ On the Africa business front, in Q3FY2012, the revenue performance for Bharti was modest (constant currency +5% quarter on quarter [QoQ]). The margin enhancement pace appeared slow with a marginal 10-30bps improvement on a sequential basis. For the quarter under consideration the margins improved by 33bps. With such a snail-paced margin improvement, we have doubts of Africa meeting its stated guidance of attaining a margin of 40% by FY2013.




■ TRAI releases consultation paper on spectrum pricing and other contentious issues-

■ TRAI has issued a consultation paper on auction of spectrum to seek views of various stakeholders and then give its recommendation to the Department of Telecom (DoT). The key issues raised in this paper are amount of spectrum to be auctioned, liberalisation and reframing of spectrum in 800/900MHz bands, structure of auction, spectrum block size, eligibility criteria for participating in the auction, reserve price, roll out obligations, spectrum usage charges and trading.


■ The consultation paper shows 60Mhz and 413.6Mhz of spectrum will be vacated in 800Mhz and 1800Mhz spectrum bands respectively from the cancellation of 122 2G licenses by the Supreme Court.


■  In the consultation paper issued, TRAI has put forward various models that can be used for auction. Similarly for deciding the minimum value for spectrum to start auction, TRAI has not specifically indicated price but has asked for model that should be used for determining the base price.

■ Most of the telecom operators, whose licenses have been cancelled by the Supreme Court, have asked for fixing it at around Rs1,658 crore which is equivalent to the license fee that has been charged for allocation of pan-India license to new telecom players after 2001. Further the consultation paper talks of initiation of spectrum refarming in the 900 as well as 1800MHZ bands.



■ TRAI has given time till March 21 for written comments and March 28 for counter-comments on this consultation paper.


Bharti to remain under pressure in short term: Taking cues from these two developments; viz consultation paper that talks of spectrum refarming, (that would entail high operational cost for incumbent players like Bharti and Idea those have substantial spectrum in the efficient 900MHZ band), coupled with MTN results that implicitly state that if Bharti Africa has to continue gaining market share in the African region, it has to up its ante on the capex front, would put some strain on its African cash flow position. Further the competitive and cost landscape in Africa would continue to remain though (as seen from MTN’s results and comments). Thus we believe that Bharti Africa is likely to miss its stated objective of reaching 40% market share by FY2013 and attaining the same may get stretched by a 12-18 month time frame. In the absence of potential revenue enhancement as well as sentimental triggers, coupled with constant overhang and negative outcome of regulatory policy, we believe that Bharti is likely to remain under pressure in short term. We however continue to maintain our Buy rating on the stock with price target at Rs450 (8.1x FY2013EV/EBITDA). Further any clarity on pending regulatory issues is likely to drive
stock performance in the near term.


RISH TRADER