Thursday, February 9, 2012

>BHARTI AIRTEL: Flat minutes of usage in India disappoints street

Bharti Airtel’s Q3FY12 results were below our estimates on operational parameters. While revenue was up 7% QoQ at Rs184.8bn, EBITDA at Rs59.3bn was 3.5% below our estimates. Minutes of Usage (MoU) was flat qoq to 219bn min, lower than the street and our estimates. Operating margin was lower at 32% due to contraction in margin in enterprise and telemedia segments and higher contribution from Africa business (24% of cons. EBITDA) which generated 26.8% operating margin. Africa business showed steady performance with 13.9% growth (5% QoQ growth on local currency basis) in revenue and 41bps margin expansion.

 Results below street expectation: Q3 result came below expectation on two counts - 1) flat minutes of usage qoq and 2) Enterprise and Telemedia segment margin contraction. Apart from these reasons, the revenue mix in favour of Africa business which generated 26.8% operating margin pulled down the overall EBITDA margin to 32.2% during Q3.

 Africa business registes 13.9% QoQ revenue growth: The Africa business showed steady performance during Q3. Revenue growth of 13.9% QoQ to Rs53.6bn (5% on like-to-like currency basis) was driven by 3% MoU growth and exchange rate gain. Operating margin expanded by 41bp to 26.8%. Some one-off events hampered growth during Q3. Management indicated the trend was positive and expected growth momentum to pick up and revenue market share gain to accelerate across countries.

 Management commentary on margin pressure during Q3: 1) Mobile segment – one time provisions in Bangladesh impacted the margin despite RPM increase. 2) Telemedia segment – major reasons for margin decline was migration to the billing system. The loss of customers due to curbs on telemarketers also impacted growth and profitability 3) Enterprise segment – the fire at Mumbai station impacted profitability to an extent that required the company to pay a penalty. Moreover, the segment showed lumpy performance and can be better judged only when analyzed on a full year basis.

 Regulatory risk to come down, maintain Buy: We have reduced our EBITDA margin estimates to factor in the impact of Q3FY12 result and also changed our assumptions by 1) lowering EBITDA margin by 1% of the Africa business to 29% for FY13E; 2) increasing SG&A expenses over Q3 trend considering sponsorship payout and additional marketing on account of customer acquisition given the competitive environment. While regulatory uncertainty continues to hover, we believe that Bharti should be preferred considering its strong balance sheet and no/low risk on the company in case license for operators is cancelled following spectrum auction. At the CMP, the stock trades at 19.4x FY13E EPS, 6.7x EV/EBITDA. We maintain Buy on the stock with a revised price target of Rs438 (earlier: Rs457), an upside of 23.9% from the CMP. The decision on regulation is likely to come up within four months wherein clear license norms and spectrum pricing would emerge. Our take is that in NTP 2012, if licenses are cancelled, competitive intensity would ease and payout would come down for players.