Bharti Airtel (Q1 FY13)

We cut our FY13/14 estimates but retain BUY for revised 9-mth tgt of Rs350 (earlier Rs409)

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs274, Target Rs350, Upside 27.6%

  • Q1 EBIDTA & PAT miss expectation by a wide margin; EBIDTA decline & higher tax rate lead to 24% qoq drop in PAT; revenues up 3.3% qoq
  • Higher SG&A spends to reverse revenue share loss and elevated network opex dent India & S Asia margin; consolidated EBIDTA down 6% qoq
  • India & S Asia wireless revenues disappoint on sharper RPM decline; traffic up 3.9% qoq; wireless capex jumps ~4x qoq on investments in 2G/3G sites, roll out of 4G services
  • Africa US$ revenue growth dips 0.5% qoq while EBIDTA margin too declined ~200bps on increased SG&A, network roll outs and country contribution mix
  • Company lowers Africa capex guidance to US$900mn but reiterates India & S Asia capex guidance of US$2-2.2bn
  • Bharti consciously sought to reverse revenue share loss which has dampened margins in Q1; given the extent of Q1 disappointment, we cut our FY13/14 estimates but retain BUY for revised 9-mth tgt of Rs350 (earlier Rs409)
Result table
(Rs m) Q1 FY13 Q4 FY12 % qoq Q1 FY12 % yoy
Net sales 193,619 187,388 3.3 169,828 14.0
Access and IUC (27,045) (25,658) 5.4 (22,158) 22.1
Network opex (45,425) (41,583) 9.2 (37,308) 21.8
License fees (16,300) (16,218) 0.5 (14,939) 9.1
Staff (9,193) (8,717) 5.5 (9,246) (0.6)
S G & A (37,169) (32,883) 13.0 (29,118) 27.6
Operating profit 58,487 62,329 (6.2) 57,059 2.5
OPM (%) 30.2 33.3 (305) bps 33.6 (339) bps
Depreciation (37,571) (34,683) 8.3 (31,314) 20.0
Interest (9,816) (8,749) 12.2 (6,734) 45.8
PBT 11,100 18,897 (41.3) 19,011 (41.6)
Tax (4,878) (6,976) (30.1) (5,141) (5.1)
Effective tax rate (%) 38.4 33.7 473 bps 24.7 1,371 bps
Minority & Associate (205) (39) 425.6 98 -
Adjusted PAT 6,017 11,882 (49.4) 13,968 (56.9)
Adj. PAT margin (%) 3.1 6.3 (323) bps 8.2 (512) bps
FX gain/(loss) 1,605 (1,823) - (1,816) -
Reported PAT 7,622 10,059 (24.2) 12,152 (37.3)

Source: Company, India Infoline Research

Big miss on EBIDTA & PAT; revenue growth at 3.3% qoq
Bharti Q1 EBIDTA at Rs58.5bn, down 6.2% qoq or 305bps, was much below our expectations of ~Rs64bn. Revenues grew 3.3% qoq, slightly lower than our estimate of Rs194.7bn. Operating disappointment reflected at PAT level where the miss was even bigger due to higher than estimated tax rate of 38.4% (est. 31%). Adjusted for FX gain of Rs1.6bn, underlying PAT has fared even worse than headline disappointment.    
Network investments, aggressive marketing dent India & S Asia margins
Company indulged in aggressive marketing to reverse decline in revenue market share and believes such an approach has resulted in some margin dilution; however, it would seek to strike a balance between market share gains and margin performance. Overall, Bharti reported 305bps qoq decline in consolidated EBIDTA margin to 30.2%, a multi year low, vs our expectation of flat margins. India & S Asia margin dropped ~350bps qoq as company deployed marketing firepower (up 22% qoq) to reverse market share decline of recent quarters. Network costs too rose 126bps on sequential basis as company ramped up investments on network expansion as reflected in 4.2% qoq rise in 2G site base. In addition, incremental investments in co-location 3G sites, 4G roll out & investments in enterprise business (revs up 6.2% qoq) contributed to higher network opex.  

Revenues up 3.3% qoq; wireless revs disappoints on sharper RPM decline
Consolidated revenues rose 3.3% qoq vs our expectation of +3.9% as lower Africa US$ sales were offset by better than estimated revenue growth in India & S Asia. Ex-Africa wireless revenues grew slower than forecast at 1.7% qoq on 2.6% qoq (slightly worse than Idea’s 2.4% drop) fall in RPM to 42.7p. RPM decline was aggravated due to 1) TRAI guidelines about processing fee restricted the sale of combo packs resulting in loss of Rs2.5-3bn in mobile revenues 2) Service tax hike wef April 1 by 200bps impacted usage and effective realization. Even so, company managed to improve traffic by 3.9% qoq, or 9bn incremental minutes, on the back of aggressive marketing tactics. Unsurprisingly India & S Asia wireless EBIDTA margin dropped 369bps qoq. Mobile capex was ramped up to Rs19bn vs Rs4.8bn in Q4 to improve voice coverage and data capabilities. Overall India & S Asia capex jumped 2.7x qoq to ~Rs29bn.     

Non wireless revenues surprise on upside; margins a mixed bag       
Telemedia revenues increased ~3% qoq, ahead of our -0.8% estimate as ARPUs gained ~3% qoq vs our expectation of flat rate; EBIDTA margin dip of 90bps was purely attributed to voice traffic gaining share to 45.7% vs 44.2% in Q4. DTH revenue growth at 2.6% qoq (est. +6% qoq) was slowest since at least company started separate DTH reporting while EBIDTA slipped into loss after 5 quarters of small operating profit which was purely due to change in the way content is being accounted. Passive Infra revenues again decelerated 0.6% qoq after 0.9% qoq fall in Q4, falling short of our +2% estimate while EBIDTA margin declined 210bps partly due to volume discounts that kicked in for tenants.    

Results give first glimpse of 3G; data ARPU at Rs40
Q1 results provided first glimpse of data usage on Airtel’s network. At ~39mn, data users constitute ~21% of the total subscriber base. As indicated in previous earnings calls, active 3G users at 3.7mn form a minuscule proportion of data users.   

Data usage details
Data Q4 FY12 Q1 FY13
Customer base (mn) 35.8 38.7
   Of which 3G customers  (mn) 2.7 3.7
% of customer base 19.7 20.6
Total MBs on the network (mn MBs) 10,006 12,566
Data ARPU (Rs) 44 40
Data Usage/customer (MB) 107 112
Data Realization/MB (paise) 40.9 35.3
Source: Company, India Infoline Research

Africa US$ revenue, margin below estimates; net loss widens to US$124mn
Africa reported an unexpected 0.5% qoq revenue decline to US$1,066mn vs our estimate of US$1,101mn as a 3.1% RPM decline overshadowed 2.7% qoq traffic gain (vs est. +5% qoq). In CC terms, revenues grew 1.2% qoq but a 7.8% qoq EoP depreciation of INR against US$ resulted in a 6.9% qoq jump in INR revenues. EBIDTA margin too disappointed at 25.8% (down ~200bps qoq) on increased network opex (up 138bps qoq due to higher fuel costs & rising coverage requirements in African cities) and marketing expenses (up 32bps qoq). Consequently, Africa net loss widened ~2x qoq to US$124mn. FY13 capex guidance for Africa has been lowered to ~US$900mn from about US$1bn earlier while that for India & S Asia has been retained at US$2-2.2bn.      

Cut estimates on disappointing Q1 but retain BUY
Bharti made a disappointing start to FY13 with results below par on most counts although we are encouraged from mgmt comments on need to balance revenue share gains with concurrent damage to margins. Indeed, we do expect EBDITA margin to improve gradually over Q2-Q4 as we expect marketing spends to taper out as company is unlikely to go too far down the revenue gain path which could elongate margin pain. We cut PAT estimates for FY13/14 primarily from margin cut (~300bps) and higher tax rate (200bps) which result in a reduced 9-mth tgt of Rs350 (earlier Rs409). Our tgt price includes Rs41 for regulatory payouts even as Bharti still retains sufficient balance sheet strength to weather any such eventualities. Retain BUY.

Financial summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 596,018 715,058 803,321 881,042
yoy growth (%) 42.4 20.0 12.3 9.7
Operating profit 200,718 237,123 257,866 289,863
OPM (%) 33.7 33.2 32.1 32.9
Pre-exceptional PAT 63,491 47,827 43,957 54,305
Reported PAT 60,831 42,594 43,957 54,305
yoy growth (%) (32.2) (30.0) 3.2 23.5

EPS (Rs) 16.0 11.2 11.6 14.3
P/E (x) 17.2 24.5 23.8 19.2

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