Bharti Airtel (Q1 FY15)

• Bharti Q1 revenue/EBIDTA growth of 3.3%/5.7% beat our estimate on robust domestic wireless performance

• Wireless margins up ~200bps qoq on robust pricing (+2.5% qoq) and volumes +2.3% qoq; consol margin expands on operating leverage tailwind

• Mobile data total vols up 17% qoq while pricing declines 2% qoq as per revised data reporting norms; non voice share at 18.2%

• Africa EBIDTA margin lower than expected even as absolute EBIDTA remains in the sub-US$300mn range; constant currency revenue growth of 3.1% qoq vs reported +1.7% qoq

• Adjusted for Rs2.5bn in net exceptional loss, reported PAT better than expected and comes after a string of profit miss in the previous quarters

• Company upped capex guidance to US$2.2-2.4bn; we revise upwards or FY15/16 EPS estimates and would accumulate stock for revised 9-12mth target of Rs400

Airtel Q1: India wireless shines, Africa disappoints

Bharti Airtel’s Q1 result was a tale of two halves as India wireless business continues to gain momentum while Africa EBIDTA remains stuck in a range. Consolidated revenue/EBIDTA growth of 3.3%/5.7% beat our estimate of 0.35/1.1% qoq on strong India showing. Domestic mobile business saw both volume and pricing surprise positively while mobile margins (+200bps qoq) benefited from operating leverage tailwinds which in turn drove a beat on our consolidated margin forecast of 33.1%. Reported PAT was lower than expected at Rs11.1bn but included e net loss of Rs2.5bn comprising a charge of Rs1.8bn on various disputes and related tax provisions Rs700mn.

India wireless: pricing, volume surprise positively; margins up 200bps qoq

India domestic wireless business continues its robust momentum with both pricing and volumes posting a positive beat on our estimates. Voice pricing rose 2.5% qoq (vs est. 0.1% qoq) to 38.1p/min, the fifth successive quarter of uptick. Volume growth of 2.3% qoq though expectedly not as strong as that for Idea was in line with our expectation which drove a 5.5% qoq rise in domestic wireless revenues and ~200bps sequential jump in margins; Bharti’s domestic mobile margin have now risen ~450bps in the past 4 Qs on robust revenue growth and operating leverage tailwinds. Churn inched up to 2.7% but still remains in a sub-3% range as a result of enhanced focus on quality customer acquisition and retention strategy. Mobile capex ramped up to ~18% of sales from 10.7% in previous quarter while total India capex stood at Rs29.5bn out of a potential Rs90bn for FY15 (at midpoint of US$1.4-1.6bn ex-Africa FY15 guidance).  

India non wireless update: Telemedia margin decline, DTH revs up 9.2% qoq

Telemedia: Healthy 4.5% qoq revenue growth, much above our estimate of 0.9% qoq on better than expected ARPUs but EBIDTA margin declined ~40bps qoq on account of license fee levy of 8% on DSL revenues introduced in March 2014.

DTH: Revenues grew 9.2% qoq (vs est. +7% qoq) on the back of higher gross adds (376k vs 205k in Q4) and rise in ARPUs driven by higher HD penetration and up selling of packs; higher gross adds also entailed correspondingly larger procurement of boxes leading to ramp up in capex.

Airtel Business: Revenues declined 1.2% qoq against estimate of 2.5% qoq rise while EBIT margin too declined a sharp 220bps qoq though the company attributed this to mainly lower collection issues, which is purely a timing issue.

Revised data reporting norms: 17% vol growth & 2% data pricing decline qoq

Bharti revised its data reporting norms from Q1 and as per revised definition (at least 1MB of usage/month) total data subscriber base stands at 39.3mn vs >50mn as per previous reporting format. Data volumes jumped 16.7% qoq, data usage/customer rose 7% and pricing (paise/MB) dropped 2% qoq for Q1. Non voice revenues now account for 18.2% of mobile revenues of which data share is at 12.4%.  

Africa: EBIDTA margin disappoint, CC revenue growth at 3.1% qoq  

Although Africa reported US$ revenue growth of 1.7% qoq came in below our estimate of +3.4% qoq, if one adjusts for currency impact, constant currency revenues grew ~3.1% qoq.  Mobile traffic barely grew at 0.4% qoq (est. +6% qoq) while voice RPM remained flat qoq vs expected 0.5% decline. EBIDTA margin decline of ~100bps qoq was a disappointment due to higher network opex and SG&A costs which led to 2.4% dip in absolute EBIDTA. The company moved the acquisition related debt and associated finance costs to India results which led to changes in below EBIDTA line items; company indicated in its conference call that such a move more accurately reflects the pure operational performance of Africa as the debt is not actually used for African operations. Data continues to be a strong point for African operations as data customers now account for more than a third of total base while data volumes grew ~7% qoq and realization improved 8.3% qoq.  

+ve on domestic business but Africa continues to drag profitability

Q1 results indicate domestic business is on strong footing supported by volume as well as pricing growth. Data volumes also retain their robust compounded growth on quarterly basis though data pricing concerns are not fully alleviated. On the other hand Africa operations continue to pose challenge in terms of absolute EBIDTA growth. We revise upwards our FY15/16 earnings estimates post the beat in Q1 and continue to prefer Bharti over Idea at current juncture on better quality of spectrum holdings; we expect renewal payouts to be higher for Idea as compared to peers in the upcoming license renewals. Accumulate with a revised 9-12mth target of Rs400 (earlier Rs380).