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Bharti Airtel 2QFY2012 performance highlights and results update

Contributed by Angel Broking

By Angel Broking

Bharti Airtel (Bharti) reported a mixed performance for 2QFY2012. The company’s revenue came in-line with our expectations, while PAT came below expectations due to higher interest and forex loss. Also, KPIs of India business declined during the quarter, leading to lower revenue growth in India  mobile business. Bharti emerged as the first-mover in undertaking price increases in prepaid call charges, the full impact of which will flow from 3QFY2012 and will aid the company’s average revenue per minute (ARPM). We maintain our Accumulate rating on the stock.

Result highlights: For 2QFY2012, Bharti’s consolidated revenue stood at  Rs.17,276cr (1.7% qoq growth). Revenue from mobile services for India came  in atRs.9,783cr, down 0.6% qoq (lower growth than estimated), due to a 4.9% qoq decline in minutes of usage (MOU) to 423min, as call drop rates are higher in 2Q. However, ARPM grew by 0.9% qoq to Rs.0.43/min. Zain Africa’s contribution to revenue stood at Rs.4,591cr, up 4.9% qoq, because of 5.5% qoq growth in MOU to 128min, whereas ARPM declined by 5.4% qoq to 5.7US?/min. EBITDA margin of mobile India as well as Africa business decreased by 50bp and 45bp qoq to 33.7% and 26.7%, respectively. Consolidated EBITDA margin for Bharti stood at 33.7%, almost flat qoq. Net profit stood at Rs.1,027cr, down 15.5% qoq, negatively affected by higher interest cost of Rs.1,318cr, which includes forex loss of Rs.239cr.

Outlook and valuation: Bharti is on its way to turnaround its Africa business by bringing down its network operating expenditure by outsourcing various network-related developments. Thus, we expect the combination of improving KPIs and cost efficiencies to drive the EBITDA margin for the Africa business to 26.6% and 27.0% by FY2012 and FY2013, respectively. We expect Bharti’s Indian and African mobile subscriber base to grow at a CAGR of 8.2% and 16.9% over FY2011-13E to 190.0mn and 60.4mn subscribers, respectively. We maintain our Accumulate rating on the stock with a target price of Rs.425, valuing Bharti at EV/EBITDA of 7.0x FY2013E EBITDA.

Mixed performance

For 2QFY2012, Bharti reported moderate revenue growth of 1.7% qoq, with consolidated revenue coming in at Rs.17,296cr, as 2Q is seasonally a weak quarter  because of the rainy season.

Mobile business – India and South Asia: Revenue of the mobile business – India and South Asia – declined marginally by 0.6% qoq to Rs.9,783cr, below our expectation due to the higher-than-expected decline in MOU by 4.9% qoq to 423min, as call drop rates are higher in 2Q due to the rainy season. However,  ARPM grew by 0.9% qoq to Rs.0.43/min. This negatively affected the company’s average revenue per user (ARPU), pulling it down by 3.8% qoq to Rs.183/month. Revenue of mobile – India and South Asia – business was also impacted because of the slight decline in value-added services (VAS) share (even when 3G services are launched in all the circles), which decreased to 14.5% in 2QFY2012 from 14.6% in 1QFY2012. In 2QFY2012, the company added 3.6mn subscribers in this segment, taking its total subscriber base to 172.8mn.

Mobile – Africa business: For 2QFY2012, Zain Africa’s revenue stood at Rs.4,591cr, up 4.9% qoq, aided by a 5.5% qoq increase in MOU to 128min; however, ARPM slipped by 5.4% qoq to 5.7US?/min as against 6.0US?/min in 1QFY2012. In 2QFY2012, net subscriber addition was strong for Zain Africa at 2.1mn, taking  its subscriber base to 48.4mn subscribers.

Telemedia services: Revenue of the telemedia business grew by merely 0.8% qoq to Rs.953cr on the back of 0.3% qoq growth in ARPU to Rs.955 in 2QFY2012 from Rs.952 in 1QFY2012, as now 52.1% of the revenue of telemedia services is from data services (non voice-based services). However, net subscriber addition again  stood very sluggish at 6,585 in 2QFY2012 vs. 25,818 in 1QFY2012.

Enterprise services: Revenue of the enterprise services segment grew by 6.1% qoq to Rs.1,104cr in 2QFY2012.

Passive infrastructure services: Revenue growth in the passive infrastructure services segment stood at 6.1% qoq to Rs.2,377cr. Tenancy ratio improved to 1.89 in 2QFY2012 from 1.87 in 1QFY2012.

Margins remain flat

During the quarter, at the operational front, EBITDA margin of mobile – India and South Asia – business, passive infrastructure business and mobile – Africa business declined by 50bp, 25bp and 45bp on a qoq basis to 33.7%, 37.5% and 26.2%, respectively. However, due to the strong increase in the EBITDA margin of Digital TV services, Bharti’s consolidated EBITDA margin almost remained flat qoq at 33.7% in 2QFY2012.

During the quarter, Bharti’s consolidated net profit stood at Rs.1,027cr, down 15.5% qoq, negatively impacted by higher interest cost of Rs.1,318cr, which includes forex loss of Rs.239cr.

Outlook and valuation

Bharti is on its way to turnaround its Africa business by bringing down its network operating expenditure by outsourcing various network-related developments. The company has been consistently adding 2.0mn–2.1mn subscribers per quarter in its Africa business. In terms of KPIs, the company has managed to increase its MOU for Africa to 128min in 2QFY2012 from 115min in 4QFY2011 and is expecting prices to remain stable in the African market. Thus, we expect the combination of improving KPIs and cost efficiencies to drive the EBITDA margin of the Africa business to 26.6% and 27.0% by FY2012 and FY2013, respectively.

On the domestic business front, the company undertook price hikes of 20% for on-net prepaid calls for all its 22 circles. We expect this to gradually push the ARPM upwards from Rs.0.43/min in 2QFY2012 to Rs.0.452/min and Rs.0.50/min bythe end of FY2012 and FY2013, respectively. Hence, we expect Bharti’s Indian and African mobile subscriber base to grow at a CAGR of 8.2% and 16.9% over FY2011–13E to 190.0mn and 60.4mn subscribers, respectively.

In addition, we expect increasing VAS share due to surging demand for non-SMS data services to further comfort the company’s ARPM. Bharti’s MOU is expected to remain soft because of the various free-minute packages offered by competition as well as some moderation in volumes due to increased rates. However, key downside risks such as 1) uncertainty in regulatory outcome; 2) pricing scenario in Africa operations; and 3) delay in return on investments made in 3G launches, still loom.

The strong cashflow generation on account of 1) the expected improvement in operating profitability due to price increases in the domestic market and cost-efficiency measures in Africa business and 2) lower capex needs of ~US$3bn annually in future are expected to help the company’s debt repayment abilities. The company has brought down its net debt-to-equity from 1.38x to 1.33x in one year’s time, and we expect it to further trend downwards to 1.2x and 0.9x by the end of FY2012 and FY2013, respectively.

Thus, we prefer Bharti in the Indian telecom space and maintain our Accumulate recommendation on the stock with a target price of Rs.425, valuing Bharti at EV/EBITDA of 7.0x FY2013E.