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Bharti Airtel 3QFY2014 performance highlights and results update

January 31, 2014, Friday, 09:48 GMT | 04:48 EST | 14:18 IST | 16:48 SGT
Contributed by Angel Broking

For 3QFY2014, Bharti Airtel (Bharti)’s revenues as well as EBITDA came in line with our expectations while the bottom-line disappointed due to exceptional tax related provisions. The growth in revenues was mainly fueled by a strong 4.1% qoq increase in USD revenue (from African operations) to US$1,165mn, which came as a positive surprise. The company is now hopeful with regards its domestic operations as mobile operators have increased tariffs and cut freebies after a bruising three-year price war. We maintain our Accumulate rating on the stock.
Result highlights: For 3QFY2014, Bharti’s consolidated revenue grew by 2.9% qoq to Rs.21,961cr. The revenue of the mobile business in India grew by 2.6% qoq to Rs.11,645cr. Volume growth was a subdued 1.5% qoq, weak for a seasonally strong quarter. The company’s consolidated EBITDA margin increased by ~30bp qoq to 32.3%, which is lower than our expectations. The EBITDA margin miss was due to sharp decline in operating margins of the Africa business. The PAT came in at Rs.623cr; profitability was hit due to an exceptional tax provision of Rs.221cr; adjusting to that, the net profit came in line with our expectations at Rs.831cr.
Outlook and valuation: The Management sounded confident of holding revenue per minute (RPM) going ahead with the company’s focus on rationalizing prices. Raising tariff is the only palpable option for the industry if it needs to improve cash flows for future funding of spectrum payouts. However, the Management indicated that the increase in tariff would be gradual due to: 1) high consumer inflation and 2) consumer behavior towards usage. Unlike Idea Cellular (Idea), Bharti dismissed any impact of recent price hikes on volume weakness. However similar to Idea, the minutes of use (MOU) growth was slow– implying changing industry dynamics of slowing MOU due to free minutes being curtailed. We expect Bharti to post a revenue CAGR of 8.4% over FY2013-15E. Higher debt, interest costs and forex risks pose a risk to earnings. Emerging regulatory clarity in the sector would be positive for the sector in the medium to long term. Bharti being the leader in the industry would be the key beneficiary of the same. We maintain our Accumulate rating on the stock. The SOTP based valuation method prices the stock at Rs.345.