Q3FY14: Overall, revenue at Rs 219 bn (8.4% y-o-y) and Ebitda at Rs 70.7 bn (+15% y-o-y) were in line with expectations but consolidated PAT (Rs 5.4bn) was 40% lower than our estimate primarily due to a Rs 2.6 bn one-time tax-settlement. India voice revenue growth of 12% y-o-y was led by 5.6% growth in voice RPM (revenue per minute) and a 6% growth in usage. Non-voice revenues (17.2% of mobile) grew 8% y-o-y as the strong uptick in data (+100% y-o-y) was offset by slowdown in other non-data VAS (value added services) revenues (-30% y-o-y). The wireless Ebitda margin has improved 60bps q-o-q to 34.1%. Africa revenue at $1.2bn (+3% y-o-y) was driven by a 5% fall in RPM and 8% growth in usage. Ebitda at $300m has been range bound for the last eight quarters.
Key takeaways from the results India voice tariffs: Bharti believes there is still room for reduction of discounted minutes. The gap between rack rates and realised rates is still at 30-40%.
India margin expansion: The company has been focusing on (a) better quality customer acquisition, (b) reducing channel commissions, (c) improving customer care, (d) driving increase in data adoption, and (e) better capital productivity to improve revenue growth and profitability.
3G tariffs: Management believes that 3G pricing is already at a low level in India and hence they would try to hold it at current levels.
Capex: Guided for $2bn each in FY14e and FY15e.
Africa tariffs: Management indicated that usage elasticity is low in Africa and hence they would not cut tariffs to drive growth. The focus remains on data usage and Airtel Money.
India mobile business: margin has improved by 500bps over last four quarters: India voice revenue growth of 12% y-o-y was led by 5.6% growth in voice RPM and 6% growth in usage. Non-voice revenues (17.2% of mobile) grew 8% y-o-y as the strong uptick in data (+100% y-o-y) was offset by a slowdown in other non-data VAS revenues (-30% YoY). The wireless Ebitda margin has improved 60bps q-o-q to 34.1%. The defining trend in the last four quarters has been the 250bps fall in SG&A (selling and acquisition expenses) costs on account of falling churn. Bharti indicated that this has been a result of better channel management and lower commissions.
Africa: muted revenue and Ebitda; management expects data to provide fillip: Revenue ($1.2bn) grew 3% y-o-y driven by a 5% fall in RPM and 8% growth in usage. Ebitda at $300m has been range-bound for the last eight quarters. Bharti has been investing in network and marketing over the last one-two quarters, which should result in better revenue growth. YTD (year to date) FCFE (free cash flow-to-equity) at -$155m is in line with our forecast funding gap of $200m for FY14e.
Our DCF-based target price is Rs 340; stock trades at 5.5xFY15e EV/Ebitda: Our target price implies 6.5xFY15e EV/Ebitda for Indian operations, assuming 5x for Africa. We assign an equity value of Rs 367/share and Rs 27/share for India and African operations, respectively. A benign spectrum auction is an upside risk. Weaker-than-expected usage growth in India is a downside risk.