Disappointing figures hit Bharti Airtel shares

Updated: Feb 11 2013, 16:02pm hrs
Bharti Airtel Q3FY13 performance was disappointing, revenue per minute (RPM) dropped, and in a seasonally strong quarter with a low base network traffic was up merely 2.8% QoQ (quarter-on-quarter), hitting shares. Although competition has eased and promotional offers are reducing, sustained tariff hikes are not on the cards. Normalised Ebitda (earnings before interest, taxes, depreciation and amortisation) was up 1% QoQ and PAT (profit after tax) plummeted with higher interest and tax burden. We have cut our FY13/15 Ebitda by 4%/7%.

Also Bharti still faces high regulatory risks, with need for further spectrum payments and reforming at a time when ROCE (return on capital employed) is a low 6%. Meanwhile, post a 20% rally, stock trades at 30x PE (price-to-earnings ratio) and 7x Ebitda for FY14CL. With 9% downside to our target, we have downgraded the stock from UPF to SELL. I

India mobile RPM dropped; traffic up 2.8% QoQ after 2.1%fall: Bharti Airtels Q3FY13 pre-exceptional consolidated revenue was up 3% QoQ and Ebitda increased 1% QoQ, while PAT plummeted 41% QoQ. The reported previous quarter included R5.9 bn one-time income in respect of prior-period interconnect agreements. In Q3, which is seasonally strong, India mobile network traffic was up merely 2.8% QoQ after falling 2.1% QoQ in the previous quarter and despite active subscribers rising 350bps to 95%. RPM (revenue per minute) was marginally down to Rs0.43 and voice RPM dipped 1% QoQ to R0.352. With a loss of 4m subscribers to now 182m, reported minutes of use (MoU) rose 4% QoQ to 435 minutes and average revenue per user (Arpu) climbed 4.5% QoQ to R186 also with value-added services (VAS) rising 50bps to 17.3% of Arpu. We maintain the view that India 2G growth continues to slow and in Africa, Bharti's revenue increased 2% QoQ, led by a 11% QoQ jump in traffic, but RPM was down 7% QoQ and Ebitda was flat QoQ.

Margin contracted 3ppts; jump in interest, tax; PAT drop: Bhartis Q3FY13 consolidated margin again failed to expand and over nine months (9M) FY13 narrowed 255bps YoY (year-on-year) to 30.6%, primarily led by a 21% YoY jump in network operating costs and an 18% YoY increase in SG&A (selling, general and administrative expenses). With 9MFY12 Ebitda growth of only 4% YoY and interest, depreciation and tax all 15-17% YoY higher, pre exceptional PAT was down 53% YoY this year. Bhartis 9MFY13 India effective tax rate was 29%, but led by Africa, the consolidated figure was hefty at 54%. The 9M capex was R99 bn/$1.8 bn and consolidated INR debt has declined 4% QoQ to R643 bn/$11.9bn after consolidating Bharti Infratels IPO proceeds.

Lower FY13/15CL Ebitda by 4-7%; regulatory risks still high: Post Bhartis lower-than-expected Q3FY13 performance and jump in interest and tax, we are cutting FY13-15 Ebitda by 4-7% and PAT by a sharper 30-41%. The next 2G auction is in March. This will include refarmed 900 spectrum in metros as well as 2G licence renewalsthis will propel Bharti to participate. Exorbitant spectrum prices, a need for further payments and refarming all threaten Bhartis business at a time when its ROCE is down to a low of 6%. Our R300 target price now factors in R60 of regulatory risks at a 33% discount with pending litigations. With 9% implied downside to our target, we have downgraded the stock from Underperform to SELL.

CLSA Asia-Pacific Markets