1. Reliance Jio impact from Q3, Bharti Airtel gets ‘Buy’ rating from Kotak

Reliance Jio impact from Q3, Bharti Airtel gets ‘Buy’ rating from Kotak

This needs to be read in light of fact that full impact of Jio will be felt from Q3

By: | Updated: November 1, 2016 6:38 AM

For whatever it is worth, and it may not be worth much given that full impact of Jio launch would be felt from Q3FY17 onwards, Bharti reported a solid, ahead-of-expectations, earnings print for Q2FY17 with 15% consolidated and 19% India wireless y-o-y Ebitda growth. In a surprising development, the company’s Board has authorised a committee of Directors to evaluate options for a significant stake sale in Bharti Infratel. We shall update our earnings post the earnings conference call.

Q2FY17 earnings print–fine on most counts

Headline consolidated financials: Consolidated revenues of R246.5 bn (+3.4% y-o-y) were 1.7% ahead of our estimates while consolidated Ebitda at R94.4 billion (+14.6% y-o-y) came in 4.6% ahead. The outperformance in Ebitda was driven by better-than-expected Ebitda print across all business segments, especially India wireless and Africa. Recurring net income of R13.7 bn (+79% y-o-y) was materially ahead of our estimate of R9.52 bn.

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India wireless financials: India wireless revenues grew 7.9% y-o-y to R147.4 bn, 0.6% ahead of our estimate; India wireless Ebitda growth of 19% y-o-y to R62.5 bn reflected sharp control on costs, which grew only 1% y-o-y in absolute terms, driving a 390 bps y-o-y Ebitda margin expansion. India wireless Ebit grew 8% y-o-y (after a few quarters of subdued growth or decline) as the impact of higher spectrum amortisation expenses starts to fade. Revenue split–voice (70% of revenues) revenues saw a 3.6% q-o-q decline and grew 3.8% y-o-y while data revenues (25% of total) grew a subdued 1.4% q-o-q and 24% y-o-y.

India wireless KPIs: Bharti delivered an impressive voice traffic growth of 11% y-o-y even as the same came at the expense of voice RPM (down 3.2% q-o-q and 6.2% y-o-y to 32.4 paise/min; still below Idea’s 33.1 paise/min for Q2FY17). Voice ARPU fell to an all-time-low of R132/sub/month. Data performance was similar to Idea’s – strong 13% q-o-q and 55% y-o-y volume growth (to 178 bn MB) coupled with a sharp 10% q-o-q and 20% y-o-y dip in realisation to 20.1 paise/MB; net result—a subdued 1.4% q-o-q growth in data revenues.

Other key highlights

India wireless Ebitda grew a strong 19% y-o-y as the company expanded margins by 390 bps y-o-y to 42.4% (flat q-o-q; healthy in a seasonally weak quarter), (ii) South Asia business reported positive Ebitda versus our expectation of a marginal loss, (iii) Africa Ebitda of R12.2 bn was 13% ahead of our estimate on the back of better-than-expected margin delivery; revenues were marginally below our expectations, and (iv) non-wireless India businesses continued their strong momentum with home broadband (Ebitda up 28% y-o-y) and DTH (Ebitda up 29% y-o-y) doing particularly well.

Data ARPU was stable at R200/sub/month. Active 3G/4G subs base at end-Q2 stood at 41.3m, +4.7m q-o-q. Consolidated capex for the quarter was R53 bn, taking H1FY17 capex to R102 bn – broadly in line with the company’s overall guidance for FY2017e, while recurring net income of R13.7 bn (+79% y-o-y) was materially ahead of our estimate of R9.52 bn.

Net debt at end-Q2FY17 stood at R815 bn, down marginally from R835 bn at end-Q1FY17. Adjusted for October auction payouts, net debt would be around R958 bn, for a net debt/Q2 annualised Ebitda of 2.54X, fairly comfortable in our view.

Africa wireless performance, especially on the margin front, was a positive surprise. We note that the company has shown good performance on the margins front in Africa in the past four quarters; however, revenue growth still remains subdued.

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