India wireless & Africa were ahead: Q2FY14 top line at R213.2bn (+5% quarter-on-quarter; 10% year-on-year) was slightly ahead primarily due to better growth in Africa (5% q-o-q). Further, India wireless Ebitda (earnings before interest, taxes, depreciation and amortisation) also benefitted from 110 basis points margin expansion. Other segments however came in below leading to consolidated Ebitda at R68.3bn (+4% q-o-q; 15% y-o-y) coming in only 2% ahead. Profit after tax at R5bn (-27% q-o-q; -30% y-o-y) was hit by forex loss (R3.4bn) & MTM (mark-to-market) losses from rising bond yields. Maintain Buy.
India wireless: Pricing discipline & data growth: Mobile trends remain encouraging with evidence of continued pricing discipline (rev/minute rose slightly) as well as sustained improvement in data (22% q-o-q; 9.2% of revenue). Traffic declined 3% q-o-q on seasonality. Margins rose 110 bps entirely due to lower termination cost. The lower cost was on account of lower usage and declining 3G intra circle roaming. Encouragingly, churn remains low (3.2%). Minutes growth should revive in Q3. 3G subscribers are 4.1% of the base (3.6% in Q1).
Africa sees revival after two quarters of decline: After a two-quarter decline in top line ($-terms) attributed to seasonality, biz disruption and regulatory changes, top line grew 5% q-o-q with improvement in usage (143mins v/s 134mins in Q1) combined with some dip in rev/min. Margins were flat despite higher termination charge as network opex (as % of rev) was lower. H1 capex is at R18.6bn; in line to meet the full-year guidance.
Other segments were subdued; Enterprise was the only silver lining: Fixed line, towerco & DTH came in below estimates. Enterprise was the only segment that was ahead but has lumpy revenues. Loss in “other” too widened.
Earnings and TP changes: We adjust FY14-16e Ebitda to factor in Q2 trends. EPS is cut 7-14% to factor in MTM & FX loss as well as higher tax. Roll forward to March-15e (Dec-14E earlier). New TP (target price) is at R420/share.
Risks: The key risks to our investment thesis which could prevent the shares from reaching our target price include: (i) a slower-than-expected turnaround in Africa, which would result in greater value depletion; (ii) the India business not improving due either to sustained high competition between existing operators or price disruption in voice by Reliance Industries (as and when it enters); and (iii) Adverse regulatory rulings/policies.