Despite R35bn capex in Q4, company was free-cash-flow positive

Bharti reported Q4FY13 results with revenue 1.3% below expectations; however, Ebitda (earnings before interest, taxes, depreciation and amortisation) was 1% above our expectations. Profit before tax was up an impressive 36% quarter-on-quarter, beating our numbers by 4%. However taxation, higher than our expectations by 61%, led to normalised profits 32% lower than our estimates. Overall domestic business did better than expected, and Africa continued to drag overall margins lower and missed expectations.

What we liked: Operationally strong performance. Overall domestic wireless traffic grew an impressive 5%, to 12.3 billion minutes, the highest incremental minutes growth in eight quarters. Voice ARPMs (average revenue per minute) fell marginally by 0.5% despite a 12% decline in the higher revenue yielding ILD (international long distance) business, due to a reduction in promotional tariffs. Data growth in volume terms was an impressive 21% q-o-q at 24 billion MB, with tariffs remaining stable. Non-voice contribution has increased from 16.2% in Q3FY12 to 17.4% this quarter, with revenues growing by an impressive 5% q-o-q. Data ARPMs maintained last-quarter levels of 7.4 paise. The SMS contribution reduced to 9.1%, 4% in absolute terms, or the data contribution would have been higher.

India+SA Wireless Ebitda improved an impressive 271 bps: The company could curtail S&D (sales & distribution) costs by 171 bps to 12.4%, the lowest in three years, as well as lower its interconnect cost to 12.9% (partly a factor of lower ILD minutes), which more than negated higher diesel costs and higher network operating costs. This led to 3% higher Ebitda than our expectations.

Net Debt to Ebitda fell from 2.61 to 2.57 and net debt was similar in dollar terms at $11.7bn: Despite higher capex at R35 billion in Q4FY13, Bharti was FCF (free cash flow) positive, generating R10 billion net of capex. Management also maintained its lower capex guidance at $2.2 billion for FY2014 (around $600 million for Africa), from $2.5 billion in FY2013.

Losses in ?others? declined 10% to R2.7 billion but still account for around 4% of Ebitda: These were lower in the quarter since there was no expenditure related to advertisement pertaining to Formula One Racing in India, as there was in the previous quarter.

What we did not like: Africa operations performance. Margins fell 112 bps to 25.4%, as against an expectation of an improvement. Traffic declined 11%, and MoU (minutes of usage) was down 15%; however the removal of freebies led to a 7% increase in voice ARPM. Overall revenues declined 1.7% q-o-q and Ebitda 5.8% in rupee terms, missing our target by around 8%. The only positive was that data growth was positive, leading to 17.7% of overall revenues, up 16% sequentially.

Overall tax increased 18% q-o-q to 61% of profit before tax, largely due to higher domestic business tax: During F4Q13, the group recognised additional tax charges of R374 million on account of a dividend distribution tax relating to dividends received from Indus Towers for which no tax credit is available to the group, and R959 million on account of an additional deferred tax charge due to the increase in the surcharge from 5% to 10% as per the Finance Bill 2013. As a result, the income tax expense for the quarter is higher by R1,333 million and net income is lower by R1,178 million.

On the conference call, management appeared quite bullish on the African operations, particularly in Nigeria. They believe that the promotional tariffs & MTR (mobile termination rate) cuts will help the company gain revenue market share and improve margins and the impact should be visible in the next quarter.

What does this do to our numbers? At the Ebitda level the positives from the domestic business should more than negate the negatives of the African business, and overall we could have around 2% higher Ebitda. We await the management meeting before reviewing our earnings.