Bharti’s reported Q3FY17 results were below expectations on already subdued estimates. The impact of demonetisation and R-Jio showed up in Bharti’s India wireless numbers where Ebitda declined 16% q-o-q. The data segment was especially weak wherein both volumes and realisations fell materially. We expect this pain to continue for the next 3-4 quarters; however, we also expect the overall industry structure to improve substantially once the current tumultuous phase gets over. Bharti would perhaps be in the best position when that happens; we remain believers.

The bleed starts; where do we go from here?

Bharti just reported the worst sequential dip in wireless revenues and Ebitda in its history and we believe Bharti may have done better than most other operators during the quarter. Even as demonetisation impact likely also played a part, we believe that a good part of the weakness was on account of Jio’s free offering.

15-2

Q3FY17 earnings print: weak as it gets but likely to get worse in Q4

Consolidated revenue at Rs 233.4 bn was down 3.0% y-o-y and 5.3% q-o-q (2.4% below our estimate), while Ebitda of Rs 84.8 bn was up 0.8% y-o-y and down 10% q-o-q (KIE estimate of Rs 87.8 bn). Ebitda weakness was primarily on account of sharper-than-expected impact of Jio launch and demonetisation on the India wireless business.

Recurring net profit was down around 60% both y-o-y and q-o-q to Rs 5.9 bn. Miss at the net profit level was driven by a combination of weak Ebitda as well as higher-than-expected provision for taxes. We note that ETR for the India business stood at as high as 47% for the quarter; the company’s guidance for India ETR has been that of marginal tax rate.

Consolidated capex (ex-spectrum) for the quarter stood at Rs 59 bn, taking 9MFY17 capex to Rs 161 bn ( Rs 142 bn India/SA + Rs 19 bn Africa); we note that India capex is tracking ahead of the company’s guidance while Africa is tracking marginally below. Overall capex could end up being marginally higher than the company’s guidance range.

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India wireless performance: R-Jio impact more than visible

India wireless revenue was down 6% q-o-q and 1% y-o-y to Rs 138.7 bn, 1.5% below KIE estimate of Rs 140.4 bn. Ebitda for the quarter was Rs 52.6 bn (down a sharp 16% q-o-q and 3% y-o-y), missing our estimate of Rs 55.9 bn by 6%. Wireless business faced pressure on two fronts in the third quarter – (i) demonetisation; we believe this should normalise in Q4F17, and (ii) R-Jio launch; this resulted in pressure on multiple fronts including data volume shift, data pricing pressure, voice pricing pressure and deterioration in voice traffic mix (in favour of incoming traffic); The impact arising out of Reliance Jio is likely to worsen in Q4FY17 (and continue to worsen till Jio starts charging customers).

Pain in India wireless is likely to continue over the next 3-4 quarters

India wireless revenue weakness was significantly higher than expected and portends the start of what could be a weak 3-4 quarters for this business; we expect similar or worse numbers for other players. Bharti has the balance sheet strength to manage the headwinds while others do not have this luxury. To that extent, we could be entering a phase of accelerated M&A activity in the sector. We retain our faith on emergence of a much-improved industry structure and expect Bharti to be at the forefront when the same happens.