Bharti Airtel (Bharti) reported Q1FY19 results a tad above expectations—revenue rose 2.4% q-o-q versus Street’s 0.8% estimate and Ebitda margin fell 170bps q-o-q to 33.8% versus the 34.0% estimate.
On like-for-like basis, ARPU dipped 6.0% to `109 from `116. Though ARPU decline has slowed, Reliance Jio (RJIO) is still undercutting aggressively, especially the tariffs for feature phones, which would keep ARPU under pressure for the next two quarters. We are thus cutting FY19/FY20e revenue and Ebitda by 2.2/1.5% and 7.7/4.9%, respectively. That said, we believe industry consolidation will give Bharti an edge in gaining market share. Maintain Buy with a revised target price of `452 (`529 earlier).
ARPU decline slows; Africa margin expansion continues: Bharti’s organic India mobile revenue fell 2.0% q-o-q, but rose 1.2% q-o-q factoring in the Telenor acquisition. We believe ARPU will remain under pressure for a couple of quarters as RJIO continues to be aggressive via its JioPhone offering. Ebitda margin for the India business plunged 250bps q-o-q, largely due to the acquisition costs, and is now expected to normalise. Africa revenue grew 1.7% q-o-q in dollar terms (2.7% in constant currency) and Ebitda margin expanded further 50bps to 36.5%.
High capex and low operating cash flow inflate debt: With `82.2 bn capex in Q1FY19, Bharti has maintained the high capex intensity that drove a 39.7% q-o-q jump in data volume owing to addition of 1,720 mobile broadband sites and 22,190 BTS. This along with lower Ebitda, deferred spectrum payment liability arising out of the Telenor acquisition and adverse movement of INR against USD pushed up net debt by `76.7 bn to `1.03 trillion, translating into 3.5x FY19e Ebitda. We expect Bharti to monetise tower/DTH business to deleverage the balance sheet.
Outlook and valuations: Poised for recovery; maintain ‘BUY’: We believe that price war in the smartphone space has stabilised while it is peaking in the feature phone segment. That said, pricing pressure is likely to abate after a couple of quarters in our view. Meanwhile, the stock is trading at an attractive 6.8x FY20e EV/Ebitda, considering the bulk of capex is behind it and ARPU improvement is likely to drive Ebitda expansion given high operating leverage nature of the business. We maintain ‘BUY/SO’ with a revised DCF-based target price of `452.