Bharti Airtel - Q4FY12 Result update - Centrum

Minutes of Usage above estimates

Bharti Airtel's Q4FY12 results were in line with our estimates on operational parameters. While revenue was up 1.4% QoQ at Rs187.3bn, EBITDA at Rs62.2bn was 3.2% above our estimates. Minutes of Usage (MoU) was up 5% QoQ to 230bn min, above our estimates as the company tweaked tariffs during Q4. Operating margin was higher at 33.2% due to lower SG&A expenses. Africa business showed steady improvement with 102bps margin expansion to 27.8%. While we retain our rating and estimates, we are adjusting the target price to Rs372 per share factoring in regulatory risks going forward.

- Results in line with expectation operationally: Q4 result came in line with expectations. Revenue grew by 1.4% to Rs187.3bn driven by growth in MoU. While the revenue assumption was in line, MoU growth of 5% QoQ was higher than our estimates. The company witnessed resurgence in minutes on the back of 1.7% decline in revenue per minutes (RPM). This indicates that Indian market is price sensitive and has a preference for established players in a competitive pricing scenario. EBITDA margin expanded 155bp to 33.2% during Q4 on lower SG&A expenses.

- Africa business registers steady improvement in margin: The Africa business showed steady performance during Q4 with revenue growth of 1.3% QoQ in dollar terms and 0.6% QoQ in rupee terms. Operating margin expanded by 102bp to 27.8%. One-off events in Nigeria hampered growth during Q4. The management indicated that the trend was positive and expected growth momentum to pick up and revenue market share gain to accelerate across countries with the launch of 3G and Airtel Money in most countries.

- Con Call highlights: 1) The management indicated a capex of US$3.2bn for FY13; 2) Enterprise segment - it expects to improve EBITDA margin to 20%+ from 18% levels in FY12; 3) it said flat performance in passive infrastructure segment was due to write off of STel account and 4) it believed African countries will see stable tariff scenario in FY13.

- Regulatory risk at its peak, maintain Buy: Regulatory uncertainty increased with recent TRAI recommendation on spectrum pricing which indicates much higher spectrum payout and risk of spectrum re-farming which would lead to increase in capex for players to maintain quality. Also, the New Telecom Policy 2012 may see abolition of roaming charges which can hamper profitability. Given the scenario, we believe that Bharti should be preferred considering its strong balance sheet and its diversified revenue stream. At the CMP, the stock trades at 13.8x FY14E EPS, 5.2x EV/EBITDA. We maintain Buy on the stock with a revised price target of Rs372 (earlier: Rs438), implying 6x FY14E EV/EBITDA. Our main reason for reduction in price target stems from higher regulatory risk which translated into the present value of Rs73 per share considering higher spectrum payouts and related capex and also due to the industry entering lower growth phase with relatively higher competitive pressure. Risk to our estimates would be hike in tariff in India resulting in more than expected increase in RPM.

Source : Equity Bulls

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