Bharti Airtel - Weak Q1 results; challenging times ahead - Centrum

Bharti Airtel's (Bharti) Q1FY13 result was much lower than our expectation and also that of the street. While revenue was in line with our estimation, EBITDA margin was lower on the back of regulatory and tax impacts. Net profit was down due to lower EBITDA margin and higher depreciation expenses. We maintain our rating but downgrade our target price to Rs288 (from Rs361) considering 1) weak operating margin in Q1 with no immediate bounce back and 2) the absence of near term triggers as there is no near term visibility on tariff hike and Q2 is seasonally weak. However, we are not advising a sell on the stock as we believe that the aggressive stance taken by Bharti in the Indian market would help gain incremental market share going forward in the present scenario where the industry is facing intense competition.

- Lower than expected Q1 performance: While revenue was in line with our estimates at Rs193.5bn, operating margin was below our estimate as well as that of the street. Operating margin decline of 300bp QoQ to 30.2% was mainly due to adverse regulatory and tax developments in India. Net profit was lower than our expectation by 40% to Rs7.6bn due to lower EBITDA margin and higher depreciation expenses.

- Africa business too sees margin decline in Q1: Revenue was flat QoQ to US$1bn (growth of 6.9% QoQ to Rs57.6bn due to exchange benefit). However, higher network expenses resulted in 200bps decline in margin to 25.9% during Q1. Subscriber net adds run rate went up this quarter to 2.7mn and minutes of usage (MoU) grew by 5% QoQ.

- Minutes of usage (MoU) coming in at a price: Subscriber addition of 6mn in Q1FY13 was a tad better on a QoQ basis. Bharti has adopted an aggressive approach to gain market share. Minutes of usage grew by 3.7% QoQ to 269bn min on the back of 2.6% QoQ to 42.7paise revenue per minute.

- Concall highlights: The competitive intensity is high among players. The management expects recovery in operating margin to take time. The focus of the management continues to be on strengthening its revenue market share. Q2 is seasonally a weak quarter from a usage perspective and the management does not expect any variation in this trend based on the current run rate. Capex guidance for FY13E remains at US$3bn. Bharti Infratel, a subsidiary of Bharti, is considering listing of equity shares (offer for sale up to 10%).

- Earnings revision: We have revised our earnings estimate to factor in change in operating margin during the quarter. We have downgraded our margin assumption by 250bps to factor in higher expenses on network and SG&A going forward.

- Upside capped, downgrade target price on the stock: The stock witnessed sharp correction after the result by 13% and the current valuation is at 6.0x FY13E and 4.7x FY14E EV/EBITDA. We do not see an immediate trigger for the stock despite this correction as the company is trying to sustain its market share in an intensely competitive scenario and regulatory environment is also likely to put further pressure going forward. Further, we do not foresee tariff hike in the near term as Q2 is another seasonally weak quarter. Hence, we downgrade reduce our target price to Rs288 per share but maintain our rating due to sharp fall in stock price post Q1FY13 result. We believe that the stock would continue to trade in a narrow range of 5% as we expect competitive pressure to continue in the near term and Bharti would be aggressive enough to save its market share.

Source : Equity Bulls

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