Bharti Airtel - Dismal On All Counts - Nirmal Bang

Bharti Airtel's 1QFY13 performance was dismal on every count - revenue growth, margin performance and net profit. Operational performance was very poor, with the fall in India revenue/minute (RPM) and change in regulations having a greater impact on margins than anticipated (371bps QoQ fall in India and South Asia, SA margin), despite minutes of usage (MoU) showing decent growth of nearly 4% QoQ. Africa margins also fell 190bps QoQ on economic and currency headwinds. Some traction on 3G subscribers and data revenue was the only positive factor. Revenue, margins and net profit all missed estimates, the latter two by a significant margin, with this being the 10th consecutive quarter of YoY decline in net profit (32.4% below our estimate, 39.1% below consensus estimates). Regulatory headwinds are likely to continue to cast a shadow. We retain our Sell rating on the stock with a revised target price of Rs260 (Rs300) and we cut our FY13/FY14 EBITDA and EPS estimates by a significant 13.2%/12.5% and 41.5%/32.3%, respectively.

Revenue below estimates: Bharti posted 1QFY13 top-line of Rs193.5bn, up 3.3% QoQ, below our and consensus estimates by 1.6% and 0.8%, respectively. India and SA revenue stood at Rs106.8bn, up 1.7% QoQ, but below our estimate of Rs107.5bn. Total MoU grew 3.9% QoQ to 239.3bn, while MoU/user grew 0.4% QoQ to 433 minutes/month, a reflection of increased aggression shown by the company to regain market share. However, this was off-set by a 2.6% QoQ fall in RPM to 42.7 paise. Higher SG&A costs and change in regulations (processing fee) reduced India & SA margin by a steep 371bps QoQ. Africa revenue also disappointed, coming in at US$1,066mn, down 0.5% QoQ versus our estimate of US$1,108mn, with margins declining 190bps QoQ. The poor performance of both these businesses led to revenue coming in below expectations.

Margins fall to a nine-year low exerting pressure on net profit: Bharti's 1QFY13 EBITDA margin declined by a steep 306bps QoQ to 30.2%, the lowest since 1QFY04 (328bps and 335bps lower than our/consensus estimates, respectively). This was owing to the fall in India RPM, lower processing fee and higher SG&A and network costs. A cause for concern is the fact that the company has stated that it will not be easy for margins to recover in the wake of intense competition and hazy regulatory environment. Lower margins led to a steep 24.2% QoQ fall in net profit to Rs7.6bn (32.4%/39.1% below our/consensus estimates, respectively).

We retain Sell rating on the stock: Poor operational performance in 1QFY13 along with regulatory issues continuing to be a headwind leads us to retain our negative view on the stock. We maintain our Sell rating on the stock with a revised SOTP-based TP of Rs260 and trim FY13/FY14 EPS estimates by 41.5% and 32.3%, respectively.

Source : Equity Bulls

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