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Research
Bharti Airtel - Growth weakens, lacks pricing power; cut estimates - BRICS Securities
Posted On : 2012-08-11 07:09:29( TIMEZONE : IST )
Bharti reported a 3.3% qoq revenue growth to Rs193.5 bn aided by3.7% volume growth in its India mobile business and rupee tailwind aiding its Africa business. EBITDA margin fell 307bps qoq to 30.2% due to higher network cost, service tax, and sales expense. We have cut our estimates to factor slower revenue growth, weak economic fundamentals (both in India and Africa), lack of pricing power because of persisting high competitive intensity, and margin dilution from network expansion and regulatory norms. We cut target price to Rs270 (from Rs316) and reiterate Reduce.
Results below expectation: Bharti reported in line revenues with 2.8% growth in its India and South Asia (SA) business and 6.9% growth (0.4% fall in dollar terms, 1.2% growth in constant currency) from Africa. TRAIguidelines about processing fees and 'combo packs' resulted in netrevenue impact of Rs2.5-3bn. India and SA mobile businesses reported only 1.7% growth as an average realised rate (ARR) drop of 2.6% nullified the effect of a 3.7% increase in volume.
Margin erosion disappointing, may remain depressed: EBITDA margins fell 370bps in India and 200bps in Africa. India business was impacted by higher network costs from 4G sites, increase in sales and marketing, and hike in service tax to 12.36% (from 10.3%). Africa business margins were impacted by adverse political developments and weak economic growth (due to higher dependence on Eurozone). Margins are likely to remain depressed as 1), competitive intensity in India is still high making it difficultto raise tariffs, 2), continued investment in 3G and 4G services, and 3),combination of weak economy and high inflation in Africa.
Outlook and valuation: The stock trades at an EV/EBITDA of 6.6x FY13 and 5.6x FY14 on our estimates. We have cut our FY13 and FY14 estimates to factor weak Q1FY13 results and sustained margin dilution. We cut our target to Rs270 using unchanged EV/EBITDA multiple of 6x on our average FY13-14 EBITDA. Maintain Reduce due to regulatory opaqueness, stretched balance sheet, and limited pricing flexibility.
