Bharti Airtel - Q2 result in line; business under pressure - Centrum

While Bharti Airtel's (Bharti) Q2FY13 reported result was better than our estimates, operating financial performance was in line. The company recognized revenues of Rs5.9 bn based on a TDSAT order which related to the previous period and this inflated PBT. Net profit was down 40% QoQ to Rs7.2bn due to higher interest and tax expenses. We revise our estimates downwards to capture the slow net adds and 1HFY13 financial performance. We believe the business would remain under pressure till there is visible improvement in revenue per minute and regulatory pressures are addressed. Accordingly, we downgrade our rating to Neutral and the target price to Rs253 (from Rs288) considering 1) declining minutes of usage Q2 and 2) the absence of near term triggers as there is no near term visibility on tariff hike and regulatory pressure in 2HFY13.

Q2 performance in line with expectations: Adjusting to prior period revenue recognition of Rs5.9bn, net sales were in line with our estimates at Rs196.9bn; operating margin was a tad better than our estimate. Operating margin improved by of ~75bp QoQ to 30.9% after adjusting to one-offs. However, net profit declined by 40% on higher interest and tax outgo.

Africa business too sees margin coming back in Q2: Revenue was up 2.8% QoQ to US$1.1bn (growth of 5.1% QoQ to Rs60.5bn due to exchange benefit). Operating profit margin bounced back during the quarter by 120bps to 27.1% during Q2. Subscriber net add run rate went up this quarter to 2.8mn and minutes of usage (MoU) grew by 20.3% QoQ.

Minutes of usage (MoU) growth slipping: Subscriber declined by of 1.4mn in Q2FY13 after consistent addition for long. Bharti has adopted an aggressive approach to gain market share since Q1. Minutes of usage declined by 1.3% QoQ to 265bn min on the back of decline in subs during the quarter.

Concall highlights: The management reiterated the concern on business model considering current tariffs and regulatory pressure. Reduction in discounts and schemes would to initial step to improve revenue per minute and this is possible once the industry together works towards withdrawing schemes. In Africa, the company is experimenting with elasticity by sacrificing tariffs. This has resulted in some minutes gain during Q2. No change in capex plans.

Earnings revision: We have revised our earnings estimate to factor in change in lowering minutes of usage growth. We have downgraded our margin assumption by 166bps to factor in lower minutes growth and flat revenue per minutes going forward.

Downgrade rating to neutral: The stock witnessed improvement during Q2 after the weak Q1 result and the current valuation is at 6.5x FY13E and 5.3x 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 Q3 would see spectrum auction. Hence, we downgrade our target price to Rs253 per share and our rating to Neutral as we changed our earning forecast. We believe that the stock would continue to trade in a narrow range of 5% as we do not expect revenue per minute to improve in the near term and Bharti would be aggressive enough to save its market share.

Source : Equity Bulls

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