Bharti Airtel - Price Cuts Drive volume in Africa; maintain estimates - BRICS

Bharti's revenue grew 4.8% qoq to Rs202.7bn, aided by a contribution of Rs5.86bn from favourable TDSAT order regarding interconnect agreement dispute. After adjusting for the one-off, revenue was up 1.7% qoq. EBITDA margin expanded by 110bps qoq to 31.3%, due to lower sales and marketing expenses. We raise our target price to Rs305, as we roll over to FY14 estimates and upgrade the stock to ADD (from REDUCE), with most of the regulatory concerns being resolved and strong traction seen in data services.

One-time revenue drives outperformance: After adjusting for the one-off, Bharti's revenue grew 1.7% qoq to Rs197bn. Besides the one-time revenue of Rs5.86bn, TDSAT order also contributed Rs3.45bn to PBT and Rs2.39bn to PAT. Revenue of India and South Asia mobile business declined 1.2% qoq (adjusted for one-off), due to a decline of 2.1% qoq in volume in a seasonally weak quarter. However, PAT was down 9.5% qoq due to increase of 24% qoq in finance cost and 58% qoq in taxes, on account of dividend distribution tax on Indus dividend payout.

Volume growth in Africa driven by price cuts: The Africa business reported revenue growth of 5.1% qoq in Rupee terms (up 2.8% qoq in US$ and 4% qoq in constant currency), led by a growth of 20% qoq in volume and decline of 15% qoq in realization. Bharti has cut its prices for on-net calls in several countries to increase its volumes. Higher contribution from on-net calls also led to lower access charges, resulting in increase of 135bps qoq in EBITDA margin to 27.1%. We believe that Bharti's strategy will result in increased customer stickiness.

Valuation: Stock trades at EV/EBITDA of 6.8x FY13 and 5.6x FY14 estimates. We broadly maintain our revenue estimates, but lower our earnings estimates for FY13/14, to factor in Bharti's performance in Q2FY12 and higher finance cost. We retain EV/EBITDA multiple of 6x and raise our target price to Rs305, as we roll over to FY14 EBITDA estimates. In view of improving clarity on regulatory issues (though at a high cost, which is mostly priced into the stock), and strong traction in data services, led by growing penetration of smartphones, we upgrade Bharti to ADD.

Source : Equity Bulls

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