Bharti Airtel - In the right direction; result update Q3FY13; Buy - Edelweiss

Bharti Airtel's (Bharti) Q3FY13 revenue rose 2.8% QoQ to INR202.4bn, in line with Street estimate, while EBITDA margin, at 30.5%, declined 40bps QoQ on higher network costs. PAT at INR2.8bn, was significantly lower due to forex fluctuation impact of INR2.4bn and a one-time tax of INR600mn. ARPU at INR185 grew 4.3% QoQ owing to reduction of inactive customers while RPM at INR0.425 was flat QoQ. The company re-iterated its stand on tariff hikes becoming imminent to offset rising input costs. We remain positive, on the long-term, based on Bharti's continued investments in profitable services (data, 3G and 4G) and shifts in focus to margins in Africa. We maintain 'BUY' with revised TP of INR397.

India- betting on data

Bharti reported a sequential decline in subscribers and voice RPM of ~4.0mn and 0.7% respectively while voice minutes at 240.8bn were up 2.8%. Churn was down 260bps QoQ to 5.9%. The management re-iterated its stand on reducing discounts with a view to improve realizations. Further, it stated it would continue to make investments in data (2G, 3G and 4G) to capture the growth seen in data demand. Bharti has a rising trend of data users (22.8% of mobile subscribers currently) and data usage per customer increased by 21% QoQ (19% in Q2FY13).

Africa- improving margin profile to be the focus

While Africa has seen an improved revenue trajectory, margins have stagnated in the 26%-27% range. The management being cognizant of this fact, stated it would shift focus from gaining revenue market share to improving margins. This will be achieved through increasing the proportion of data revenues as the customers in Africa have a higher propensity for data than voice. Hence its incremental capex in Africa will be to develop its 3G network.

Outlook and valuations: Positive; maintain Rs.BUY'

We continue to believe data usage (in India and Africa) will increase in future, thus providing impetus to growth and tariff hikes (through reduced promotions) will increase going forward, thus offsetting the increasing input costs. We have cut our FY13E/14E EPS estimate by 43%/11% to INR6.8/INR18.7 to factor in the increased costs and lower 9MFY13 performance. At 5.9x FY14 EV/EBITDA, even adjusting for the regulatory charges, we see an upside of 21% in the stock. We maintain 'BUY/ SO'.

Source : Equity Bulls

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