Bharti Airtel - Nothing to cheer - ElaraCapital

India EBITDA upbeat on traffic growth; Africa continues to disappoint

Overall revenues are 2% behind expectation, despite steady growth in India business, largely due to disappointment in Africa. India revenues are up 4.9% qoq led by healthy 5.1% traffic growth benefiting from shift in subscribers from small players which have shutdown operations in few circles. However, the key variable RPM is yet subdued with 0.5% decline (similar to Idea), vs consensus expectation of about 1% rate increase which makes us circumspect about the much spoken reducing competitive intensity. Africa revenue degrowth of 2% and EBITDA margin shrinkage of 110bps remains a damp squib.

Uncertain business environment

The market does not have place for 7-8 players. Small players with low market share continue to keep high competitive intensity and offer rate arbitrage of about 12 paisa, 1/3rd of idea RPM. We have factored 2-3% RPM increase staggered over next five quarters, but token hikes may not help as cost pressures persist. On the other hand regulatory burden continues to persist and playing double whammy with smaller players indicating willingness to acquire license at lower cost.

RPM strong earnings driver-1paisa adds 65% incremental EBITDA

With nearly two-third of cost being fixed, every 1 paisa of RPM increase can add incremental EBITDA margin of 65% to India business, subject to all other cost components being constant. Thus it can increase India EBITDA margin by a sizeable 60bps with EBITDA growth of 3.7%. The overall PAT has the potential to grow 12%.

Earnings face risk of further cuts; valuation not compelling

Our steep 73% EPS CAGR for FY14-15E also does not make a compelling valuation case with FY15E P/BV of 2x for below WACC return ratio profile. The stock may remain steady in near term due to the buoyant traffic growth in India, but it could be short lived due to the onetime shift in subs base from circles shut down. Competitive and regulatory risks continue to persist. We retain our cautious stance and reduce rating.

Source : Equity Bulls

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