Bharti Airtel - Indian metrics improves, volatility in Africa continues - LKP Research

Good set of consolidated numbers in Q3

Bharti's Q3 FY14 consolidated numbers were decent, driven by resilience in the domestic operations, where we saw volumes, minutes as well as margins moving up. ARPM grew to Rs 0.465, a growth of 2% qoq as this stability was seen on the back of higher contribution of data services at 27.4% of total mobile sales. Revenues in India grew by 2.6% as compared to a 2.1% decline qoq in last quarter. EBITDA margins in India remained stable at 34.1% in difficult market environment as well. On a consolidated level, the performance in Africa was weak as compared to the domestic operations, but revenues still managed to grow at 2.9% at Rs219 bn, while at EBITDA levels, margins grew by 30 bps qoq to 32.3% as SG&A expenses and license fees showed some reduction as a % of sales. Below EBITDA levels, depreciation expenses as a % of sales declined qoq from 18.5% to 17.8% while interest costs moved down on huge derivative and exchange loss of close to Rs3.4bn in Q2. Tax expenses included a one-time charge close to Rs 2.76 bn. PAT adjusted for this charge along with an exceptional gain of Rs 674 mn came in at Rs8.32 bn, a growth of 42.6% sequentially. Reported PAT grew by 19% to Rs 6.12 bn.

Outlook and Valuation

We are positive on Bharti's domestic operations in the current competitive landscape, while going forward with the upcoming spectrum auction and entry of Reliance Gio, we expect pressure to build up on Bharti's market share and profitability trend. Africa business reported weak margins this quarter but some of the operational parameters like ARPM have shown recovery. We believe African operations will keep on showing a sequential improvement as data business expands rapidly and profitability moves up with Airtel Money and tariff hikes in some of the geographies. This will keep margins buoyant. Adverse forex movement however, may act as a dampener to the overall growth at the bottomline. Also increased capex in India will add pressure to the balance sheet as well as profitability. However, with the wide scale of operations, pricing power still in their hands, market leadership position and bright prospects in Africa, we are maintaining our BUY rating on the stock with a trimmed target price of Rs341.

Source : Equity Bulls

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