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Bharti Airtel BRICS FEB 12

VIEWS: 4 PAGES: 5

									Telecom I December 2011 Quarter Review                                    8 February 2012




Bharti Airtel                                                                        BUY
 Below-par volume growth in seasonally strong quarter CMP: Rs354                                   Target Price: Rs415

Bharti Airtel reported a 7% sequential revenue growth boosted by                 KEY DATA
14% growth in Africa, driven by a weak rupee. Adjusting for currency             Bloomberg                             BHARTI IN
                                                                                 Reuters                                BRTI.BO
tailwind, consolidated revenue growth was only 4%. EBITDA margins
                                                                                 52-wk H/L (Rs)                         448/309
declined     155bps   due    to   higher    sales   and    marketing    and      6-m avg trd value                   US$46.5mn
administrative expenditure. We have revised our FY13 and FY14                    Market cap                   Rs1,344.3bn/US$27
estimates downward to factor slower margin expansion. We reduce                  Shares o/s                                 .4bn
                                                                                                                      3,797.5mn
our target EV/EBITDA multiple to 7.2x (from 8x) on underperformance              Face value                                   Rs5
                                                                                Source: Bloomberg
compared with peers, which brings our target down to Rs415.
Maintain Buy.
                                                                                SHAREHOLDING (%)
India business: Despite marginal drop in non-voice revenue contribution
(14.3% vs. 14.5%), Bharti reported a 3% improvement in rate realisation to
44.6paise/minute. Lower subscriber addition and usage led to only 0.6%
increase in volume in a seasonally strong quarter. Telemedia services
revenues declined 4.2% qoq as stringent TRAI regulations slowed
telemarketing. EBITDA margins fell to 32.1% from 33.6% as a fire in its
Mumbai data center drove up administrative expenditure and as the Airtel        Source: CMIE       As of 31 December 2011

Formula-1 GP and Delhi half-marathon sponsorship increased sales and
                                                                                RELATIVE PRICE PERFORMANCE
marketing expenditure.

Africa business stable: Bharti’s Africa business reported 2.6% increase in
dollar revenue driven by 3% growth in volume and stable ARR. In local
currency, revenue growth was 5%. Its EBITDA margin improved to 26.7%
from 26.2% qoq. Depreciation charges increased to US$224mn, of which
US$15mn are for a one-time impairment.

Revise estimates downwards: We have maintained our revenue                      Source: Bloomberg
estimates but revised our FY13 EBITDA margins down 219bps to 34.7%
                                                                                Key financials                             (Rs mn)
and FY14 down 214bps to 35.4% to factor higher promotional cost and                                  2012E        2013E      2014E
administrative expenses in India, and slower margin expansion in Africa.         Revenue           718,322       827,405   944,069
We cut our net earnings estimates by 18.1% and 17.6% to factor                   EBITDA            239,323       287,074   333,901
slower margin expansion, higher depreciation charges, and a slightly             EBITDA margin
                                                                                                       33.3         34.7      35.4
                                                                                 (%)
higher tax rate.
                                                                                 PAT                 50,784       80,017   103,078
Outlook and valuation: The stock trades at an EV/EBITDA of 8.5x FY12             FDEPS (Rs)            13.4         21.1      27.1
                                                                                 % growth            (17.0)         57.6      28.8
and 7.1x FY13. While net debt is up by Rs33.2bn in Q3 to Rs679.2bn due
                                                                                 P/E (x)               26.5         16.8      13.0
to rupee depreciation, in dollar terms, it has gone down by US$447mn to
                                                                                 RoCE avg (%)          12.0         14.6      17.2
US$12.7bn. We revise our price target to Rs415 (from Rs467) assigning
                                                                                Source: Company, BRICS Research
EV/EBITDA multiple of 7.2x to our average FY13-14 EBITDA (from 8x FY13
earlier) to factor slower margin expansion and revenue growth
                                                                                Sushil Sharma
underperformance relative to peers such as Idea. We maintain our Buy            +91 22 66360073
rating as Bharti will be the key beneficiary of reduced competitive intensity   sushil.sharma@bricssecurities.com
(with cancellation of 2G licenses) and higher spectrum availability, its        Pranav Kshatriya
                                                                                +91 22 66360093
Africa business performance will be strong, and contribution from 3G
                                                                                pranav.kshatriya@bricssecurities.com
services will rise.


BRICS Securities Limited
Bharti Airtel                                                                                               8 February 2012


                                     December 2011 quarter performance                                                                                                (Rs mn)
                                                             Dec-11        Dec-11
                                                                                         Difference %              Dec-10           yoy (%)              Sep-11        qoq (%)
                                                             Actual      Estimate
                                      Revenue               184,767       181,455                      1.8        157,560                17.3           172,698            7.0
                                      EBITDA                 59,273        63,463                     (6.6)        49,816                19.0            58,085            2.0
                                      OPM(%)                   32.1          35.0                                       31.6                                33.6
                                      Depreciation           35,845        32,727                      9.5         27,107                32.2            31,839           12.6
                                      PBT                    15,806        19,430                   (18.7)         15,495                 2.0            15,126            4.5
                                      Tax                    (5,585)       (6,294)                  (11.3)         (3,366)               65.9            (4,900)          14.0
                                      PAT                    10,113        13,180                   (23.3)         13,033               (22.4)           10,270           (1.5)
                                      EPS (Rs.)                 2.7              3.5                (23.2)               3.4            (22.4)                 2.7        (1.6)
                                     Source: Company, BRICS Research

Revise estimate
                                Old estimates                                    New estimates                                              % change
Particulars
                     FY12E           FY13E            FY14E             FY12E            FY13E                FY14E             FY12E              FY13E                FY14E
Sales               712,541         825,835          943,104           718,322          827,405             944,069               0.8%                 0.2%               0.1%
EBITDA              244,716         304,582          353,746           239,323          287,074             333,901              -2.2%                 -5.7%             -5.6%
Margin (%)           34.3%            36.9%           37.5%             33.3%            34.7%                35.4%
PAT                  53,267          97,754          125,054            50,784           80,017             103,078              -4.7%             -18.1%               -17.6%
EPS                      14.0          25.7             32.9              13.4               21.1              27.1              -4.7%             -18.1%               -17.6%
Source: BRICS Research


                                      India business: Despite Q3 being a seasonally strong quarter with a string of festivals,
                                      minutes of usage (MoU) per subscriber has gone down to 419 from 423 in Q2FY12.
                                      ARR per minute has improved by 1.4paise to 44.6paise. Non-voice revenue as a % of
                                      revenue has declined marginally to 14.3% (from 14.5% in Q1FY12) despite increase in
                                      3G usage.

                                     India mobile business operational performance
                                      Particulars                                              Q3FY11           Q4FY11             Q1FY12          Q2FY12              Q3FY12
                                      Subscribers (mn)                                              152.5         162.2                 169.2            172.8           175.7
                                      Minutes of use (min)                                            449             449                445              423              419
                                      Monthly churn (%)                                                7.8              7.6               6.4              7.2             7.9
                                      Non voice Revenue as % of Revenue                               13.8            15.0               14.6             14.5            14.3
                                      ARPU (Rs)                                                        198            194                190              183              187
                                      ARR (paisa/min)                                                 44.2            43.1               42.8             43.2            44.6
                                      EBITDA Margin (%)                                               34.6            33.3               34.2             33.7            33.8
                                     Source: Company, BRICS Research

                                     India business (Rs mn)
                                                                                                  qoq            yoy                     EBITDA             qoq            yoy
                                      Particulars                                Revenue                                  EBITDA
                                                                                               growth         growth                      margin         growth         growth
                                      Mobile Services                            101,764           4.0           11.1         34,431        33.8             4.6            7.9
                                      Telemedia Services                           9,128            (4.2)         0.7          3,542         38.8          (15.9)        (13.3)
                                      Digital TV Services                          3,327             6.1        56.0              90             2.7       (22.5)       (160.2)
                                      Enterprise Services                         11,881             7.6        12.7           2,008         16.9          (15.3)        (13.0)
                                      Passive Infrastructure services             24,393             2.6        11.0           9,110         37.3               2.3         7.3
                                      Others                                           666      (22.5)          (3.5)         (3,139)       (471)              59.4      (12.4)
                                     Source: Company, BRICS Research




BRICS Securities Limited                                                                                                                                                          2
Bharti Airtel                                                                    8 February 2012



                           Africa Business: In Q3, Bharti added 2.5mn subscribers in Africa. Average revenue
                           per user (ARPU) dropped marginally to US$7.1. MoU dropped to 125 (from 128 in
                           Q2FY12)—therefore ARR was stable at US¢5.7. The non-voice revenue as a % of
                           revenue also dropped marginally to 8% (from 8.5% in Q2FY12).

                           Africa business operational performance
                           Particulars                             Q3FY11        Q4FY11      Q1FY12          Q2FY12        Q3FY12
                           Subscribers (mn)                            42.1        44.2         46.3             48.4        50.9
                           Minutes of use (min)                        120          115          121             128          125
                           Monthly churn (%)                            5.9         6.2          6.3              6.1         5.4
                           Non voice Revenue as % of Revenue            7.9         7.8          8.4              8.5         8.0
                           ARPU (US$)                                   7.3         7.2          7.3              7.3         7.1
                           ARR (US¢/min)                                6.1         6.2          6.0              5.7         5.7
                           EBITDA Margin (%)                           19.1        24.3         25.2             26.2        26.7
                           Source: Company, BRICS Research

                           Africa (US$ mn)
                                                                          qoq        yoy               EBITDA       qoq       yoy
                           Particulars                       Revenue                        EBITDA
                                                                       growth     growth                margin   growth    growth
                           Africa Business                     1,057       2.6       16.1      282        26.7       4.3      62.4
                           Source: Company, BRICS Research




BRICS Securities Limited                                                                                                             3
  Bharti Airtel                                                                                8 February 2012



Financial summary
Income statement                                               (Rs mn)    Balance sheet                                                  (Rs mn)
Y/E 31 March                       2011    2012E      2013E      2014E    Y/E 31 March                        2011 2012E        2013E     2014E
Revenue                        594,672    718,322    827,405    944,069   Net fixed assets                 651,426 730,969 818,685 921,020
Revenue growth (%)                 42.1       20.8      15.2       14.1   Investments                           —      4,733     5,271     5,882
Operating exp                  394,316    478,999    540,331    610,168   Current assets                   112,077 187,537 206,628 172,032
EBITDA                         200,356    239,323    287,074    333,901    Inventories                       2,139     2,524     2,726     2,944
EBITDA margin (%)                  33.7       33.3      34.7       35.4    Sundry debtors                   54,929 68,880       78,887    87,941
Depreciation                   102,066    133,429    149,494    162,362    Cash & bank balance               9,575 57,424       53,040        84
EBIT                            98,290    105,894    137,580    171,539    Loans & advances                     —         —         —         —
MTM profit / (loss)                  —          —         —          —    Other current assets              33,930 37,796       50,086    56,706
Other income                      1,363        980     1,176      1,364   Total assets                   1,465,064 1,690,998 1,822,987 1,917,735
Interest paid                   20,189     35,515     30,461     33,508   Net worth                        468,680 520,194 607,113 711,157
PBT                             79,152     71,303    108,294    139,395   Share capital                     18,988 18,988       18,988    18,988
Tax                             17,790     20,446     28,203     36,243   Reserves & surplus               449,692 501,206 588,125 692,169
PAT                             62,837     50,784     80,017    103,078   Minority interest                 28,563 27,764       27,764    27,764
Minority interest               (1,475)         74        74         74   Total debt                       616,708 729,874 730,688 677,897
EO income                            —          —         —          —    Secured loans                    532,338 510,512 506,939 476,522
APAT                            62,837     50,784     80,017    103,078   Unsecured loans                   84,370 219,362 223,749 201,374
PAT growth (%)                   (25.7)     (19.2)      57.6       28.8   Current liabilities & prov       291,560 341,654 382,915 423,146
Shares o/s (mn)                   3,798     3,798      3,798      3,798   Current liabilities              284,295 333,429 373,535 412,362
Fully diluted o/s shrs (mn)       3,798     3,798      3,798      3,798   Provisions                         7,265     8,226     9,380    10,783
FDEPS (Rs) recurring               16.1       13.4      21.1       27.1   Net deferred tax liab             12,487 14,735       16,503    18,483
                                                                          Total liabilities              1,465,064 1,690,998 1,822,987 1,917,735
Cash flow statement                                            (Rs mn)
Y/E 31 March                        2011   2012E     2013E     2014E
                                                                          Key ratios
PBT                              79,152    71,303 108,294 139,395
Depreciation                    102,066 133,429 149,494 162,362           Y/E 31 March                      2011      2012E     2013E      2014E
Amortisation                       1,561       —         —         —      Valuation ratios
Interest paid                    21,813    31,130    25,024    26,766     PE (x)                             22.0      26.5       16.8       13.0
Tax paid                       (17,790) (20,446) (28,203) (36,243)        CEPS (Rs)                          43.0      48.5       60.5       69.9
Chg in working capital             9,577   24,115    26,485    25,665     PCE (x)                             8.2        7.3       5.9        5.1
Int/div in other income               —        —         —         —      BVPS (Rs)                           123       137        160        187
Other operations                     537       —         —         —      Price/Book (x)                      2.9        2.6       2.2        1.9
CF from operations (a)          188,513 239,532 281,094 317,945           EV/EBITDA (x)                       9.7        8.4       7.0        6.1
Capital expenditure           (277,877) (212,972) (237,210) (264,698)     EV/Revenue (x)                      3.3        2.8       2.4        2.1
Chg in investments            (327,401) (49,122) (13,993) (15,713)        Dividend yield (%)                   —          —         —          —
Other investing act                  783    3,500     2,141     2,821     Cash flow yield (%)              (30.9)      (1.4)       2.4        3.0
Int/div in other income               —        —         —         —      Performance ratios
CF from investments (b)       (604,495) (258,594) (249,062) (277,590)     Raw material to sales (%)            —         —          —          —
Free cash flow (a+b)          (415,982) (19,062)     32,032    40,356     SGA to sales (%)                     —         —          —          —
Equity raised/(repaid)           (6,410)       96        96        96     Effective tax rate (%)             22.5      28.7       26.0       26.0
Debt raised/(repaid)            429,586 113,166         814 (52,791)      PAT margin (%)                     10.6       7.1        9.7       10.9
Interest paid                  (21,719) (38,356) (32,898) (36,189)        DPS (Rs)                             —         —          —          —
Dividend (incl tax)              (4,428)  (4,428)   (4,428)   (4,428)     Dividend payout ratio (%)            —         —          —          —
Other fin activities                  —        —         —         —      Return ratios
CF from financing (c)           397,029    70,478 (36,416) (93,312)       RoE avg (%)                        14.4      10.3       14.2       15.6
Net chg in cash (a+b+c)        (18,953)    51,416   (4,384) (52,956)      RoCE avg (%)                       11.4      12.0       14.6       17.2
Opening balance                  24,961     6,008    57,424    53,040     Fixed asset turnover (x)            1.0       1.0        1.1        1.1
Closing balance                    6,008   57,424    53,040        84     Working capital ratios
                                                                          Inventory (days)                       —       —         —          —
                                                                          Payable (days)                         —       —         —          —
                                                                          Receivable (days)                      34      35        35         34
                                                                          Working capital (days)                 34      35        35         34
                                                                          Leverage ratios
                                                                          Interest cost (%)                   5.6       5.3        4.2        4.8
                                                                          Net debt/equity (x)                 1.3       1.3        1.1        1.0
                                                                          Interest coverage (x)               4.9       3.0        4.5        5.1




  BRICS Securities Limited                                                                                                                   4
Bharti Airtel                                                                           8 February 2012




                                             BRICS RECOMMENDATION SCALE


                                 BUY:            More than 15% upside
                                 ADD:            Upside up to 15% (between 0% and 15%)
                                 REDUCE:         Downside up to 15% (between 0% and –15%)
                                 SELL:           More than 15% downside


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                                  Worli, Mumbai - 400 018. Tel: (91-22) 6636 0000
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BRICS Securities Limited                                                                                                                  5

								
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