RESULTS REVIEW 1QFY16 5 AUG 2015 Bharti Airtel SELL Beats estimates; but outlook remains grim Bharti’s 1QFY16 results (adjusted for extra- ordinaries) were ahead of estimates as the company’s domestic wireless business continues to outperform on the back of robust data revenue growth. During the quarter Bharti was also able to divest tower assets worth US$ 1.3bn in Africa. Yet, this result doesn’t assuage our concerns on the damaging prospects of Reliance Jio’s market entry, which could pressure FY17/18 voice as well as data pricing. We value the company’s India business at 6x rolling 12 month forward EV/EBITDA arriving at a target price of Rs 375 and maintain our anti- consensus SELL stance. Investors should look at the company’s Africa tower divestiture(s) and/or exit from African operations as exit opportunities as we believe that these positives are dwarfed by concerns in the India business due to competitive factors. Q1FY16 results exceed expectations : Revenues of Rs 237bn grew by 3%YoY/3%QoQ; EBITDA grew by a healthy 7%YoY/2% QoQ to Rs 82.6bn. In the mobile segment, volume trends surprised positively with 5%QoQ/7%YoY growth, led by 4%QoQ/8%YoY decline in voice RPM. Africa : tower sale the key highlight : The company’s Africa business continues to witness sluggish growth trends, underperforming low expectations and growing just 1%YoY/1%QoQ on a constant currency basis. During the quarter, the key highlight was the divestiture of tower assets in four countries, Congo B, Ghana, Nigeria and Uganda, helping the company raise US$ 1.34bn. The company’s Africa PBT improved significantly (reduced losses) due to the same. Outlook and view : We believe that the company faces a bleak growth outlook from the competitive threats in the data business, led by the entry of Reliance Jio. Our estimates are significantly below consensus, and we retain our SELL stance. FINANCIAL SUMMARY # (Rsmn) 1QFY16 1QFY15 YoY (%) 4QFY15 QoQ (%) FY13 FY14 FY15 FY16E FY17E Net Sales 236,808 230,055 2.9 230,398 2.8 769,470 858,635 921,351 939,037 995,336 EBITDA 82,562 77,200 6.9 81,123 1.8 232,579 277,770 313,883 318,074 340,322 APAT 18,764 16,610 40.2 24,976 21.1 22,756 27,520 56,063 54,404 74,527 Diluted EPS (Rs) 4.9 4.4 13.0 6.6 (24.9) 6.0 6.9 14.0 13.6 18.6 P/E (x) 68.8 59.8 29.4 30.3 22.1 EV / EBITDA (x) 9.6 8.3 7.9 7.4 7.0 RoE (%) 4.8 5.4 10.0 9.2 11.7 Source: Company, HDFC sec Inst Research * FY13 financials not comparable YoY led by change in accounting of Indus to equity basis # Consolidated INDUSTRY TELECOM CMP (as on 4 Aug 2015) Rs 413 Target Price Rs 375 Nifty 8,517 Sensex 28,072 KEY STOCK DATA Bloomberg/Reuters BHARTI IN/BRTI.BO No. of Shares (mn) 3,997 MCap (Rs bn) / ($ mn) 1,652/25,899 6m avg traded value (Rs mn) 2,245 STOCK PERFORMANCE (%) 52 Week high / low Rs 452 / 336 3M 6M 12M Absolute (%) 5.2 12.0 9.6 Relative (%) 3.1 14.8 0.5 SHAREHOLDING PATTERN (%) Promoters 65.45 FIs & Local MFs 9.46 FIIs 16.28 Public & Others 8.81 Source : BSE Vivekanand Subbaraman [email protected]+91-22-6171-7321 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
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RESULTS REVIEW 1QFY16 5 AUG 2015
Bharti Airtel SELL
Beats estimates; but outlook remains grim Bharti’s 1QFY16 results (adjusted for extra-ordinaries) were ahead of estimates as the company’s domestic wireless business continues to outperform on the back of robust data revenue growth. During the quarter Bharti was also able to divest tower assets worth US$ 1.3bn in Africa.
Yet, this result doesn’t assuage our concerns on the damaging prospects of Reliance Jio’s market entry, which could pressure FY17/18 voice as well as data pricing. We value the company’s India business at 6x rolling 12 month forward EV/EBITDA arriving at a target price of Rs 375 and maintain our anti-consensus SELL stance.
Investors should look at the company’s Africa tower divestiture(s) and/or exit from African operations as exit opportunities as we believe that these positives are dwarfed by concerns in the India business due to competitive factors.
Q1FY16 results exceed expectations : Revenues of Rs 237bn grew by 3%YoY/3%QoQ; EBITDA grew by a healthy 7%YoY/2% QoQ to Rs 82.6bn. In the mobile segment, volume trends surprised positively with 5%QoQ/7%YoY growth, led by 4%QoQ/8%YoY decline in voice RPM.
Africa : tower sale the key highlight : The company’s Africa business continues to witness sluggish growth trends, underperforming low expectations and growing just 1%YoY/1%QoQ on a constant currency basis. During the quarter, the key highlight was the divestiture of tower assets in four countries, Congo B, Ghana, Nigeria and Uganda, helping the company raise US$ 1.34bn. The company’s Africa PBT improved significantly (reduced losses) due to the same.
Outlook and view : We believe that the company faces a bleak growth outlook from the competitive threats in the data business, led by the entry of Reliance Jio. Our estimates are significantly below consensus, and we retain our SELL stance.
Bharti’s consolidated EBITDA was marginally ahead of estimates, led by positive surprise on revenue. During the quarter there were several exceptional items including (1) gains (net of depreciation, tax and minority interest impact) pertaining to divestiture of tower assets in Uganda, Ghana, Congo B & Nigeria of Rs 11.3bn (2) charges and provisions on account of dispute settlements and restructuring of Rs 6.7bn Adjusted PAT was in-line with estimates. EBITDA margins were in-line with our estimates with SGA savings offsetting higher than expected network costs.
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BHARTI AIRTEL : RESULTS REVIEW 1QFY16
Management highlighted that India revenue growth adjusted for the change in termination rates stood at 13%YoY, against a reported number of 10%YoY. India EBITDA margin was positively impacted by 70bps YoY/50bps QoQ, on account of the regulatory changes. Despite improving EBITDA and EBIT margins, PBT margins declined YoY/QoQ on account of high spectrum amortisation and interest costs. Africa continues to disappoint, as constant currency revenue growth stood at 1%YoY/1%QoQ. Africa network operating cost increased by 10% QoQ as a result of the tower asset divestiture. This has resulted in lower EBITDA margins. Africa PBT margin improved sharply (reduced losses) as a result of the tower deals.
EBITDA margin improvements have been aided by regulatory changes and operating leverage. Management mentioned that EBITDA margin was higher by 40bps QoQ/60bps YoY due to regulatory changes. However, EBIT margin improvements haven’t kept pace with EBITDA margin improvements due to spectrum amortisation and interest costs. Non-wireless businesses : Telemedia and Enterprise business, saw sharp improvement in EBIT margin, led by robust growth. Airtel’s DTH business witnessed robust revenue growth and operating leverage. The company’s DTH business continues to outperform Dish TV and Videocon DTH.
Minutes growth exceeded estimates and was driven by elasticity as voice RPM declined. Adjusted for the termination cut, voice RPM declined by 4%YoY (Rs 0.0138/min decline to Rs 0.367/min) The sharp increase in monthly churn is an area of concern and management attributed the same to market interventions by the company and comeptitive pressures. Data revenue grew 67%YoY/12%, a continuation of healthy trends, driven by greater per subscriber usage and customer adds. At this juncture, reduction in per MB realisations isn’t alarming as the same is driven by increased utilisation of data packs by customers, rather than rate decreases.
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BHARTI AIRTEL : RESULTS REVIEW 1QFY16
KEY OPERATING METRICS : AFRICA WIRELESS BUSINESS 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 % chg YoY % chg QoQ
EOP Subs (in 000's) 69,086 71,367 74,599 76,263 78,323 13.4% 2.7% MOU (in mins/sub) 136 138 140 137 141 3.7% 2.7% RPM (in US Cents) 4.12 3.94 3.63 3.22 3.02 -26.7% -6.3% ARPU (in US$) 5.60 5.43 5.09 4.43 4.26 -24.0% -3.8% MOUs (in mn) 28,256 28,966 30,361 31,045 32,791 16.0% 5.6% Wireless Revenue (in $ mn) 1,164 1,140 1,103 1,000 970 -16.6% -3.0% Churn % 7.0 6.1 5.5 5.8 5.4 -162 bps -39 bps Active Subs (VLR) % 86.6 85.7 84.0 83.9 83.5 -307 bps -40 bps Voice KPIs Voice Revenue (in US$ mn) 913 869 844 748 706 -22.7% -5.6% Voice RPM (in US cents) 3.23 3.00 2.78 2.41 2.15 -33.3% -10.6% Non Voice KPIs (incl. data) Non Voice Rev (in $ mn) 250 271 259 252 264 5.4% 4.9% Non Voice RPM (in US cents) 0.89 0.94 0.85 0.81 0.80 -9.1% -0.7% Data KPIs Subs (in 000's) 9,882 11,049 11,242 12,289 13,039 31.9% 6.1% Usage (mn MBs) 6,541 8,061 9,475 11,256 13,843 111.6% 23.0% Usage/Sub (MBs) 231 253 290 321 359 55.8% 11.8% Rate/MB (in US cents) 1.31 1.21 1.10 1.00 0.92 -29.8% -8.0% ARPU ($) 3.0 3.1 3.2 3.2 3.3 9.3% 2.9% Revenue ($ mn) 86 98 104 113 128 48.5% 13.2% Data rev % 7.4% 8.6% 9.4% 11.3% 13.2% 576 bps 188 bps Non Voice Rev (excl. data) ($ mn) 164 174 155 139 136 -17.1% -1.8% Source: Company, HDFC sec Inst Research
Currency effects continued to play a spoil-sport in the company’s Africa business, where reported revenue growth sharply diverged constant currency revenue growth, which stood at 1%YoY/1%QoQ. In Africa too, the company faces pressures in voice business, akin to India. Africa data revenue surged 49%YoY/13%QoQ, driven by elasticity of usage to pricing reduction.
We build in a tepid oiutlook for the Bharti’s India wireless business due to the entry of Reliance Jio. We expect the company’s voice as well as data business revenue to get impacted by pricing pressure We expect India and South Asia EBITDA margin to witness gradual improvements as India business margin pressures are offset by reduced losses in South Asia. For Africa, our EBITDA margin estimates factor in higher network costs due to tower divestiture
We reduce our RPM assumptiosn for the India wireless business as we build in a sharp decline in pricing on account of competitive pressures. Our voice RPM assumptions are Rs 0.337/min for FY16 and Rs 0.320/min for FY17 (FY15 : Rs 0.374/min; Q1FY16 : Rs 0.349/min) We also reduce our Africa business estimates led by persistent weakness in underlying revenue growth and unfavourably currency moves. We reduce our EBITDA estimates for the company’s Africa business as we build in network cost escalation led by tower asset divestiture.
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BHARTI AIRTEL : RESULTS REVIEW 1QFY16
We value Bharti’s domestic wireless business at 6.0x rolling 12-month forward EV/EBITDA, a discount to Idea (6.5x) due to the company’s lower growth prospects. We remain concerned about Bharti’s domestic wireless business on account of (1) increasing capex to support data growth: this is likely to cap FCF potential (2) sustained competitive pressures preventing tariff increases (3) looming threat of Reliance Jio’s entry in the telecom business. We believe that Reliance Jio’s competitive entry could be very damaging for Bharti, if voice RPM is under pressure.
SOTP VALUATION SUMMARY
Segments Methodology Rolling 12m EBITDA (Rs bn)
EBITDA/share (Rs)
EV/EBITDA multiple (x)
Value (in Rs bn)
Value/Share (Rs)
Wireless EV/EBITDA 198 49 6 1,185 297 Telemedia " 19 5 5 97 24 Enterprise " 18 4 5 88 22 DTH " 10 3 11 85 21 International " 58 14 4 231 58 Infratel DCF* 557 139 Enterprise Value 2,243 561 (-) Net debt 653 163 Equity Value 1,589 398 (-) One time spectrum charge 92 23 Target price 1,498 375 * Details available in our Bharti Infratel result update ; we assign 25% holdco discount to the valuation of Bharti Infratel and Airtel DTH Source: HDFC sec Inst Research SOTP VALUATION SUMMARY
Source: HDFC sec Inst Research Note : We assume stable cost inflation as well as a steady multiple of 6x rolling 12-m forward multiple to arrive at a target price.
Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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