Stock Market Result Update on Bharti Airtel for 2QFY2012

Stock Market Result Update on Bharti Airtel for 2QFY2012 with an Accumulate recommendation and a Target Price of `425 (12 months).

Bharti Airtel(Bharti) reported a mixed performance for 2QFY2012. The company’s revenue came in-line with our expectations, while PAT came below expectations due to higher interest and forex loss. Also, KPIs of India business declined during the quarter, leading to lower revenue growth in India mobile business. Bharti emerged as the first-mover in undertaking price increases in prepaid call charges, the full impact of which will flow from 3QFY2012 and will aid the company’s average revenue per minute (ARPM). We maintain our Accumulate rating on the stock.

Result highlights: For 2QFY2012, Bharti’s consolidated revenue stood at `17,276cr (1.7% qoq growth). Revenue from mobile services for India came in at `9,783cr, down 0.6% qoq (lower growth than estimated), due to a 4.9% qoq decline in minutes of usage (MOU) to 423min, as call drop rates are higher in 2Q. However, ARPM grew by 0.9% qoq to `0.43/min. Zain Africa’s contribution to revenue stood at `4,591cr, up 4.9% qoq, because of 5.5% qoq growth in MOU to 128min, whereas ARPM declined by 5.4% qoq to 5.7US¢/min. EBITDA margin of mobile India as well as Africa business decreased by 50bp and 45bp qoq to 33.7% and 26.7%, respectively. Consolidated EBITDA margin for Bharti stood at 33.7%, almost flat qoq. Net profit stood at `1,027cr, down 15.5% qoq, negatively affected by higher interest cost of `1,318cr, which includes forex loss of `239cr.

Outlook and valuation: Bharti is on its way to turnaround its Africa business by bringing down its network operating expenditure by outsourcing various
network-related developments. Thus, we expect the combination of improving KPIs and cost efficiencies to drive the EBITDA margin for the Africa business to 26.6% and 27.0% by FY2012 and FY2013, respectively. We expect Bharti’s Indian and African mobile subscriber base to grow at a CAGR of 8.2% and 16.9% over FY2011-13E to 190.0mn and 60.4mn subscribers, respectively. We maintain our Accumulate rating on the stock with a target price of `425, valuing Bharti at EV/EBITDA of 7.0x FY2013E EBITDA.