Bharti Airtel's Q2FY18 results (Underperformer) - Good quarter; limited margin of safety
Q2FY18 result highlights
- Strong operating performance: Cons. revenues were down 0.8% qoq at Rs217.8bn (IDFCe Rs216.5bn), with 3% qoq decline in India revenues (mobile and Homes -5% each; Passive Infra +3.9%; DTH +4.4%); Africa revenues were up 7.4% in USD terms. EBITDA margins were up 110bp to 36.8% (India wireless +8bp qoq; Africa +425bp) leading to 2% qoq growth in EBITDA (Rs80bn vs IDFCe Rs75.4bn). Recurring profit at Rs4.7bn beat estimates on higher EBITDA and lower D&A.
- Focus on cost control amidst revenue weakness: Incumbents’ drive to retain mid-high ARPU subscribers with targeted bundled plans has led to continued pressure on revenue (-17% yoy). Management’s concerted effort to control cost is visible in savings of ~Rs5bn in quarterly opex run-rate (margins flat despite 5% revenue decline in Q2FY18). Also, the ‘war on waste’ program in Africa has driven a 920bp margin improvement (US$60m savings quarterly) and improved FCF generation.
- Balance sheet could be lightened for flexibility to invest: Strong data growth has necessitated the need to expedite 4G deployment across operators. In the light of preparing for the ‘data capacity’ game, management is evaluating options to lighten the balance sheet including majority stake sale in Bharti Infratel (media also reporting possibility of selling DTH business). We believe this could substantially reduce the existing US$14bn debt pile and impart flexibility to invest for future growth.
Key positives: Strong margins across India/ Africa
Key negatives: Higher capex
Impact on financials: FY18-19E EBITDA upgraded by 2-4%
Valuations & view
Bharti reported healthy operating performance with strong margins led by cost control exercise in India and Africa. We believe shift towards bundled plans would be a drag on Revenue/ EBITDA growth in the near term even as we optimistically build in recovery starting Q4FY18. Recent stock outperformance (9x FY19E EBITDA) on expectation of deleveraging and Tata Teleservices acquisition leaves limited margin of safety. Maintain Underperformer with target price of Rs445 (Rs380 earlier) based on 7.5x FY19E wireless EBITDA.
Bharti Airtel provides telecommunication systems and services to individuals and businesses in India with operations in 20 countries across Asia and Africa. In India, Co.'s product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobile commerce. Co. had nearly 287 million customers across its operations at the end of Dec 2013.
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