MOSL: BHARTI AIRTEL (Buy)-ARPU down-trading continues-merger synergies to provide a breather
Bharti Airtel: ARPU downtrading continues; merger synergies to provide a breather
(BHARTI IN, Mkt Cap USD26.0b, CMP INR420, TP INR581, 38% Upside, Buy)
- ARPU downtrading continues to pull down EBITDA: Consol. revenue fell 3% QoQ (-11% YoY) to INR196.3b (2% miss), while consol. EBITDA declined 7% QoQ (-12% YoY) to INR69.3b (in-line). India wireless revenue/EBITDA fell 4%/16% QoQ to INR103.5b/INR29.4b, primarily due to APRU downtrading (-6% QoQ) to INR116. Africa revenue/EBITDA was down 3%/2% QoQ to INR49.7b/17.9b due to currency fluctuations; however, the EBITDA margin of 36.0% expanded 60bp from the previous peak of 35.5%. Consol. PAT fell 73% QoQ to INR829m (est. of INR1.6b). Adj. PAT stood at -INR410m.
- Concall highlights: 1) Telenor’s acquisition to be completed by 1QFY19; TTSL acquisition under NCLT approval stage. 2) Bharti has no restriction on selling Bharti Infratel stake until Indus deal concludes. Management is also exploring listing of Africa business. 3) FY19 capex will be INR270-280b, of which USD600-700m will be for Africa business.
- M&A to provide some comfort in FY19 as APRU finds no floor: ARPU downtrading is expected to continue in FY19 until 1) ~14% market share of the smaller players get cleaned up and 2) Vodafone-Idea merger concludes. However, contribution from Telenor and TTSL acquisition will start buffering the impact of ARPU pressures from 2QFY19; expect Telenor/TTSL to contribute revenue/EBITDA of INR56.3b/INR33.b (annualized) to India wireless by 4QFY20. We expect India wireless revenue/EBITDA to decline by 3%/10% in FY19 before making a recovery by 17%/29% in FY20 (led by ARPU accretion).
- Valuation view: Resurgence in the India wireless business, together with other moving levers of Africa, is expected to drive consol. revenue/EBITDA CAGR of 7%/9% over FY18-20E. Valuing India business at 10x EV/EBITDA FY20 and Africa business at 7x FY20E EBITDA, our SOTP-based TP of INR581 remains unchanged. Maintain Buy.
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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