MOSL: BHARTI AIRTEL (Buy)- Cost-structuring measures show results

​Bharti Airtel:Cost-structuring measures show results

(BHARTI IN, Mkt Cap USD33.3b, CMP INR538, TP INR680, 26% Upside, Buy)

• Africa delivers, finally: Consol. EBITDA of INR79.2b was up only 2% QoQ (-16% YoY, 6% beat) due to a 1% QoQ drop in revenue. Africa surprised with a 7% QoQ revenue jump (-2% YoY) to INR52b, backed by a 5% dollar ARPU rise; Africa EBITDA surged 23% QoQ to INR16.8b on a leaner cost structure. India wireless revenue drop of 5% QoQ (-17% YoY) to INR122.5b was in line with our est., but flat EBITDA margin of 34.4% implies a beat of 180bp to our est.
  
• Lean cost structure supports strong EBITDA growth: Bharti has created a lean cost structure. This is evident from Africa’s 800bp margin improvement in the last four quarters, despite a 2% revenue decline YoY. India wireless too has seen a 7%/1% YoY decline in network/employee cost, despite accelerated network rollout. We believe this offers Bharti strong ARPU sensitivity to EBITDA, which should drive healthy operating leverage, as ARPU recovers in FY19E.
  
• Expect India ARPU recovery in FY19 to drive growth: RJio has taken four price actions since turning paid, signaling ARPU accretion, which has been hostage to competition. Post IUC and Jiophone launch impact in 2HFY18, we believe ARPUs should improve from FY19. Bharti’s strong spectrum/data network portfolio and data volume of meager 260m GB (i.e. less than one fifth of RJio) indicate a huge scope to improve ARPUs (26% below pre-RJio launch) through value-accretive offerings. Management’s guidance of 25% capex increase to INR250b should therefore be more front-loading and reduce capex beyond 3-4 quarters.