Sell Bharti Airtel; target of Rs 260: Nirmal Bang

“Bharti posted 1QFY13 top-line of Rs193.5bn, up 3.3% QoQ, below our and consensus estimates by 1.6% and 0.8%, respectively. India and SA revenue stood at Rs106.8bn, up 1.7% QoQ, but below our estimate of Rs107.5bn. Total MoU grew 3.9% QoQ to 239.3bn, while MoU/user grew 0.4% QoQ to 433 minutes/month, a reflection of increased aggression shown by the company to regain market share. However, this was off-set by a 2.6% QoQ fall in RPM to 42.7 paise. Higher SG&A costs and change in regulations (processing fee) reduced India & SA margin by a steep 371bps QoQ. Africa revenue also disappointed, coming in at US$1,066mn, down 0.5% QoQ versus our estimate of US$1,108mn, with margins declining 190bps QoQ. The poor performance of both these businesses led to revenue coming in below expectations.”

“Bharti’s 1QFY13 EBITDA margin declined by a steep 306bps QoQ to 30.2%, the lowest since 1QFY04 (328bps and 335bps lower than our/consensus estimates, respectively). This was owing to the fall in India RPM, lower processing fee and higher SG&A and network costs. A cause for concern is the fact that the company has stated that it will not be easy for margins to recover in the wake of intense competition and hazy regulatory environment. Lower margins led to a steep 24.2% QoQ fall in net profit to Rs7.6bn (32.4%/39.1% below our/consensus estimates, respectively).”

“Bharti’s 1QFY13 performance was disappointing on every aspect, with the steep under-performance on margins being the major concern. The management has also said in the post-results conference call that it will take time for margins to recover from current levels. The Africa business performance was also a negative surprise, and management commentary regarding lower elasticity in these markets, as also economic and currency headwinds are likely to ensure that any major traction will take time. Regulatory headwinds remain an overhang. We maintain our Sell rating on the stock with a revised TP of Rs260 (Rs300) and cut FY13/FY14 EBITDA and EPS estimates by a steep 13.2%/12.5% and 41.5%/32.3%, respectively,” says Nirmal Bang research report.

Non-Institutions holding more than 90% in Indian cos

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