Bharti's Africa EBITDA estimates need to be trimmed: JM Fin

Bharti Airtel's profit falls 61 percent QoQ to Rs 284 crore for the quarter ending December. Voice average revenue per user (ARPU) grew 4 percent to Rs 153 quarter-on-quarter, but declined 3 percent year-on-year, which analysts see as a key concern. Sanjay Chawla of JM Financial said that the numbers are totally in-line with expectation. "If you breakout the numbers, revenues from India are pretty good, slightly better than expectation," told Chawla to CNBC-TV18 in an interview.

Further Chawla feels that the African estimates have to be trimmed down on the EBITDA side. "Africa from a stock-price point of view, doesn't move the needle as much as India does. Africa EBITDA is about 1-1.25 of the total EBITDA, so, estimates would have to be trimmed down," added Chawla.

Below is an edited transcript of Sanjay Chawla's interview on CNBC-TV18

Q: What do you think of the Bharti Airtel numbers reported this quarter around and how you would approach the stock now given the big run up seen in the last fortnight or so?

A: The numbers are totally in-line. Earnings before interest, tax, depreciation, and amortisation (EBITDA) is a tad weaker compared to our expectations. But if you just breakout the numbers – revenues from India are pretty good. They are slightly better than our expectation. Africa revenues are also broadly in line.

But it is the Africa EBITDA and Africa EBITDA margin, which has disappointed a bit this quarter, which is not a big deal because the recovery can always happen and as far as India voice revenue per minute (RPM), that is also a bit of a dampener because it has dropped by about 0.5 percent quarter-on-quarter, whereas Idea and Reliance Communications have seen an improvement in voice pricing, voice realisation that's a bit of a dampener.

Overall, the operating metrics are good. If you look at non-voice spend, the churn rate has come down within non-voice the data growth is 25 percent data consumption, data usage growth in India, that is good. India margins are okay and India EBITDA was in-line. So, there isn't much from a stock price point of view. But the stock is not going to correct even though it has run-up quite a lot, because the expectations are pinned on the Q4 numbers where one expects to see a good improvement in voice pricing in India.

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Q: Do you think the street estimates for the Africa business, there might be a downside risk or the street might scale down their estimates for Africa because A) The margins have disappointed and have come in slightly lower than what the street was estimating and B) The loss emerging out of African business continues to remain high and has doubled on a year-on-year basis?

A: Yes, Africa estimates have to be trimmed down on the EBITDA side, Africa from a stock-price point of view, doesn't move the needle as much as India does. Africa EBITDA is about 1-1.25 of the total EBITDA. So, the estimates would have to be trimmed down, but it will not lead to any material changes atleast in our overall estimates.

Q: You were telling us about how Q4 is expected to be better. Beyond this 30.6 percent margin that they have reported this quarter, how much of an incremental growth are you expecting to see on the back of the voice call charges going up and within the entire space now that all three are out, what would pegging order look like?

A: Next quarter, improvement in voice pricing is what market is looking for and that should contribute to some margin expansion in Indian mobile business. Also, one should expect a share of – the non-voice share may remain flat because there is pressure on the Wireless Application Protocol (WAP) revenue, although the data revenue share continues to grow. But the churned rate is coming down and that should help support the EBITDA margin.

But a part of these margin improvements will also be offset partly by the increase in diesel prices. So overall, the performance should be good in the next quarter. The question is whether it will be strong enough for stock price to remain at these levels, we will have to wait and see.

Q: Within the top three, which ones would you choose?

A: Although, we have a hold rating on both Bharti and Idea, our preference would still be for Bharti compared to Idea at these levels.

Q: How do you explain the 40 percent decline on a quarter-on-quarter basis in the adjusted profits, part of the reason is forex, but is there anything else, which explains the performance and how would you read the bottom-line performance of Bharti?

A: Yes, it is a bit disappointing. There are three main reasons why the profits have disappointed. One is ofcourse forex, the other is tax rate. But I would say these two aspects are not very important. The third aspect is the interest cost, which have remained stable quarter-on-quarter. We were expecting them to come down because the average, the rupee-dollar had moved favourably. So, interest cost not coming down is a bit of a negative below the EBITDA line.

Q: What do you think about the RPMs declining marginally on a quarter-on-quarter basis?

A: Yes, RPM has remained stable. But the voice RPM has come down in India on a quarter-on-quarter basis, which is a bit of a dampener because the trend in the case of other companies has been positive.