Bharti Airtel's India data growth robust, maintain buy: UBS

Latha: EBITDA at 21.9 per se not bad but it is the lowest we have seen since Bharti acquired the African business?A: I am taking about the Indian mobile business. There are no doubts that Africa has been poor but African has been poor partly due to currency partly due to Ebola type stuff which has impacted and partly also Bharti Airtel had underestimated the challenges. They have got a new CEO who is cleaning up the stuff. However, my sense on Bharti is nobody gives it a positive value. We take Rs 25 per share negative for Bharti Africa maybe that number has to be higher. I do not know, but my sense is it is not like high expectations are built in to the business. What I talked about when I said 23 percent growth was. If you look at Indian mobile business EBITDA, on a year on year basis has grown 23 percent. How many businesses in India can you find with that kind of growth? It is difficult.

Sonia: If you take a look at the stock performance of both Bharti and Idea in the last six months. It has gone nowhere, both those stocks have been extremely range bound. It could be perhaps because of some concerns as you mentioned about the upcoming auctions or Reliance Jio, but nevertheless what do you think is hindering the performance of the stocks and what do you forecast as the next six months for these two stocks? A: If you look at the last seven-eight quarters EBITDA margins for both Bharti and Idea have expanded from 700 to 800 bps. This is a serious trend here and this is largely driven by data and of course there is some pricing power as well but that is something you cannot like ignore, of course the market is ignoring and I will come to that. The second thing is if you look at the next six months or one year, the data growth is not going to stop. We still have 120-130 million data users in India who consume 350-400 mb a month and this is a country where outside the big cities there is no real fix line. You could potentially see 130-140 million users go to 500-600 million in the next five years. So that is a big upside and that is a big expansion in the revenue pie which both Bharti and Idea will take advantage of. However, coming to the concerns, auctions are not a concern; it is not very different from excise duty hike in India. If government wants more money for spectrum, let them have it but you have to transfer it to the consumer. The second thing is R-jio. I have covered regional telecom for 12 years. I am yet to come across anything in Asia or anywhere in the world where an operator enters 20 years later and grabs a vast chunk of market share. I am not saying it is impossible but the odds are very heavily stacked again such a move.

Latha: In that case you have a buy on both stocks?A: We like both. We think Idea is a pure play in Indian mobile market. Bharti unfortunately is getting little impacted by Africa but there is another point I would like to make that if you look at Bharti Infratel which has done extremely well; the stock is up 130 percent down in the last 12 months. Bharti own 75 percent of this company. Bharti’s stock has not even moved the same proportion to how much Infratel has moved. So the market is mispricing this according to me.

Latha: What these payment banks going to do to both of these entities assuming they get it. How much money is involved and what returns will come in how many years. Anything to the earnings per share (EPS) or is it going to be too marginal?A: It is a bit premature but if you think about it – Reserve Bank of India (RBI) and the government wants to practice financial inclusion and it is a very well-known fact that maybe a vast majority of Indian population do not have bank accounts, so Aadhar push and everything is towards that. I think the telecoms, the good thing about them, if you take Bharti, they have 220 million real people they are connected to, connected to 24/7, so could that be leveraged to do some banking stuff, of course yes, but what is the business model etc, we will have to wait and see but one thing I would add here, if the government is serious about this stuff, they have to release a lot more spectrum, they cannot maximise government revenues on spectrum auctions, in fact that is one thing why the stocks have not done well because post the government change unfortunately nothing has changed for the sector whereas it should have. So that’s one thing if the government wants to push digital India etc, they have to address the spectrum situation, they cannot just look at these companies as ATM machines to balance the fiscal deficit. They have to enable the sector to deliver technology to the masters of India. I think it will eventually happen, so far the progress is very disappointing despite having a very good regulator Telecom Regulatory Authority of India (TRAI). Disclosure: I do not own any of these names. I only write research on these names.