Q2FY16 in line but fault lines emerging in the India wireless narrative. Slowdown in data volume growth momentum and subdued stance on voice RPM (revenue per minute) drive cuts in our India wireless and consolidated estimates for Bharti even as the company reported, overall in-line Q2FY16 and improved performance in Africa. The India wireless narrative has weakened a tad with an increase in competitive intensity, raising questions on the timeline of the return to healthy shareholder surplus. Beaten-down valuations keep us positive. We retain ADD with a revised target price of Rs 410/share (from Rs 460).
Q2 earnings print in line at the consolidated level, but hit/miss mix disappointing
Bharti reported a marginally ahead-of-our-estimate Q2FY16 at the operational level even as higher-than-expected forex losses and effective tax rate (ETR) drove a substantial recurring PAT miss. Reported consolidated revenue, Ebitda (earnings before interest taxes depreciation and amortisation), Ebit (earnings before interest and taxes), and PBT (profit before tax) were 1.5%, 1.6%, 4.4% and 4.3% ahead of our expectations, respectively. However, one of the key sources of Ebitda beat was the India enterprise business; we view this as a low-quality beat given the inherent quarterly volatility of this business. Beat on Africa estimates, both revenues and Ebitda, was indeed a positive surprise; however, we had good quarters in the Africa business in the past only to be followed by disappointment in subsequent quarters.
India wireless – fault lines emerging
Bharti’s India business performance was decent as far as reported headline numbers are concerned. Better-than-expected cost control aided a marginal 0.7% beat in Ebitda despite a 1% topline miss. Reported revenue and Ebitda growth of 8% and 14% y-o-y (year on year) were healthy. However, in line with the trends reported by Idea, Bharti too saw (i) another quarter of sequential pressure on voice RPM and (ii) deceleration in data volume and revenue growth momentum. The latter was disappointing in the backdrop of sharp increase in Bharti’s absolute and relative investments on data network rollouts. We should perhaps not be reading a lot into quarterly trends in a still-evolving data story, but—Data trends reported by Bharti and Idea were weak for this stage of evolution of the data market; market growth rates would have been lower than Bharti’s and Idea’s, and management commentaries suggested that the strength of the multi-year data volume growth story is not a given.
A larger point we are trying to drive home is that the broader India wireless narrative took a beating on two key fronts (with the results and commentaries of the two bellwethers)—(i) voice RPM (revenue per minute) trajectory, and (ii) strength of the data volume growth story.
Cut estimates and target price to reflect weakened prognosis on India wireless
In line with the discussion above, we have cut our voice RPM and data ARMB (average realisation per MB) assumptions, resulting in sharp 3-6% cut in our India wireless Ebitda and 2-3% cut in consolidated Ebitda forecasts for FY2016-18e (estimates). Our EPS (earnings per share) estimates stand reduced by 2-19% for FY2016-18e with sharper cut in FY2016e EPS estimate reflecting higher-than-expected forex losses in Q2FY16.
Detailed Analysis
Consolidated results
Bharti reported consolidated revenues of Rs 238 bn (+0.7% q-o-q, +4.3% y-o-y), 1.5% ahead of our expectations, driven by ahead-of-estimates revenues in Africa, South Asia, and India Enterprise businesses. Ebitda came in at Rs 81.6 bn (down 1% q-o-q, +8% y-o-y), 1.6% ahead of our estimate on the back of better-than-expected performance in the Africa and India Enterprise businesses. The bulk of the Ebitda beat in fact came from the India Enterprise business–a low-quality beat, if you will, given the volatility of (and hence, difficult to forecast) this business on a quarterly basis. Recurring net profit fell 30% q-o-q and 50% y-o-y to Rs 7.66 bn, 31% below our estimate. The bulk of the miss was on account of higher-than-expected forex losses and higher-than-expected ETR.
India wireless segment
Bharti’s India wireless revenues were up 8% y-o-y and Ebitda was up 14%. Voice traffic declined 3% q-o-q but grew 7% y-o-y. Voice RPM declined 1% q-o-q and 9% y-o-y to 34.6 paise/min, in line with trends reported by Idea. The important aspect here is the sustained weak trajectory of voice RPM at a time when stability or gradual improvement was expected. On the data front, Bharti reported data revenue and volume growth of 60% and 70% y-o-y, weaker than Idea’s on both counts.
Africa wireless
The performance of Africa wireless was a positive surprise after long; reported US$ revenues were broadly flat q-o-q despite the loss of external tenant revenues on account of tower sales and material currency pressure. On a constant currency basis, adjusted for impact of tower sale, revenues and Ebitda grew 5% and 10% q-o-q. Africa revenues and Ebitda came in 5% and 9% ahead of expectations.
Other businesses—DTH, Telemedia steady
Bharti reported healthy y-o-y comps across non-wireless India businesses with Ebitda growth of 16.5% y-o-y in Telemedia, 53% in DTH, and 27% in the Enterprise segment. On the Telemedia (wireline) front, the company saw accelerated net adds and another quarter of healthy ARPU (average revenue per user) increase (+4% y-o-y to Rs 1,066/month). Q-o-q momentum did slowdown in the DTH business as revenue growth slowed down; Ebitda declined q-o-q and churn increased to a multi-quarter high of 1.3%.
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