SingTel – CIMB

Bharti’s 3QFY08 results

Beating consensus. Bharti’s (SingTel’s 30.5% associate) 3QFY08 earnings of Rs17.2bn (+42% yoy) beat consensus estimate by almost 3%. This was another strong all-round performance. Topline growth was 42% yoy as Bharti increased its market share to 23.6% (+180bp yoy). EBIT margin expanded to 27.7% (+125bp yoy) through economies of scale and operating leverage. Bharti also announced additional spectrum granted by the government in five telecom circles.

Extends lead over rivals. Bharti added 6.3m (49% more than Vodafone) wireless subscribers in 3QFY08 and extended its market lead over Vodafone and Reliance, ending the quarter with a 23.6% market share and a wireless subscriber base of 55.2m. As expected, ARPU continued to slide (-2% qoq) as Bharti continued to roll out aggressively in rural villages.

Allocated additional spectrum in five telecom circles. Bharti has received formal communication from the Department of Telecom for the allotment of additional spectrum in West Bengal, Gujarat, Uttar Pradesh (west), Assam and Haryana. Bharti is expecting additional spectrum in another five circles (Rajasthan, Andhra Pradesh, Karnataka, Bihar and Tamil Nadu) in a couple of months.

Monetising Infratel and sharing of tower assets. Bharti has sold an 8-10% stake in Infratel to eight leading international investors for US$1bn, valuing Infratel’s assets at US$10bn-12.5bn. Separately, Infratel has formed a JV (TowerCo) with Vodafone and Idea last month to share tower assets. The rational for the exercise is to reduce the capex burden. FY09 capex is forecast to decline to US$2.5bn from US$3.3bn-3.5bn in FY08.

Comments

This strong set of results should dispel rising concerns over Bharti’s growth prospects, e.g. threat of competition from Vodafone and Reliance, spectrum shortage. Bharti continues to prove its unrivalled advantages in branding, distribution network and economies of scale.

We are positive on the tower-sharing strategy as we expect benefits to outweigh risks for Bharti. Firstly, Bharti will have a reduced capex burden and enlarged coverage.

Secondly, we believe Bharti stands to win more subscribers than it will lose from tower-sharing given its strengths in branding and distribution network.

Valuation and recommendation

Maintain Outperform on SingTel with unchanged sum-of-the-parts target price of S$4.55. SingTel’s reliable earnings growth remains intact, in our view, with Bharti’s strong showing. Bharti is the key earnings driver at SingTel, contributing 20% to its underlying earnings. In addition, SingTel’s 5.3% YTD outperformance relative to Bharti supports our view that SingTel offers lower risk exposure to the earnings growth of regional mobile operators in an environment of heightened risk aversion.

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