SingTel – CIMB

Bharti continues to charge ahead

Bharti’s 1QFY09 results

Within expectations.
SingTel’s 30.5% associate Bharti reported a 1QFY09 net profit of Rs20.3bn (+34% yoy, +9.3% qoq), which was within consensus but below our expectations. When annualised, the results were 95% of consensus forecast but only 87% of ours. Nevertheless, this was another strong set of results as revenue leapt 44% yoy on the back of robust subscriber growth of 63% yoy. EBITDA margins were steady at 41.5%.

Sterling revenue growth. As it continued its rural push, Bharti extended its lead in market share to 24.8% (+0.5% pt qoq, +1.1% pts yoy). Consequently, revenue surged 44% yoy. Although ARPU was diluted by its push into rural areas, margins were propped up by economies of scale.

EBITDA margins firm. Bharti was able to sustain its margins despite the onslaught of competition and call-tariff reductions. We attribute the margin firmness to its unrivalled economies of scale. Bharti highlighted that profitability was not under pressure and it has always been focused on profitability per subscriber. With its pre-emptive move to cut rates, we believe that rivals or new entrants would have little room to manoeuvre. That said, margins across the sector could come under pressure, should competition continue to drive down tariffs.

Tying up with MTN and 3G policy. With the MTN-Reliance deal now dead in the water, talk has shifted back to a resumption of negotiations between Bharti and MTN. Should any deal materialise, we would be positive as it would help Bharti evolve into an emerging-market powerhouse. However, the risk remains the price to be paid for MTN. Recent acquisitions have been pricey and have resulted in de-ratings in the share prices of acquirers.

Separately, India’s 3G policy is set to be announced soon. We believe Bharti stands a strong chance of securing the coveted 3G spectrum. This is crucial for distinguishing the company in this competitive market and in alleviating margin pressures given the premium services it would be able to offer.

Forecasts unchanged. The strong set of numbers underscores management’s ability to extract profits even from first-time users in poorer and less developed areas. Bharti’s economies of scale and unrivalled branding power set it apart from competitors and showcase its best-in-class attributes. India’s growth potential remains attractive over the near term, although margin pressures could creep in over the longer term. We maintain our earnings estimates as we see stronger quarters ahead and continue to believe that Bharti remains SingTel’s most reliable growth driver. We expect Bharti to contribute 21% of SingTel’s pre-tax profits in FY09.

Valuation and recommendation

Maintain NEUTRAL and sum-of-the-parts target price of S$4.05. We believe SingTel lacks catalysts given the mixed performance of its portfolio. With mature operations in Singapore and Australian and Telkomsel facing intense competition, Bharti is SingTel’s key earnings driver. Key risk for SingTel is earnings delivery at Telkomsel which is facing increased competition from Excelcomindo.

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