SingTel – CIMB
Bharti’s 3QFY09 results
Bharti’s (SingTel’s 30.8% Indian associate) 9MFY09 results met our expectations but were ahead of consensus forecast. Core net profit of Rs68.9bn (+48% yoy) made up 74% of our full-year forecast but 82% of consensus. 3Q numbers were once again strong, characterised by: 1) admirable topline growth; 2) continued market-share gains; and 3) improving EBITDA margins.
Topline admirable. 3Q09 topline grew by 38% yoy and 7% qoq even in a highly competitive environment, led by remarkable subscriber growth of 55% yoy and 10% qoq. Bharti highlighted that its brand continued to hold sway and that the top-2 operators in India now command a larger revenue market share (in excess of 50%) in a 12-player market compared with a smaller revenue market share (of below 50%) when there were only 4-5 operators.
Market-share gains. As Bharti pushes deeper and wider into India, it is able to withstand the tide of competition, extending its market share to 24.7% (+0.1% pt qoq, +1.1% pts yoy). The Indian telco market is extremely resilient to economic challenges worldwide. Net adds have hit 10m per month, higher than the run rate of 9m subscribers per month only a few months ago.
Margins were firmer. EBITDA margins rose in 3Q09 to 41.0% from 37.7% in 2Q09 as 2Q was hit by a full quarter’s worth of increased carriage charges and higher diesel costs. Margins were helped by economies of scale on the back of the sheer volume of minutes carried on the network (1.4bn minutes per day), tighter cost control especially on non-network-related costs and greater productivity and operational efficiency.
3G services and WiMAX. At this stage, much of the timeline and process relating to 3G remains uncertain as the regulator irons out the timetable for auction given the tepid response from foreign operators, wrangling over the number of slots and fears that the government may not be able to fully maximise the revenue-generation potential from auctioning licences. Bharti has not disclosed its strategy for 3G for competitive reasons.
Sri Lanka launch. Bharti launched its service in Sri Lanka on 12 Jan using both 2G and 3.5G, becoming the fifth operator to do so. It sees potential in the market given that penetration rates are only at 50%. Sri Lanka has geographical and cultural proximity to India and Bharti can migrate its low-cost business model there. It has come up with a simplified and below-the-market tariff structure to gain an edge and response has been overwhelming. It believes that it will be able to match the coverage capacity of Dialog (which has 1,000 towers) in the next 6-8 months. It will be investing US$200m on capex over five years. That said, we see numerous challenges, including severe competition leading to margin compression, runaway inflation of 25% affecting mobile spending and escalating costs as well as lower elasticity of demand. Bharti would also have to unseat Dialog, the market leader with a 50% subscriber market share at end-3QCY08, which is rather tough given that it is coming from behind and starting as a greenfield operator.
Other updates. Towerco sustained its margins at 33.5% in 3Q (vs. 33.3% in 2Q) and benefited from lower diesel costs in 3Q. It will be transferring 35,000 towers from 1 Jan 09. It is looking to increase its tenancy ratios from the 1.34x in 3Q, up from 1.26x as at end-2Q. Apart from that, it has launched IPTV services, which have taken off rather well. Towerco deems this an integral part of any triple-play offering.
Valuation and recommendation
Unrivalled execution. While the market remains hyper-competitive, Bharti has been able to withstand the tide, executing well even as it extracts profits from first-time users in more rural areas in India. Subscriber momentum is unabated, led by its branding pull and it enjoys a huge competitive advantage from its economies of scale. We continue to view Bharti as one of the more reliable drivers of SingTel. We estimate that Bharti would constitute 24% to SingTel’s PBT.
Maintain OUTPERFORM, earnings forecasts and target price. Pending the release of SingTel’s 3QFY09 results on 10 Feb, we are maintaining our earnings forecasts and sum-of-the-parts target price of S$3.10. Bharti makes up about 37% of SingTel’s valuation. We reiterate OUTPERFORM on key re-rating catalysts of: 1) appreciating regional currencies; 2) further signs of easing competition in Singapore; 3) strong quarterly results, especially at key units; and 4) a bottoming out of earnings in 3QFY09.