Weak 3Q Bharti results

Bharti’s 3QFY10 results

Maintain Underperform. SingTel’s Indian associate, Bharti, turned in relatively weak 3QFY10 results although the results fell in line with consensus forecast (75% of full year). Our numbers are based on consensus. 3Q was marked by a rather tepid topline, weak MOUs, high churns and lower margins due to intense price competition. While Bharti expects competition to stabilise in 2H10, we are less sanguine and believe the competitive phase will persist throughout the most part of 2010. We retain our earnings forecasts, sum-of-the-parts target price of S$3.30 and UNDERPEFORM rating on SingTel pending SingTel’s results release on 9 Feb. We are concerned about competition in India and Australia, 3G spectrum bidding in India, and an inability to recover the cost of BPL rights. Switch to M1 or Axiata.

Effect of price war telling. Bharti turned in a rather weak performance even after factoring in recent security issues when it lost over 25% subscribers who could not be re-authenticated and the prepaid ban in Jammu & Kashmir (J&K) where it has a 35% market share. 3QFY10 core net profit slipped 13% qoq and 14% yoy, on the back of a revenue drop of 1% qoq but 1% yoy growth. This was due to the effects of savage price cuts and partly due to the J&K ban despite seasonal strength. These factors also resulted in a 2.1%-pt qoq decline in EBITDA margins.

Wireless metrics affected. The intense competition had manifested itself in the wireless business which fell 2% qoq, despite a healthy 8% qoq rise in net adds to more than 8m. ARPUs fell 9% qoq, while MOU declined 1% (would have been flat if not for the J&K ban), leading to a steep 8% fall in average revenue per minute (ARPM) to Rs0.52 in 3Q.

2H10 to be better? Bharti sees a more stable environment in 2H10 with hypercompetitiveness culminating in the launches of several new players in the next 5-6 months and as new entrants begin to realise the non-viability of their business models following losses over 2-4 quarters. We anticipate the start-up of three telcos in the coming months. During this period, Bharti will focus on increasing its subscriber and revenue market share and stabilising its margins.

We are less sanguine and believe that the competitive phase will prevail throughout most of 2010 as the new entrants would have a long term view, backed by strong parents. Hyper competition in Bangladesh, Indonesia, Pakistan and Sri Lanka took 12-18 months to play out, based on our observation. In India, the intense competition was sparked off in Sep 09. On the positive side, any relaxation in M&A norms would accelerate the consolidation process, we believe.

Elasticity to recover? Bharti presented a more upbeat picture on elasticity, noting that it had arrested the erosion in its MOU and that not all of the elasticity had been reflected as it was still in the process of migrating its customers to new pricing plans.

Bangladesh, Sri Lanka and international acquisitions. Bharti is excited over its acquisition of a 70% stake in Warid Bangladesh as it sees this as a promising market with a low tele-density of 32% and a fairly large population of 160m. It is still formulating its strategy there but believes it has the potential to capture market leadership in the next few years. In Sri Lanka, Bharti has moved to the fourth slot from the fifth after one quarter of operation and now covers the southern and eastern parts of the country and will be present almost everywhere soon. Bharti remains committed to its international aspirations, particularly as it has completed its South Asian footprint. It has formed a dedicated business to pursue opportunities in emerging markets, for the next phase of growth.

Valuation and recommendation

Maintaining earnings forecasts, target price and UNDERPERFORM rating. We make no changes to our forecasts, sum-of-the-parts target price of S$3.30 and UNDERPERFORM rating pending SingTel’s results release on 9 Feb. We see potential de-rating catalysts from rising competition in India and Australia, an upcoming 3G spectrum auction in India which should be hotly contested, and an inability to recover the high cost of BPL.

Switch to M1 (Outperform, TP: S$2.07) which is our top Singapore telco pick for its capital-management potential or Axiata (Outperform, TP: RM3.86) for its fast-growing regional telco exposure.

Bharti does not disappoint!

• Bharti’s 3QFY10 earnings slightly ahead of consensus due to healthy growth in network traffic.
• Upside potential for Bharti’s FY11F street estimates, if industry consolidation kicks in another 2-3
quarters
• Maintain HOLD for SingTel due to (i) National Broadband National (NBN) related concerns in
Singapore and (ii) potential pay TV losses in Singapore.

Bharti numbers slightly better than consensus. Bharti’s 3QFY10 net profit of INR 22.1bn as per US GAAP (-4% qoq, +2% yoy) was better than street expectations of INR 21.6bn. EBITDA stood at INR 39.1bn (-5% qoq, -3 yoy), due to slightly weaker contribution from the mobile business. Mobile ARPU at INR 230 was down 9% qoq, offset to a large extent by traffic growth of 7% qoq, highest in the last five quarters. This could be attributed to stable minutes of usage (MoUs) per subscriber, which had been declining for quite some due to more rural subscribers.

Management expects consolidation in another 2-3 quarters. Bharti’s management expects industry consolidation in another 2-3 quarters as initial excitement over cheaper price plans fades out and smaller players realize that their business models are unsustainable. Consensus has assumed continued price wars with 5% yoy decline in Bharti’s earnings in FY11F. In our view, there could be potential upside to consensus estimates, if sector consolidation starts to kick in.

Maintain HOLD with TP of S$3.15. We retain our forecasts for Bharti, but have lowered our forecasts for Singapore business due to NBN related concerns and pay TV related losses. As such, our FY10F/11F earnings for SingTel are trimmed down by 1%/2%.

Bharti profit rises as price cuts boost wireless use

BHARTI Airtel reported a quarterly profit that beat analysts’ estimates after price cuts helped India’s largest mobile-phone operator boost traffic on its wireless network.

Net income increased 2.3 per cent to 22.1 billion rupees (S$674 million) for the three months ended Dec 31, from 21.6 billion rupees a year earlier, New Delhi-based Bharti said yesterday. That compared with the 21.9 billion-rupee median of 16 analyst estimates compiled by Bloomberg. Sales rose 1.5 per cent.

Billionaire chairman Sunil Mittal’s flagship company slashed call rates to as little as 0.01 rupee a second to keep customers after overseas carriers NTT DoCoMo Inc and Telenor ASA entered the market with cut-price plans. The reduced prices encouraged users to spend more time talking on Bharti’s network.

‘Most people had been more pessimistic than (the) results warrant,’ said G V Giri, an analyst with IIFL Capital Ltd in Mumbai. The earnings reflect ‘lower tariff translating into correspondingly increased traffic,’ he said.

The Indian operator reported that traffic on its mobile network increased in the last quarter by 9.56 billion minutes from the preceding three-month period to 153.2 billion minutes. The number of wireless customers grew 40 per cent from a year earlier to 120.2 million as on Dec 31, Bharti said in the statement.

‘The resurgence of minutes has been a highlight of this quarter,’ chief executive officer Manoj Kohli said in a post-earnings briefing in New Delhi yesterday. ‘This is despite the hyper-competition,’ he said.

Phone companies are reducing prices to get a larger share of a wireless market that is on average adding more than 14 million subscribers every month and is forecast by researcher Gartner Inc to exceed 771 million users by 2013. India had 506 million mobile-phone accounts at the end of November, according to data from the Telecom Regulatory Authority of India, second only to China’s market in size.

The increased competition, at a time when growth in the telecom industry is slowing, is leading to overcapacity, Kotak Securities Ltd, ranked India’s top local brokerage by Asiamoney last year, said this month.

Third-quarter revenue was 97.7 billion rupees, compared with analysts’ median estimate of 97.6 billion rupees.

Bharti is now targeting emerging markets as competition intensifies and growth slows in India’s cities. The operator on Jan 13 named Mr Kohli to head a new team to acquire companies outside the region after it made its first overseas acquisition in Bangladesh earlier this month.

The Indian carrier announced on Jan 12 that it agreed to buy a 70 per cent stake in Bangladesh’s Warid Telecom and will invest US$300 million in the neighbouring South Asian nation’s fourth-largest mobile-phone operator. Bharti last year failed to conclude a US$23 billion purchase of South Africa’s MTN Group Ltd in its second attempt.

Bharti will focus on emerging markets and has no plans to acquire companies in the US, Mr Kohli said yesterday. Competition will ease after a couple of quarters and India’s wireless market will see more stable and orderly growth in the second half of the year, he said.

‘With the pricing regime stabilising, the operators will get back to a more normal environment and Bharti will benefit from its scale in terms of operating performance,’ Theo Maas, who owns Bharti shareholder Singapore Telecommunications Ltd as part of the US$4.5 billion in assets he manages at Fortis Investment Partners Pty in Sydney, said. — Bloomberg