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

Be more generous SingTel, you can afford it

LAST week an old rumour resurfaced which said that Singapore Telecommunications (SingTel) is planning to sell 25 per cent of its wholly owned Australian unit Optus. SingTel, as expected, declined comment. That speculation had made its rounds late last year and chief executive Chua Sock Koong then basically responded with a never say never, shedding no light on the issue.

Some analysts though are puzzled by the old chestnut as they cannot see a need for a sale and one even accused journalists of doing the rumour-mongering.

A check with a SingTel source found that the speculation originated in Australia, no surprises there. One commentary Down Under essentially said it would be an opportunistic way for the firm to unlock extra value from Optus.

It cited the rise in the Aussie dollar and Optus’ recent outperformance – which may not last – but which gives SingTel a nice window to cash out. It added that an IPO that could raise as much as A$4 billion (S$5.1 billion) could be used for potential acquisitions.

But SingTel does not need the cash, not for capital expenditure nor acquisitions. The telco would be able to raise money from the debt market cheaply if there is to be a multiple billion dollar purchase, one analyst noted. And the bulk of its capital expenditure is done or provided for.

SingTel, in fact, enjoys solid cash flows from recurrent earnings and dividends from its associates. Free cash flow for the six months ended Sept 30, 2009, was S$1.67 billion. It is expected to get slightly over S$1 billion in dividend contributions for the current financial year.

Rather than journalists, it is probably fee-seeking investment bankers who are dangling the story of an Optus sale to SingTel. The rumours offer two sale routes of either new or vendor shares.

It sounds sexy, especially to shareholders – not the idea of potential acquisitions – but the prospect of money being returned to them.

Said CIMB analyst Kelvin Goh on the listing rumours – ‘We would be positive if SingTel sell down its stake as the funds raised could be distributed as dividends.’

Stock return and dividend

SingTel has seriously underperformed the rest of the stock market of almost 50 per cent. According to Bloomberg, the one-year total return on the stock is 21.66 per cent. The Straits Times Index (STI) is up 68 per cent from a year ago.

The firm did cautiously increase its interim dividend by 11 per cent to 6.2 cents a share, representing a payout ratio of 52 per cent. Last year’s total dividend of 12.5 cents was unchanged from 2008.

Analysts are betting that there will be a higher final dividend, and projecting the full year to be at least 13.5 cents, achievable given the telco’s strong showing so far.

Nomura analyst Sachin Gupta said in a Jan 11 report that its solid momentum at wholly owned businesses should continue in FY10-11, which bodes well for cash flows.

While there are margin concerns for its Singapore business, SingTel will continue to maintain its market lead share in the wireless and broadband segments. As for Optus, the past four quarters have been the best since 2004, with 7-12 per cent year-on-year revenue growth. Its key regional associates, India’s Bharti and Telkomsel in Indonesia, have dominant positions in their respective markets and continue to gain customers despite intensive competition.

SingTel has been firing on all pistons – no doubt about it. No mean feat in a recession year and so last year’s underperformance has been disappointing.

Mr Gupta said the underperformance was across the board for Asia ex-Japan telcos because operational surprise was non-existent. In fact, SingTel was one of the better telcos last year.

For those with a bit of historical perspective, SingTel actually outperformed the benchmark index during the most dire period of the financial crisis. From April 1, 2008, to March 31, 2009, the stock fell 36 per cent against a 44 per cent decline for the STI.

Whichever route SingTel takes to increase dividend as long as it does not harm the value of the company, is what shareholders care most about. Many are retirees and hold on to their stock because they regard it as a safe investment and a bigger fillip once in a while is seen as a bonus.

SingTel does not need to sell a chunk of Optus to return money to shareholders though one cannot rule out parent Temasek’s requirements.

What the overly prudent management could do is widen its purse strings. The current dividend policy is to pay out 45 to 60 per cent of underlying net profit as ordinary dividends. That could be easily raised to say 55-80 per cent with no negative impact on its financials given its stable cash flows and impeccable rating. That would be a nice move to reward its legion of patient shareholders where dividend income is more critical in their retirement years.

SingTel joins US$400m cable project

SINGTEL has joined a diverse group of industry players to build a US$400 million subsea cable system that will initially link Singapore, Indonesia, the Philippines, Hong Kong and Japan by the second quarter of 2012.

The 8,300 km system, dubbed the South-east Asia Japan Cable (SJC) system, has a design capacity of 17 Terabits per second (Tbps) – equivalent to 17 million Internet users simultaneously accessing a 1 Mb file in real time – and can be upgraded to 23 Tbps, making it the highest capacity system ever to be built.

The other members of the SJC consortium are Globe Telecom, Google, KDDI, Network i2i, Reliance Globalcom, Telemedia Pacific Inc and PT Telekomunikasi Indonesia International. According to a statement yesterday, the consortium may be expanded in future to include other carriers.

The SJC system will cater to the strong bandwidth demand seen in high growth Asian countries, said Mark Chong, SingTel’s executive vice-president for networks. The system will also be a boon to Singapore when the country’s national broadband network is rolled out.

‘As the SJC connects Singapore to other cable systems in Asia, it will provide access to other parts of the region and serve as an important cable diversity route. SJC is designed to avoid outage prone areas. It will also be linked to the new Unity cable network, thus enhancing SingTel’s ability to offer superior connectivity between Asia and the US,’ Mr Chong said.

Unity refers to the name of another subsea cable consortium that SingTel is involved in.

The six-member Unity consortium, which comprises Bharti Airtel, Global Transit, Google, KDDI Corp, Pacnet and SingTel, is building a 9,620km system that spans Japan and the US via the Pacific Ocean. This US$300 million system recently landed in Japan and is expected to be ready in the middle of this year.

The Unity cable system will add up to 4.8 Tbps of bandwidth across the Pacific between the US and Asia.

Before Unity and SJC, SingTel’s last involvement in funding subsea cable systems was in 2004, when it joined 15 other companies to build the 20,000km South-east Asia-Middle-East – West Europe 4 system, or SEA-ME – WE 4.