Bharti Airtel
Competition bites – downgrade to reduce
REDUCE
CMP: Rs 292 Target Price: Rs 250
Bharti Airtel's Q2FY10 results disappointed with 9.4% QoQ decline in mobile ARPU resulting in first ever revenue decline of 1% QoQ v/s our estimate of 3.6% growth. EBIDTA for the quarter remained flat at Rs41.4bn (v/s our estimate of Rs43.2bn) although margins improved by 30bps QoQ to 42.1% on cost control. Higher than expected PAT of Rs23.3bn (v/s our estimate of Rs22.7bn was however led by lower tax and interest expense. Q2FY10 performance with mobile MOU decline of 6% QoQ to 450 minutes and ARPU fall of 9.4% QoQ to Rs252 is clearly an impact of increased competition and aggressive pricing.
We believe that best of the quarterly performance for Bharti is behind us and business environment for telecom operators remains extremely challenging given the entry of new players with free capacities & aggressive price cuts. While we also believe that such aggressive pricing is not sustainable, consolidation remains the savior for the sector, but would be a long drawn process. While near term pain is inevitable and would severely impact the financial performance, we believe Bharti with strong balance sheet and execution capability remains the strongest player to withstand the difficult times.
Considering the pricing pressure and eventual switch-over to per second billing, we cut our ARPU estimates by 8.5% and 25.5% for FY10E and FY11E respectively. We cut our PAT estimates by 16.2% and 42.7% resulting in EPS of Rs22.2 and Rs17.1 for FY10E and FY11E respectively.
While stock price of Bharti Airtel has corrected by sharp ~35% over the last month, we believe that negative news flows (in the form of price cuts, MNP, 3G) and sector de-rating, provides further room for downside in the stock. We hence cut our rating from BUY to REDUCE with target price of Rs250 (from Rs476 earlier). Although at our target price of Rs250, the stock would trade at healthy valuation of 15x FY11E EPS, we believe that 6% FCF yield would limit downside to the stock. Faster than expected consolidation in the sector, favorable regulatory changes and withdrawal of per second pricing remain upside risks to our call on the stock.
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