After a slew of downgrades brought about by a weak June quarter performance, Bharti Airtel’s stock has tanked 15 per cent (since its results earlier this month). The Street is worried about increasing debt, capital expenditure requirements, regulatory issues and prospects for both Indian and African businesses. While these concerns persist, Bharti has had some success in its strategy of gaining market share in India as well as progress in monetising its tower assets.
After nine successive quarters of registering a drop, its revenue market share (RMS) saw an increase of 90 basis points to 31 per cent. Secondly, it has appointed lead managers to list its tower arm, Bharti Infratel, and is likely to raise about $750 million-$1 billion from the same. While it may not make a large dent on its $13 billion debt pile, it will help in operational needs, especially given the upcoming 2G auctions and the need for it to secure spectrum coming for renewal.
While Bharti has the strongest balance sheet among listed peers, given the competitive landscape, the Street does not expect pricing power to return in the near-term for telcos. Even on Bharti’s African business, its flat revenue growth and the 200 basis points margin contraction sequentially in the June quarter indicates a tough business environment and possibility of the company missing its $5 billion revenue (FY12 $4.1 billion) and $2 billion Ebitda ($1.08 bn) guidance for FY13. Given the lack of visibility, analysts continue to hold a negative view on the scrip which is currently trading at 22 times its FY13 earnings estimates. Religare analysts in an August 27 telecom sector update, say: “While Bharti has corrected sharply, we see limited catalysts for the stock in the near term.”
| UNDER PRESSURE | ||
| In Rs crore | FY12 | FY13 E |
| Revenues | 71,450 | 78,837 |
| % change y-o-y | 20.0 | 10.3 |
| Ebitda | 23,712 | 24,438 |
| % change | 18.1 | 3.1 |
| Ebitda (%) | 33.2 | 31.0 |
| Net profit | 4,789 | 4,091 |
| % change y-o-y | -27.3 | -14.6 |
| P/E (x) |
- | |
RMS gains at high cost?
Bharti’s market share gains both in respects of subscribers and revenues have come after it dropped fares in select markets at the start of the year. The gains, especially on the revenue market share, has been sharp and stem the decline vis-à-vis its largest peers Vodafone and Idea. Both its competitors saw gains in the region of 180-220 basis points since the June quarter of FY11, while Bharti lost about 240 basis points during the same period. HSBC analysts say the company changed its strategy from tariff hikes and free cash flow focus to RMS earlier this year and expect the company to sustain RMS gains over the next two-three quarters. While this is a positive, Religare analysts say the gains have come at the expense of RCom/Tata and stronger incumbents continue to retain their market share. “In our view, the quality of the acquired market share could be of dubious nature, as was seen in the poor margins for Bharti. We continue to believe that overall growth in the market is slowing down,” they say.
While Bharti management has indicated it will be ‘mark to market’ in their pricing policy, given no operator is willing to cede an inch and pricing discipline is some time off, expect competitive pressures to sustain, going ahead.
High debt, cash outflow
The buyout of Zain assets in Africa, 3G auctions payments and rollout have resulted in Bharti’s net debt ballooning to about $13 billion. While its cashflows continue to be strong, analysts at Nomura equity research say its gearing levels at three times net debt to Ebitda is high. This is so given weak operational trends and potential cash outflow due to forthcoming spectrum auctions. What the Street is also worried about is the competitive situation if RIL Infotel makes an entry into the 2G space. If a pricing war is to start, then it would put pressure on the leading incumbents, both on the voice as well as the data side of the business.
While the market environment continues to be difficult and RCom could not find buyers for its Flag Telecom business, a successful listing of Bharti’s tower unit could be a positive for the stock. The last time Bharti had monetised its tower assets was in 2007 and early 2008 when it offloaded about 10 per cent stake in its tower arm for about a $1 billion. However,the company may not get the $10-12 billion valuations it had been able to garner this time around, say analysts.
