Bharti Airtel –Sell- Anand Rtahi

Bharti Airtel’s consolidated revenue was 1% higher, but EBITDA/EBIT (down 5.6%/11.4% q-o-q) came in 1.6%/4.4% lower vs. our estimates. Revenue surprise would have been meaningful (approximately 2.4%), but for the prepaid ban in J&K circle (now lifted) and impact of IMEI related SIM deactivations. net income (down approx 5% q-o-q) still came in 1% higher, thanks to FX-related gains.

Wireless MOU per SIM dropped by 1% q-o-q vs. our expectation of 3%, thanks to stronger seasonality (delayed monsoons), elasticity and pull back of traffic lost to the new entrants in 2Q. According to the mgmt, MOU would have been flat without the J&K prepaid ban. However, we note that the 8% price (ARPM) erosion in 3Q was a tad higher than expected (7%)

Despite a positive surprise, Bharti’s wireless revenue was flat q-o-q vs. 5.9% growth reported by Idea. In our view, this is explained by: (1) Bharti’s higher share of revs from metros and top cities (more overcapacity), from high-end subs (lower elasticity), and roaming (less elastic) versus Idea; (2) Bharti is also battling with Voda/Idea in smaller/rural towns with their recent footprint expansion; (3) Bharti charging 1.2p/sec in most circles vs. Idea’s 1p/sec rate—this probably led to lesser pull back of traffic lost in 2Q; and (4) Bharti introduced PSB later than Idea.

We now estimate a 5% EPS drop in FY11 vs. 10% previously. Our EPS estimates for beyond FY10 are up by 6-9% on back of higher volume (subs) and lower capex forecasts. Our revised Sep-10 TP is Rs325 (vs Rs300 previously). We still expect EBITDA/EPS to bottom out in 4Q, given seasonal effects and full impact of tariff cuts. Competition risks remain elevated as industry overcapacity continues to increase.

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