Gaining momentum in India, but Africa remains subdued: The strong performance of Indian mobile revenues business is the key highlight of Bharti Airtel‘s Q1FY14 results. African business performance was muted as revenues were flat and Ebitda grew 3% year-on-year. On a consolidated basis, revenue (R203 bn) and Ebitda (R65.4 bn) grew 9.2% and 19.3%, but profit after tax (R6.9 bn) fell 7% y-o-y due to higher taxes.
Importantly, Bharti maintains its strong FCFE?free cash flow-to-equity ratio?(Q1: R18 bn) unlike incumbent peers. Relative to our estimates, revenue was in line and Ebitda was 5% higher, adjusting for the estimated impact of the accounting change. We raise our FY14e/FY15e EPS estimates by 5% to R15.5/R23.2 and target price by 10% to R 385; maintaining Buy.
India mobile business ? usage growth sustains despite price increases: While usage growth at 8% y-o-y was in line with recent trends, a 2% y-o-y increase in RPM?revenue per minute?(R0.36) was a positive surprise, which led to a 10% growth in voice revenues (R94 bn). Non-voice revenues (17.3% of mobile) grew 18% driven primarily by the continuing strength of data usage. Wireless Ebitda margins have improved 180bps q-o-q to 32.4%. Over the four quarters, the defining trend in the domestic business has been the fall in SG&A (selling and acquisition) costs by 360bps, reflecting an improving competitive environment.
Africa?muted revenue and Ebitda growth; expecting data to provide a fillip: Revenue ($1bn) fell 0.4% y-o-y driven by a 25% fall in RPM, but 32% growth in usage. Voice revenue trends for Bharti and its peers, such as Millicom, have slowed as tariffs fell due to competition and a reduction in interconnect charges. Ebitda at $283m has been range-bound for the last eight quarters. Bharti has guided for high-single-digit revenue growth for FY14e. FCFE at -$52m suggests a manageable funding gap of $200m for FY14e.
Cash flow gap continues to be moderate: One of the key concerns for investors in Bharti has been the negative FCF (free cash flow) in Africa, which has been financed by the cash flows of the Indian operations. The African operations are now close to turning FCF positive and the current Ebitda is able to take care of the capital expenditure requirements and the interest cost of operations as well as the acquisition debt. The key reason for the continued shortfall is the tax payments.
Trading at 6.7x FY14e EV/Ebitda, three-year Ebitda CAGR (FY13-16e) of 18%: Our target price of R385 is DCF (discounted cash flow)-based and implies 8x (times) FY14 EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation, and amortisation) for Indian operations, assuming 5.5x for Africa. We imply equity value of India and African operations at R403 and -R9 per share. The key risk is weak usage growth in the Indian wireless business.
