07/05/2013

Hold Bharti Airtel Ltd For Target Rs.344 


Revenue Disappoints, Margins Above Estimate
Bharti Airtel’s (BAL) 4QFY13 revenue stood at Rs204.5bn, up 1% QoQ, but below our/consensus estimates by 1.5%/1.9%, respectively. India minutes of use (MoU) rose by a strong 5.1% QoQ, as the company benefitted with some subscribers of newer operators (who shut down operations) porting to its network. However, revenue per minute (RPM) declined 0.5% QoQ. Data revenue growth was healthy at 19.7% QoQ. Africa revenue was poor, down 1.1% QoQ in US dollar terms. BAL surprised positively on the margin front, up 118bps QoQ, led by higher India profitability. However, higherthan- expected interest due to forex loss and dividend distribution tax on Indus resulted in net profit growth of 79.3% QoQ at Rs5.1bn, 39.1%/30.4% below our/consensus estimates, respectively. At this point, regulatory headwinds remain a bugbear, while RPM increase is yet to materialise. Africa revenue growth has been below expectations and we expect this to be a headwind for FY14 revenue growth. Data growth is a bright spot. Current valuation, at 5x FY15E EV-EBITDA, is not too demanding. However, regulatory headwinds are likely to cap any significant upside. We have introduced our FY15 estimates. We retain our Hold rating on BAL with a revised TP of Rs344 (Rs308 earlier), rolling over to FY15E EV-EBITDA valuation.
Revenue below expectations: BAL posted 4QFY13 revenue of Rs204.5bn, up 1% QoQ, below our/consensus estimates by 1.5%/1.9%, respectively. India and South Asia revenue stood at Rs112.9bn, up 3.2% QoQ (our estimate Rs115.2bn). MoU rose by a strong 5.1% QoQ at 253.1bn, as the telecommunications major gained to some extent due to subscribers from newer operators porting post shut-down of services. MoU/user also rose 4.8% QoQ to 455 minutes/month. RPM, however, fell 0.5% QoQ to 42.3 paise. India voice revenue grew 4.8% QoQ, while data growth was heartening at 19.7% QoQ. Africa revenue was a major disappointment, down 1.1% QoQ at US$1,120mn (our estimate US$1,167mn).
Margins surprise positively, but forex loss and dividend distribution tax dent net profit: BAL’s 4QFY13 margin rose 118bps QoQ to 31.7% (5bps/75bps above our/consensus estimates, respectively). This was owing to higher India and passive infrastructure margins, with the former getting the benefit of operating leverage. However, owing to forex loss and dividend distribution tax on Indus dividend, net profit stood at Rs5.1bn, up 79.3% QoQ (39.1%/30.4% below our/consensus estimates, respectively).
Retain Hold rating: At this point, regulatory headwinds remain a bugbear, while RPM increase is yet to materialise. Africa growth has undoubtedly been below expectations and we expect this to be a headwind for FY14 revenue growth. Data growth is a bright spot. Current valuation, at 5x FY15E EV-EBITDA is not too demanding. However, regulatory headwinds are likely to limit any significant upside. We have introduced our FY15E numbers. We have retained our Hold rating on BAL with a revised TP of Rs344 (Rs308 earlier), rolling over to FY15E EV-EBITDA valuation.
Buy United Phosphorus For Target Rs.170 

Concerns overdone, CMP factors in all negatives: United Phosphorus (UPL) continues to trade at ~50% discount to peers due to investor concerns related to piling up of debt, further deterioration in working capital, margin dilutive acquisitions and decline in return ratios. However, we believe, concerns are overdone and CMP factors in all negatives. We would like to highlight that despite decline in return ratios from their peak, current RoE/RoA at 16.4%/6.1% are significantly higher than the global generic players, Nufarm & Makhteshim‐ Agan (MAI).
* Working capital unlikely to deteriorate further: Despite increasing contribution from Brazil which has longer credit cycles, we do not expect working capital to deteriorate further. On the contrary, we have modelled for working capital improvement of three days over the next two years to 143/142 in FY14E/FY15E. We believe there is room for improvement in inventory/receivables across multiple geographies as unfavourable weather conditions this year have resulted in piling up of inventory and longer credit days. However, rebound in these markets over the next two years would result in marginal improvement of working capital.
*  Earnings growth, combined with improvement in return ratios, to trigger re‐rating: UPL’s higher exposure to emerging markets positions it well to deliver sustainable revenue growth over the medium term. EBITDA margins are likely to improve by 60bps over the next two years, driven by a turnaround in DVA(expect DVA to contribute 20-30 bps of improvement), significant cost savings initiatives and shift in product mix. We expect UPL to register 12.5%/14.1% CAGR in Revenue/PAT over FY12-15E. RoE/ROCEs are likely to improve ~150bps
to 17.8%/12.6% from FY13E-FY15E. With sustainable earnings growth and improvement in return ratios, stock is likely to get re-rated. We value UPL at 9x FY14 earnings and recommend ‘BUY’ with target of Rs 170 (43% upside to CMP).