Bharti Airtel

Bharti's 1Q09 headline results were significantly ahead of our estimates; however, the outperformance was largely in its non-mobile business and from one-time factors. Operationally, the showcase was continued pick-up in demand elasticity post a cut in STD tariff, in line with our near-term view. We retain our view of a modest pace of margin decline over the medium term, despite the consolidated EBITDA margin being flat qoq vs our expectation of an increase. We expect consensus estimates to move up, given the 1Q09 outperformance and management's guiding for lower effective tax rates. We retain the stock as our only Buy idea in the sector.

1Q09 results – Key highlights
Financials
Consolidated revenues at Rs84.8bn were up 8.5% qoq (vs our estimates of Rs81.3bn). Among the segments, the mobile business grew broadly in line at 7.7% qoq to Rs 69.2bn. Alignment of tariff in the carrier business to market rates drove segmental revenues 25% qoq; but the impact going forward may be limited as 90% of the business is captive. Revenues in the tower business were ahead of our estimates by 10%; however, the increase was mainly due to a pick-up in the pass-through power and fuel charges.

The consolidated EBITDA margin was flat qoq at 41.5% (vs our estimates of a 50bp expansion). The margin in the mobile business was down 4.8% qoq due to three factors: a) higher access charges for the business as tariffs in the carrier business were aligned with market rates; b) increase in the pass-through charges for passive infrastructure due to higher power and fuel charges; and c) an uptick in the pre-paid subscriber share that has higher upfront costs.

Net profit at Rs20.2bn, up 9.3% qoq, was significantly ahead of our estimates, driven by onetime gains (mainly insurance claims payment) in other income and lower effective tax rate.