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Bharti Airtel: Defying slowdown - Views on News from Equitymaster
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Bharti Airtel: Defying slowdown
Jan 22, 2009

Performance summary
  • Consolidated sales grow by 39% YoY during 3QFY09, 42% YoY during 9mFY09. Growth led by a strong 55% YoY rise in the mobile subscriber base, which crossed the 85 m mark by the end of December 2008.
  • Achieves highest ever net addition of 8.3 m subscribers in a single quarter.
  • Mobile services revenue grow by 41% YoY during the quarter, aided by a 7% YoY rise in minutes of usage. Average revenue per user declines by 9% YoY.
  • Operating margins contract by 1.7% YoY during the quarter owing to higher network operating costs (as percentage of sales), seemingly on the back of higher import costs of network equipments due to rupee’s depreciation against the US dollar.
  • Net profits grow by 38% YoY during the quarter and 29% YoY during the nine-month period.


Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 69,501 96,674 39.1% 191,486 270,969 41.5%
Expenditure 40,448 57,915 43.2% 111,868 161,575 44.4%
Operating profit (EBDIT) 29,053 38,759 33.4% 79,618 109,395 37.4%
Operating profit margin (%) 41.8% 40.1%   41.6% 40.4%  
Other income 678 211 -68.8% 2,133 1,119 -47.6%
Interest expense/(income) 4,961 4,576 -7.8% 2,234 14,626 554.8%
Depreciation 9,862 12,488 26.6% 26,564 33,481 26.0%
Profit before tax 14,909 21,906 46.9% 52,954 62,406 17.9%
Minority interest 209 471 125.8% 588 1,369 132.9%
Tax 415 1,671 303.2% 7,400 2,925 -60.5%
Profit after tax/(loss) 14,286 19,764 38.3% 44,965 58,112 29.2%
Net profit margin (%) 20.6% 20.4%   23.5% 21.4%  
No. of shares       1,897.7 1,898.0  
Diluted Earnings per share (Rs)*         40.6  
P/E ratio (x)*         15.0  
* On a trailing 12 months basis

What has driven growth in 3QFY09?
  • Bharti grew its net sales by 39% YoY during 3QFY09. Its mobile services business grew sales by 41% YoY. While this seems good on the face of it, it is the slowest the company has recorded over the past many quarters. Growth of this segment was impacted by a decline in average revenue per user (ARPU) while the average minutes of usage (MoU) also did not show a stellar performance. While the ARPU declined 9% YoY, the MoU increased by 7% YoY. The management has clarified that the decline in MoU has been on account of its own initiatives of clearing out unprofitable subscribers. Importantly, Bharti has recorded a consistent rise in its net additions per month over the past two years. On the other hand, the subscribers on Bharti’s network are also talking more. At the end of December 2008, Bharti held 24.7% share of India’s mobile services market (in terms of subscribers).

    Segment-wise performance*
      3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Mobile Services            
    Revenue (Rs m) 56,501 79,560 40.8% 154,377 221,759 43.6%
    % of total revenues 71.9% 64.5%   71.5% 64.1%  
    Minutes billed (m) 73,840 123,626 67.4% 195,340 344,677 76.4%
    Revenue per minute (Rs) 0.77 0.64 -15.9% 0.79 0.64 -18.6%
    Profit margin (EBIT) 27.2% 23.3%   27.5% 22.5%  
    Profit per minute (Rs) 0.21 0.15 -28.1% 0.22 0.15 -33.2%
    Telemedia Services#            
    Revenue (Rs m) 7,299 8,424 15.4% 20,959 24,833 18.5%
    % of total revenues 9.3% 6.8%   9.7% 7.2%  
    Minutes billed (m) 4,604 4,750 3.2% 13,653 14,594 6.9%
    Revenue per minute (Rs) 1.59 1.77 11.9% 1.54 1.70 10.8%
    Profit margin (EBIT) 21.8% 23.6%   20.0% 25.0%  
    Profit per minute (Rs) 0.34 0.42 21.2% 0.31 0.43 38.4%
    Long Distance Services            
    Revenue (Rs m) 11,421 17,785 55.7% 31,189 50,614 62.3%
    % of total revenues 14.5% 14.4%   14.4% 14.6%  
    Minutes billed (m) 9,489 14,212 49.8% 24,707 40,215 62.8%
    Revenue per minute (Rs) 1.20 1.25 4.0% 1.26 1.26 -0.3%
    Profit margin (EBIT) 23.7% 38.4%   26.4% 37.5%  
    Profit per minute (Rs) 0.29 0.48 68.6% 0.33 0.47 41.7%
    Enterprise Services            
    Revenue (Rs m) 3,343 4,072 21.8% 9,509 12,242 28.7%
    % of total revenues 4.3% 3.3%   4.4% 3.5%  
    Profit margin (EBIT) 36.5% 33.0%   35.0% 34.9%  
    Passive Infra. Services^            
    Revenue (Rs m) NA 13,498 NA NA 36,335 NA
    % of total revenues NA 10.9%   NA 10.5%  
    Profit margin (EBIT) NA 2.9%   NA 8.1%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations and other revenue
    # Broadband & Telephone services
    ^ Share of revenue in the demerged tower subsidiary - Bharti Infratel Ltd.

    The other services lines of the company – Broadband & Telephone Services (these have been renamed as Telemedia Services, given the company’s foray into IPTV and DTH spaces), Long Distance Services (LDS) and Enterprise Services (ES) – also reported decent growth during the fiscal, with their sales growing by 15% YoY, 56% YoY and 22% YoY respectively. Revenue from the telecom tower subsidiary (Bharti Infratel) formed 11% of the company’s consolidated revenue during the quarter.

  • Bharti recorded a 1.7% YoY decline in its operating margins during 3QFY09. This was on account of higher network operating costs (as percentage of sales) that the company incurred during the quarter. These costs increased from 12.6% of sales in 3QFY08 to 16.5% in 3QFY09. The sharp rise in these costs was seemingly on the back of higher import costs of network equipments due to rupee’s depreciation against the US dollar. Based on business segments, the mobile services segment recorded the worst performance as its EBIT margins declined from 27.2% in 3QFY08 to 23.3% in 3QFY09.

  • Bharti’s net profits recorded a trong 38% YoY growth during the third quarter. This came very much in line with its topline growth. The growth in profits would have been higher but for a 300% rise in tax payments.

What to expect?
    At the current price of Rs 620, the stock is trading at a multiple of 8.8 times our estimated FY11 earnings. Bharti’s 9mFY09 performance has been fairly in line with our estimates. On Reliance’s aggressive stance with respect to its GSM business, Bharti’s management is of the belief that it is a ‘self destruction mechanism’ considering its unsustainability. “No free models are sustainable,” said one senior member of the management team during the conference call. It believes once the free trial period is over, Reliance’s subscribers will lower their usage.

    Overall, this has been yet another quarter of stable and strong performance from Bharti. As such we maintain our view on the company from a 2 to 3 years perspective.

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