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Bharti Infratel: A rise in profitability - Views on News from Equitymaster

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Bharti Infratel: A rise in profitability
Jan 23, 2014

Bharti Infratel has declared its results for the third quarter (3QFY14) for the financial year 2013-14. The company has reported a 4% YoY increase in total revenues and a 61.6% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 4% YoY during the third quarter of the financial year 2013-2014 (3QFY14). For the nine months ended September 2013 (9MFY14), net sales increased by 5.8% YoY.
  • The operating margin improved from 37.9% in 3QFY13 to 41.3% in 3QFY14. For 9MFY14, the operating margin increased by 3.5% YoY to 40.5%. The operating profit increased by 13.3% YoY.
  • The higher operating profit coupled with lower depreciation charges and lower interest costs led the net profit to increase by 61.6% YoY during the quarter. For 9MFY14, net profits increased by 46.2% YoY.
  • Total towers on a consolidated basis stood at 82,813 at the end of the quarter. Total co-locations stood at 163,370. Average sharing factor improved by 2.1% YoY. However sharing revenue per tower declined by 0.6% YoY during the quarter.

(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 26,264 27,311 4.0% 75,984 80,368 5.8%
Expenditure 16,309 16,028 -1.7% 47,866 47,833 -0.1%
Operating profit (EBDIT) 9,955 11,283 13.3% 28,118 32,535 15.7%
Operating profit margin (%) 37.9% 41.3%   37.0% 40.5%  
Other income 630 917 45.6% 1,892 3,042 60.8%
Interest expense/(income) 996 792 -20.5% 2,877 3,171 10.2%
Depreciation 5,820 5,252 -9.8% 16,544 16,166 -2.3%
Exceptional items - -   - -  
Profit before tax 3,769 6,156 63.3% 10,589 16,240 53.4%
Tax 1,228 2,051 67.0% 3,437 5,785 68.3%
Profit after tax/(loss) 2,541 4,105 61.6% 7,152 10,455 46.2%
Net profit margin (%) 9.7% 15.0%   9.4% 13.0%  
No. of shares         1,889  
Diluted Earnings per share (Rs)*         7.1  
P/E ratio (x)*         24.4  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 3QFY14?
  • Bharti Infratel reported a revenue growth of 4% YoY during the quarter. This was achieved by the growth in number of towers as well as an improvement in the tenancy ratio during the quarter.

  • The average sharing factor (or tenancy ratio) improved to 1.96 in 3QFY14 as compared to 1.92 in 3QFY13. Even on a sequential basis, the factor saw an increase as it had stood at 1.93 in 2QFY14. The sharing revenue per tower as well as the sharing revenue per sharing customer declined by 0.6% YoY and 2.6% YoY respectively. The reason for this was the merger of Bharti Infratel Ventures Ltd with Indus Towers which was completed in 2QFY14. Due to this, the IRU (Indefeasible Right to Use) agreement between Bharti Infratel Ventures Ltd and Indus has ceased to exist.

    Key Indicators (consolidated)
      3QFY13 3QFY14 YoY Change 2QFY14 QoQ Change
    Total Towers (Nos.) 81,389 82,813 1.7% 82,476 0.4%
    Total Co-locations (Nos.) 156,336 163,370 4.5%   159,997 2.1%
    Average sharing factor  1.92 1.96 2.1%    1.93 1.6%
    Sharing revenue per tower per month (Rs) 67,136 66,760 -0.6% 65,608 1.8%
    Sharing revenue per sharing operator (Rs) 35,022 34,124 -2.6% 33,996 0.4%

  • The net profit saw a big jump of 61.6% YoY during the quarter. The higher operating profit, lower depreciation charges as well as a big increase in other income helped the growth at the bottom line level.
What to expect?
At the current price of Rs 172, the stock is trading at a multiple of 24.4 times its trailing twelve months earnings.

The company had a good all around performance in this quarter. In the conference call, the management remained positive on the 3G rollout by large telcos. They also stated that data continued to be the big driver for the sector. They said that data usage was rising at rate over 100% YoY.

The company has tied up with Reliance Jio for a comprehensive infrastructure sharing. This would include not just telecom towers but also long range fiber-optic networks, submarine cable networks and internet broadband services.

The company has made a change to its dividend policy. Earlier the dividend payout was 40-60% of the post capex net profit (including dividend tax). Now it has been changed to 60-80% of the post capex net profit (excluding dividend tax). This would result in the company paying out almost its entire bottomline as dividend.

The management has maintained its capex guidance for the rest of the financial year at Rs 14-15 bn. The company has spent about Rs 9.6 bn on capex so far this year.

The scenario is certainly improving for the company from an operational point of view. However the company still faces serious regulatory risks. Therefore we still believe that the risk reward ratio is skewed for the company. Also the stock is not available at a reasonable valuation. Keeping in mind all these factors we continue to maintain our ‘Sell' view on the stock.

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