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Bharti Airtel: A good quarter - Views on News from Equitymaster

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Bharti Airtel: A good quarter
Jan 29, 2014 | Updated on Jan 31, 2014

Bharti Airtel has declared results for the third quarter (3QFY14) for the financial year 2013-14. The company has reported a 13.3% YoY increase in total revenues and a 114.6% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 13.3% YoY during the third quarter of the financial year 2013-2014 (3QFY14). For the nine months ended December 2013 (9MFY14), revenues were up by 10.8% YoY.
  • Mobile subscriber base in India grew by 9% YoY during the quarter. Total count of subscribers stood at around 198.5 m at the end of December 2013. Total subscriber base on the network (including South Asia and African operations) grew by 9.6% YoY during the quarter.
  • Operating margins improved by 2.4% YoY to 32.2% during the quarter. For 9MFY14, operating margins increased to 32.1% from 29.9% seen during the same period last year.
  • The net profit increased by 114.6% YoY. For 9MFY14, net profits were up by 2.5% YoY.

Consolidated financial performance snapshot (IFRS)
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 193,624 219,385 13.3% 573,224 635,268 10.8%
Expenditure 136,009 148,673 9.3% 401,572 431,326 7.4%
Operating profit (EBDIT) 57,615 70,712 22.7% 171,652 203,942 18.8%
Operating profit margin (%) 29.8% 32.2%   29.9% 32.1%  
Other income 1,003 2,700 169.2% 3,746 5,081 35.6%
Interest expense/(income) 13,177 13,160 -0.1% 32,349 42,788 32.3%
Depreciation 37,351 39,188 4.9% 110,144 117,052 6.3%
Share of (loss)/gain in associates 943 1,064 12.8% 2,631 3,538 34.5%
Exceptional items - 674   - 2,107  
Profit before tax 9,033 22,802 152.4% 35,536 54,828 54.3%
Tax 6,190 16,569 167.7% 17,929 34,887 94.6%
Profit after tax/(loss) 2,843 6,233 119.2% 17,607 19,941 13.3%
Minority interest 3 131   (65) 1,830  
Net profit 2,840 6,102 114.6% 17,672 18,111 2.5%
Net profit margin (%) 1.5% 2.8%   3.1% 2.9%  
No. of shares         3997.4  
Diluted Earnings per share (Rs)*         5.8  
P/E ratio (x)*         53.1  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 3QFY14?
  • Bharti reported a revenue growth of 13.3% YoY during the quarter. This was achieved by growth in the revenues from most of its segments. Revenues from mobile services (including South Asia and African operations), increased by 10% YoY. The tele-media services segment recorded a decent growth of 10.4% YoY. Revenues from the B2B services and digital TV business (DTH) witnessed a robust growth of 13.9% YoY and 25.8% YoY respectively. The passive infrastructure service segment however witnessed a fall in revenues of 1.2% YoY during the quarter. However this should be viewed in light of the lower IRU revenues this quarter following the merger of Bharti Infratel Ventures Ltd (BIVL) with Indus Towers that had taken place in 1QFY14.

  • Coming to the key parameters relating to the company's mobile service business in India, the average revenue per user (ARPU) increased to Rs 195 per user per month. The same figure stood at Rs 185 during 3QFY13 and at Rs 192 during 2QFY14. The minutes of usage (MoU) declined sequentially to 434 minutes per subscriber per month in 3QFY14 from 437 in 2QFY14. The same figure for the corresponding quarter last year stood at 435. During 3QFY14, the voice realization per minute increased by 6% YoY to 37.13 paisa as against 35.17 paisa in 3QFY13. On a sequential basis the growth was 1% QoQ.

  • The growth continued on the data front in 3QFY14. The data ARPU and usage increased by 59% YoY and 54% YoY respectively. On a sequential basis, the growth in ARPU and usage was 7% QoQ and 8% QoQ respectively.

  • The tele-media services segment reported a 10.4% YoY increase in revenues during the quarter. However, there was a fall in EBITDA in this quarter by 4.3% in this segment.

  • The international operations witnessed a growth of 18.5% YoY. The EBITDA margins for the business however fell slightly to 24.7% from 25.2% in 3QFY13.

  • Voice ARPU for the African business declined by 12% YoY to US$ 4.7. On a sequential basis, ARPU was flat. The voice usage too was largely flat on a QoQ and on a YoY basis. Data ARPU increased by 39% YoY while usage too went up by 69% YoY. The management has expressed that they expect growth to continue in Africa even at stable tariffs. This would be largely driven by the new value added revenue streams as well as by Airtel Money that has been successfully launched.

    Segment-wise performance*
    Mobile Services-India 3QFY13 3QFY14 Change
    Revenue (Rs m) 106,994 116,446 8.8%
    % of total revenues 55.3% 53.1%  
    Minutes billed (m) 240,814 255,030 5.9%
    Voice realization per min (Rs) 0.35 0.37 5.6%
    Data realization per mb (Rs) 0.29 0.30 2.8%
    EBITDA margin 29.2% 34.1%  
    EBITDA per minute (Rs) 0.13 0.16 20.2%
    Telemedia Services
    Revenue (Rs m) 8,938 9,869 10.4%
    % of total revenues 4.6% 4.5%  
    Minutes billed (m) 4,209 4,075 -3.2%
    Revenue per minute (Rs) 2.12 2.42 14.0%
    EBITDA margin 41.8% 36.2%  
    EBITDA per minute (Rs) 0.89 0.88 -1.2%
    B2B (Formerly Enterprise Services)
    Revenue (Rs m) 14,219 16,195 13.9%
    % of total revenues 7.3% 7.4%  
    Minutes billed (m) 27,519 30,916 12.3%
    Revenue per minute (Rs) 0.52 0.52 1.4%
    EBITDA margin 15.1% 25.6%  
    EBITDA per minute (Rs) 0.08 0.13 71.0%
    Passive Infra. Services
    Revenue (Rs m) 12,745 12,592 -1.2%
    % of total revenues 6.6% 5.7%  
    EBITDA margin 44.5% 42.4%  
    DTH (Direct to Home)
    Revenue (Rs m) 4,280 5,384 25.8%
    % of total revenues 2.2% 2.5%  
    EBITDA margin 3.4% 18.0%  
    International operations (Africa & South Asia)
    Revenue (Rs m) 64,775 76,763 18.5%
    % of total revenues 33.5% 35.0%  
    EBITDA margin 25.2% 24.7%  
    Others (India )
    Revenue (Rs m) 729 707 -3.0%
    % of total revenues 0.4% 0.3%  
    EBITDA (Rs) (481) (610)  

  • Bharti's operating margins stood at 32.2% during 3QFY14, which was higher than the 29.8% seen during the same period last year. This was largely on account of the savings in access charges and SG&A expenses as percentage of sales.

    Cost Breakdown
    Cost Breakdown 3QFY13 As % of sales 3QFY14 As % of sales
    Access charges 19,622 10.1% 17,613 8.0%
    Licence fee & Spectrum charges 13,486 7.0% 15,342 7.0%
    Network operation 32,634 16.9% 36,429 16.6%
    Employee 4,886 2.5% 5,529 2.5%
    SG&A 19,031 9.8% 17,879 8.1%
    Total exp. 89,659   92,792  

  • Net profits (after minority interest) increased by 114.9% YoY during the quarter. The positive movement in the operating margins was aided by a marginal fall in interest costs during the quarter.
What to expect?
At the current price of Rs 308, the stock is trading at a multiple of 53.1 times its trailing twelve months earnings.

The company's performance continued to improve in 3QFY14. The clamp down on free minutes as well as several promotional offers has had a positive effect on realized rates. The management has stated that the sequential fall in minutes of usage was also as a result of this. They expect usage to pick up in the coming quarters. Keeping this in mind the company has no plans for increasing tariffs.

The management sounded cautious on the regulatory situation in the country and dubbed it to be dynamic. They stated that as the largest player in the country, even small changes in regulations could have a big effect on the company. However, in light of the recent improvement in the regulatory structure, they said that they were hopeful of further clarity on important regulatory issues.

The management re-iterated their strategy to be among the top two players in each of the 17 markets in the African continent. They stated that they had already achieved this in 14 markets and sounded confident about achieving the same in the other 3 markets as well. The strategy in Africa will involve growing volumes with stable pricing led by data services. The company's data services like Airtel Money have been well received in Africa as per the management. Airtel Money has helped to reach out to the large unbanked population in Africa and the management stated that transaction volumes were growing at an exponential rate although from a very low base.

The management was hopeful of growth coming in from 3G data services in Bangladesh as well. The management expects the high growth in data services from all geographies to continue for the foreseeable future.

The fundamentals of the company continue to improve every quarter. As the regulatory overhang over the sector steadily clears, Bharti will be one of the big beneficiaries. Also in the long term Bharti is best poised to reap returns in the event of consolidation in the Indian telecom sector. We had recommended investors to 'Buy' the stock in November 2013. We maintain the same view. However we reiterate that investors need to understand that the risk profile of the company is unusually higher than in the case of most blue chip stocks due to the high regulatory and operational risk.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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