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Bharti Airtel: Interest & taxes sting
Feb 1, 2013

Bharti Airtel declared the results for the third quarter (3QFY13) for the financial year 2012-13. The company has reported a 9.4% YoY increase in total revenues but a 71.9% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 9.4% YoY during the third quarter of the financial year 2012-2013(3QFY13). For the nine months ended December 2012 (9MFY13), consolidated net sales increased by 13.5% YoY.
  • Mobile subscriber base in India grew by 4% YoY during the quarter. Total count of subscribers stood at around 181.9 m at the end of December 2012. Total subscriber base on the network (including Asia and African operations) grew by 4% YoY during the quarter.
  • Operating margins dipped by 1.7% YoY to 30.5% during the quarter. For 9MFY13, operating margins declined to 30.7% from 33.1% seen during the same period last year.
  • Lower operating margins coupled with higher interest costs led net profits to decline by 71.9% YoY during the quarter. Profits were also impacted negatively by the increase in tax outflow during the quarter.

Consolidated financial performance snapshot (IFRS)
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Sales 185,078 202,537 9.4% 527,670 598,986 13.5%
Expenditure 125,494 140,698 12.1% 352,876 415,152 17.6%
Operating profit (EBDIT) 59,584 61,839 3.8% 174,794 183,834 5.2%
Operating profit margin (%) 32.2% 30.5%   33.1% 30.7%  
Other income - -   - -  
Interest expense/(income) 7,877 13,319 69.1% 27,613 31,749 15.0%
Depreciation 35,845 39,005 8.8% 98,998 115,136 16.3%
Share of (loss)/gain in associates (56) -   (56) (76)  
Exceptional items - -   - -  
Profit before tax 15,806 9,515 -39.8% 48,127 36,873 -23.4%
Tax 5,585 6,675 19.5% 15,626 19,267 23.3%
Profit after tax/(loss) 10,221 2,840 -72.2% 32,501 17,606 -45.8%
Minority interest (108) (3)   34 65  
Net profit 10,113 2,837 -71.9% 32,535 17,671 -45.7%
Net profit margin (%) 5.5% 1.4%   6.2% 3.0%  
No. of shares       3,797.5 3,797.5  
Diluted Earnings per share (Rs)*         7.30  
P/E ratio (x)*         46.3  
*based on trailing 12 months earnings

What has driven the performance in 3QFY13?
  • Bharti reported a revenue growth of 9.4% YoY during the quarter. This was achieved by growth in the revenues from all segments. Revenues from mobile services (including African operations), increased by 10.1% YoY. The tele-media services segment recorded a tepid growth of 4.8% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 19.7% YoY and 8% YoY respectively. The company's digital TV business (DTH) reported a growth of 28.7% YoY during the quarter. The other operating revenues also witnessed a growth of 17.4% YoY during the quarter.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) stood at Rs 185 per user per month. The same figure stood at Rs 187 during 3QFY12 and at Rs 177 during 2QFY13. During 3QFY13, the average revenue per minute (ARPM) stood at 42.5 paisa as against 44.6 paisa and 42.6 paisa during 3QFY12 and 2QFY13 respectively. The minutes of usage (MoU) increased sequentially to 435 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 417 and 419 respectively.

  • The telemedia services segment reported a 4.8% YoY increase in revenues during the quarter. This was driven by the 10.8% YoY increase in the average realized rate per minute which was offset to some extent by the 5.4% YoY decline in the number of minutes billed.

    Segment-wise performance*
      3QFY12 3QFY13 Change
    Mobile Services-India & South Asia
    Revenue (Rs m) 101,764 109,364 7.5%
    % of total revenues 55.0% 54.0%  
    Minutes billed (m) 227,115 250,044 10.1%
    Revenue per minute (Rs) 0.45 0.44 -2.4%
    EBITDA margin 33.8% 30.3%  
    EBITDA per minute (Rs) 0.15 0.13 -12.7%
    Mobile Services-Africa
    Revenue (Rs m) 53,577 61,694 15.2%
    % of total revenues 28.9% 30.5%  
    Minutes billed (m) 18,496 26,174 41.5%
    Revenue per minute (Rs) 2.90 2.36 -18.6%
    EBITDA margin 26.7% 26.5%  
    EBITDA per minute (Rs) 0.77 0.62 -19.2%
    Telemedia Services
    Revenue (Rs m) 9,128 9,566 4.8%
    % of total revenues 4.9% 4.7%  
    Minutes billed (m) 4,186 3,958 -5.4%
    Revenue per minute (Rs) 2.18 2.42 10.8%
    EBITDA margin 38.8% 43.5%  
    EBITDA per minute (Rs) 0.85 1.05 24.4%
    B2B (Formerly nterprise Services)
    Revenue (Rs m) 11,881 14,219 19.7%
    % of total revenues 6.4% 7.0%  
    Minutes billed (m) 24,080 27,519 14.3%
    Revenue per minute (Rs) 0.49 0.52 4.7%
    EBITDA margin 16.9% 16.2%  
    EBITDA per minute (Rs) 0.08 0.08 0.1%
    Passive Infra. Services
    Revenue (Rs m) 24,393 26,350 8.0%
    % of total revenues 13.2% 13.0%  
    EBITDA margin 37.3% 37.0%  
    DTH (Direct to Home)
    Revenue (Rs m) 3,327 4,280 28.6%
    % of total revenues 1.8% 2.1%  
    EBITDA margin 2.7% 3.4%  
    Others (India & South Asia)
    Revenue (Rs m) 666 782 17.4%
    % of total revenues 0.4% 0.4%  
    EBITDA (Rs) (3,139) (3,010)  
    * As per IFRS numbers.
    Excluding inter-segment eliminations and other revenue from Africa

  • Bharti's operating margins stood at 30.5% during 3QFY13, which was lower than the 32.2% seen during the same period last year. This was largely on account of higher access charges as well as higher network operating costs and employee costs. This offset the decline in selling, general and administrative expenses during the quarter (all as percentage of sales).

  • Effective tax rates shot up substantially during the quarter. This had a onetime impact of de-recognition of a deferred tax asset in one of the African countries. This onetime adjustment amounted to Rs 600 m during the quarter.

  • Net profits (after minority interest) declined by 71.9% YoY during the quarter. This was on account of lower operating margins during the quarter. Profits were also negatively impacted by the higher interest costs as well as higher tax rates.

  • The debt equity ratio stood at 1.43 times at the end of December 2012 as compared to 1.36 times at the end of March 2012 and 1.43 times at the end of September 2012.

What to expect?
At the current price of Rs 338, the stock is trading at a multiple of 46.3 times its trailing twelve months earnings.

The company's performance has continued to languish in the current quarter as well. As per the management this was on account of two reasons. First the hyper competition coupled with increasing costs continue to hurt the business back home. The Indian markets have seen saturation in recent times. With most operators withdrawing free benefits, subscribers have been surrendering their multiple mobile connections. This has led to a decline in overall telecom subscriber base in the country and has hurt all operators including Bharti. The second was the extended time in African operations panning out. The management had earlier expected African operations to pan out at a much faster tick. But it appears to be taking time.

The operators have been stressing on the need for tariff increases. As per the management of Bharti there is a huge gap between the headline tariff (published rates) and what is actually realized by the operators. This gap needs to be bridged for the long term sustainability of the companies. Bharti has undertaken tariff hikes very recently. The management expects this to have a positive impact in the coming months. It is important to note that though this hike will help reduce the gap a bit, it will however not eliminate the same.

Though the company has seen a decent traction on the data side however data growth in the country is still at a nascent stage. The management continues to remain optimistic that data would be the long term driver for the company and the industry as a whole. This would be particularly pronounced in Africa where data off take is much higher as compared to India. In lines with this it has already invested heavily on the data front. The benefits of this would be visible in the time to come.

We believe that the current headwinds that the company and the sector as a whole are facing would continue to mar operational performance in the short term. But they should clear up in the long term. In fact Bharti is best poised to reap returns in the event of consolidation in the Indian telecom markets.

At current prices, we find that the stock still offers considerable upside for the next 2 to 3 years. Therefore, we continue to maintain our 'Buy' view on the company.

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