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Bharti Airtel: Interest costs drag down profits
Feb 2, 2011

Bharti Airtel has announced its 3QFY11 results. It is important to note that this quarter’s results include the consolidated operations of Zain Africa, which was not there last year. Therefore, we believe that doing a quarter on quarter comparison of results would be more meaningful. The company has reported around 4% QoQ growth in sales and a 22% QoQ decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 4% QoQ during 3QFY11.
  • Mobile subscriber base in India grew by 6% QoQ during the quarter. Total count of subscribers stood at around 152 m at the end of December 2010. Total subscriber base on the network (including Asia and African operations) grew by 7% QoQ during the quarter.
  • Operating margins declined by 2% QoQ during the quarter owing to higher selling and marketing expenses (as percentage of sales). The selling expenses included one-time re-branding expenses of Rs 3.3 bn. Excluding these, operating margins actually improved marginally by 0.1% QoQ.
  • Net profit declined by around 22% QoQ during the quarter. This was on account of lower operating margins as well as higher depreciation and interest charges.

Consolidated financial performance snapshot (IFRS)
(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 152,150 157,560 3.6% 310,981 432,018 38.9%
Expenditure 100,941 107,746 6.7% 184,357 286,106 55.2%
Operating profit (EBDIT) 51,209 49,814 -2.7% 126,624 145,912 15.2%
Operating profit margin (%) 33.7% 31.6% -2.0% 40.7% 33.8%  
Other income 169 258 52.7% 483 958 98.3%
Interest expense/(income) 3,319 7,470   534 14,987  
Depreciation 25,790 27,107 5.1% 45,879 72,364 57.7%
Share of loss/(gain) in associates (2) -   (16) (56)  
Exceptional items - -   - (982)  
Profit before tax 22,267 15,495 -30.4% 80,678 58,481 -27.5%
Tax 5,678 3,366 -40.7% 10,038 12,794 27.5%
Profit after tax/(loss) 16,589 12,129 -26.9% 70,640 45,687 -35.3%
Minority interest 23 904   (1,317) 774 -158.8%
Net profit 16,612 13,033 -21.5% 69,323 46,461 -33.0%
Net profit margin (%) 10.9% 8.3%   22.3% 10.8%  
No. of shares 3,797.5 3,797.9   3,797.1 3,797.9  
Diluted Earnings per share (Rs)*         18.13  
P/E ratio (x)*         17.8  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 3QFY11?
  • Bharti reported a revenue growth of around 4% QoQ during the quarter. This was achieved by growth in the revenues from mobile services (including African operations), which increased by 4% QoQ growth. Revenues from the passive infrastructure services segment also grew by around 4% QoQ during the quarter. This offset the decline of 0.5% QoQ in the revenues from the telemedia services as well as the muted growth of 0.8% QoQ in the enterprises services segment.

  • Coming to the key parameters relating to the company’s mobile service business, the average revenue per user (ARPU) stood at about Rs 198 per user per month. The same figure stood at Rs 230 during 3QFY10 and at Rs 202 during 2QFY11. During 3QFY11, the average revenue per minute (ARPM) stood at 44.2 paisa as against 44.4 paisa and 52 paisa during 2QFY11 and 3QFY10 respectively. The minutes of usage (MoU) continued their downward trend and ended at 449 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 454 and 446 respectively.

    While the ARPU and ARPM continued to decline, the rate of decline has come down as operators are no longer trying to aggressively slash tariffs to gain market share. The decline in MOU, however, continues to be a concern as it indicates that new operators are most probably capturing a larger pie of minutes.

    Segment-wise performance*
      2QFY11 3QFY11 Change
    Mobile Services-India & South Asia      
    Revenue (Rs m) 88,045 91,459 3.9%
    % of total revenues 67.2% 67.4%
    Minutes billed (m) 196,196 205,018 4.5%
    Revenue per minute (Rs) 0.45 0.45 -0.6%
    EBITDA (Rs) 30,964 31,689 2.3%
    EBITDA margin 35.2% 34.6%  
    EBITDA per minute (Rs) 0.16 0.15 -2.1%
    Mobile Services-Africa      
    Revenue (Rs m) 38,906 40,530 4.2%
    % of total revenues 38.5% 37.6%
    Minutes billed (m) 12,782 14,904 16.6%
    Revenue per minute (Rs) 3.04 2.72 -10.7%
    EBITDA (Rs) 9,311 8,435 -9.4%
    EBITDA margin 23.9% 20.8%  
    EBITDA per minute (Rs) 0.73 0.57 -22.3%
    Telemedia Services      
    Revenue (Rs m) 9,118 9,068 -0.5%
    % of total revenues 7.0% 6.7%
    Minutes billed (m) 4,791 4,598 -4.0%
    Revenue per minute (Rs) 1.90 1.97 3.6%
    EBITDA (Rs) 4,200 4,045 -3.7%
    EBITDA margin 46.1% 44.6%  
    EBITDA per minute (Rs) 0.88 0.88 0.4%
    Enterprise Services      
    Revenue (Rs m) 10,424 10,503 0.8%
    % of total revenues 8.0% 7.7%
    Minutes billed (m) 20,723 21,255 2.6%
    Revenue per minute (Rs) 0.50 0.49 -1.8%
    EBITDA (Rs) 2,571 2,260 -12.1%
    EBITDA margin 24.7% 21.5%  
    EBITDA per minute (Rs) 0.12 0.11 -14.3%
    Passive Infra. Services      
    Revenue (Rs m) 21,161 21,972 3.8%
    % of total revenues 16.2% 16.2%  
    EBITDA (Rs) 7,858 8,486 8.0%
    EBITDA margin 37.1% 38.6%  
    Others      
    Revenue (Rs m) 2,260 2,793 23.6%
    % of total revenues 1.7% 2.1%  
    EBITDA (Rs) (2,714) (3,733)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • The telemedia services segment reported a decline of 0.5% QoQ during the quarter. The enterprise segment on the other hand witnessed a growth of 0.8% QoQ during the quarter as the total number of minutes billed during the quarter saw a decline of 4% QoQ. This offset the 3.6% QoQ improvement in the average realized rate per minute.

  • Bharti’s operating margins stood at 31.6% during 3QFY11, as compared to 33.7% in 2QFY11. This 2% QoQ decline in margins was mainly due to higher selling and administration related expenses (as percentage of sales). The selling expenses included a onetime rebranding expense of Rs 3.3 bn. Excluding this, the operating margins improved marginally by 0.1% QoQ during the quarter.

  • Profits declined by 21.5% QoQ during the quarter. This was mainly on account of lower operating margins as well as higher depreciation and interest related costs. Interest costs have almost doubled from the level of last quarter. This was due to the debt taken to fund the African operations as well as the 3G and BWA related expense. The company has paid off about Rs 20 bn of debt during the quarter. The debt equity ratio stood at 1.3 at the end of December 2010 as compared to 1.4 at the end of the previous quarter (2QFY11)

What to expect?
At the current price of Rs 323, the stock is trading at a multiple of 11.4 times our estimated FY13 earnings (Research Pro subscribers please click here).

The management views MNP (mobile number portability) as an opportunity for the company. It has seen positive signs in the early days of MNP launch. However, it has stated that it would be reviewing the revenue profile of the customers who are signing up for Airtel under MNP. The company is also upbeat about the MNP opportunity in Africa. Kenya would be the first market where MNP would be launched in April. It is also being seriously discussed in three other markets that include Nigeria, Ghana and Uganda.

The company has paid back debt that was largely related to the 3G fees. The management expects to continue paying back debt in the coming quarters. The company also sees 3G as a major opportunity. The management expects 3G to be a major growth driver as it would lead to an increase in data related revenues as well as decongestion of the 2G networks.

With regards to Africa, the management has cited three major challenges - logistics, cost structures, and people capabilities. However, it has stated that Bharti is making huge progress on each of these issues through automation, cost containment, and training and mentoring.

Overall, we maintain our positive view on the stock from a 2-3 year perspective.

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