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Bharti Airtel: Interest costs continue to haunt - Views on News from Equitymaster

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Bharti Airtel: Interest costs continue to haunt
Feb 8, 2012

Bharti Airtel: Interest costs continue to haunt Bharti Airtel declared the results for the third quarter of the financial year 2011-12 (3QFY12). The company has reported a 17.3% YoY increase in total revenues but a 22.4% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 17.3% QoQ during the third quarter of the financial year 2011-2012(3QFY12). For the nine month period ended December 2011 (9MFY12), net sales grew by 21.9% YoY.
  • Mobile subscriber base in India grew by 15% YoY during the quarter. Total count of subscribers stood at around 176 m at the end of December 2011. Total subscriber base on the network (including Asia and African operations) grew by 17% YoY during the quarter.
  • Operating margins improved by 0.5% YoY to 32.2%. For 9MFY12, operating margins declined by 0.8% YoY to 33.1%.
  • Net profit witnessed a decline of 22.4% YoY during the quarter. This was due to higher interest costs as well as higher depreciation charges during the quarter. For 9MFY12, net profits declined by 30% YoY.


Consolidated financial performance snapshot (IFRS)
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 157,818 185,078 17.3% 432,976 527,670 21.9%
Expenditure 107,746 125,494 16.5% 286,106 352,876 23.3%
Operating profit (EBDIT) 50,072 59,584 19.0% 146,870 174,794 19.0%
Operating profit margin (%) 31.7% 32.2%   33.9% 33.1%  
Other income - -   - -  
Interest expense/(income) 7,470 7,877 5.4% 14,987 27,613 84.2%
Depreciation 27,107 35,845 32.2% 72,364 98,998 36.8%
Share of (loss)/gain in associates - (56)   (56) (56)  
Exceptional items - -   (982) -  
Profit before tax 15,495 15,806 2.0% 58,481 48,127 -17.7%
Tax 3,366 5,585 65.9% 12,794 15,626 22.1%
Profit after tax/(loss) 12,129 10,221 -15.7% 45,687 32,501 -28.9%
Minority interest 904 (108)   774 34  
Net profit 13,033 10,113 -22.4% 46,461 32,535 -30.0%
Net profit margin (%) 8.3% 5.5%   10.7% 6.2%  
No. of shares       3,797.9 3,798.1  
Diluted Earnings per share (Rs)*         12.25  
P/E ratio (x)*         28.9  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 3QFY12?
  • Bharti reported a revenue growth of around 17.3% YoY during the quarter. This was achieved by growth in the revenues from mobile services (including African operations), which increased by 17.5% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 12.7% YoY 5 and 11% YoY respectively. The company's digital TV business (DTH) reported a growth of 56% YoY during the quarter. The telemedia service segment witnessed a tepid growth of 0.7% YoY during the quarter. The other operating revenues witnessed a decline of 3.5% YoY during the quarter.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) improved to Rs 187 per user per month. The same figure stood at Rs 198 during 3QFY11 and at Rs 183 during 2QFY12. During 3QFY12, the average revenue per minute (ARPM) stood at 44.6 paisa as against 44.3 paisa and 43.2 paisa during 3QFY11 and 2QFY12 respectively. The minutes of usage (MoU) declined marginally to 419 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 423 and 449 respectively.

  • Bharti's MOU has continued to decline which is a worrisome fact considering that the company has raised promotional tariffs in some of its key circles.

  • The telemedia services segment reported a muted growth of 0.7% YoY during the quarter. Though the segment witnessed a 10.3% YoY growth in the average realized rate per minute, however its impact was offset by the 8.7% YoY decline in total billed minutes.

  • The enterprise segment witnessed a muted growth of 12.7 % YoY during the quarter. This was driven by the 13.3% YoY increase in the number of minutes billed. However, the average realized rate per minute declined 0.6% YoY during the quarter.

    Segment-wise performance*
      3QFY11 3QFY12 Change
    Mobile Services-India & South Asia      
    Revenue (Rs m) 91,620 101,764 11.1%
    % of total revenues 68.4% 68.8%  
    Minutes billed (m) 205,018 227,115 10.8%
    Revenue per minute (Rs) 0.45 0.45 0.3%
    EBITDA margin 34.8% 33.8%  
    EBITDA per minute (Rs) 0.16 0.15 -2.6%
    Mobile Services-Africa      
    Revenue (Rs m) 40,531 53,577 32.2%
    % of total revenues 37.6% 42.7%  
    Minutes billed (m) 14,904 18,496 24.1%
    Revenue per minute (Rs) 2.72 2.90 6.5%
    EBITDA margin 19.1% 26.7%  
    EBITDA per minute (Rs) 0.52 0.77 48.8%
    Telemedia Services      
    Revenue (Rs m) 9,068 9,128 0.7%
    % of total revenues 6.8% 6.2%  
    Minutes billed (m) 4,598 4,196 -8.7%
    Revenue per minute (Rs) 1.97 2.18 10.3%
    EBITDA margin 45.0% 38.8%  
    EBITDA per minute (Rs) 0.89 0.84 -5.0%
    Enterprise Services      
    Revenue (Rs m) 10,546 11,881 12.7%
    % of total revenues 7.9% 8.0%  
    Minutes billed (m) 21,255 24,080 13.3%
    Revenue per minute (Rs) 0.50 0.49 -0.6%
    EBITDA margin 21.9% 16.9%  
    EBITDA per minute (Rs) 0.11 0.08 -23.2%
    Passive Infra. Services      
    Revenue (Rs m) 21,972 24,393 11.0%
    % of total revenues 16.4% 16.5%  
    EBITDA margin 38.6% 37.3%  
    DTH (Direct to Home)      
    Revenue (Rs m) 2,133 3,327 56.0%
    % of total revenues 15.7% 21.6%  
    EBITDA margin -7.0% 2.7%  
    Others      
    Revenue (Rs m) 690 666 -3.5%
    % of total revenues 0.5% 0.5%  
    EBITDA (Rs) (3,584) (3,139)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • Bharti's operating margins stood at 32.2% during 3QFY12, which was higher than the 31.7% seen during the same period last year. Operating expenses were lower on account of the savings in staff costs as well as in selling, general and administrative expenses. This offset the increase in access charges and network operating expenses during the quarter (all as percentage of sales).

  • Net profits declined by 22.4% YoY during the quarter. This was on account of higher interest costs. Profits were also negatively impacted by the higher depreciation charges as well as forex losses during the quarter. Effective tax rates were higher during the quarter as the tax rates for India and Asia region have gone up due to the end of tax holidays in the region.

  • The debt equity ratio stood at 1.48 at the end of December 2011 as compared to 1.39 at the end of September 2011. Though the company has paid back some of its outstanding debt, the debt levels still appear high due to the effect of the higher exchange rate that makes rupee value of the debt appear higher.

What to expect?
At the current price of Rs 354, the stock is trading at a multiple of 13.6 times our FY14 estimates for the company.

With regards to Africa, the management has stated that the operations continue to deliver positive results. They are upbeat with regards to the prospects of data and 3G related revenues in the region. The business has already become positive on the free cash flow front which is a good sign. The company continues to rationalize its tariffs in the region and has seen some elasticity as minutes of usage have gone up. The company has been gaining market share in nearly all of the markets where it is present in Africa.

With regards to the current order of the Supreme Court to cancel the 2G licenses, the management declined to comment on the situation. But they did state that with or without the affected players, the competition in the market would still continue to be intense.

Based on the valuations and the company's future growth prospects, we maintain our 'Buy' view on the stock.

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