Bharti vs. Singtel: Who delivered better performance?
In our previous article we talked about Bharti Airtel and Singtel and discussed issues like what these companies are, from where they earn their revenues and the differences in the markets they operate in. In this article, we would see how the differences affect their financial performance and valuations. We reiterate that our intention is to provide information to the reader so that he can understand how the same business has different results because of operating in two different countries. It would also provide information on whether or not Bharti Airtel has superseded its Singapore counterpart in terms of performance. The latter is important because it will help identify the reasons as to why the better performance was possible. Was it because of something that Bharti did right or was it because of operating in another country?
One thing that came out quite clearly in the previous article is that Bharti has been exposed to a higher regulatory risk and resulting costs as compared to Singtel. So the question that comes to mind is that has it been able to earn higher revenues as well in order to offset this risk? The way we can establish this is by looking at the operating margins of the two companies.
Source: Company data
Clearly, Bharti has been able to earn higher margins since FY08. But in recent times the margin advantage has almost faded. This is on account of growing competition in India. Due to intense competition, tariffs have remained at rock bottom. As a result the company has been unable to pass on the increase in costs to its customers. This has led margins to contract in recent times. Therefore despite facing higher risk in the form of higher regulation, Bharti has not been able to outperform Singtel in a major way at least in terms of margins.
But was it able to take this outperformance to the net level? Unfortunately no.
Source: Company data
Singtel has consistently beaten Bharti when it comes to net margins. This is due to high depreciation charges as well as the enormous interest burden borne by Bharti.
So what about growth? Let us take a look at how the two stack up in terms of growth numbers:
*CAGR growth from FY07 to FY12
In terms of growth, Bharti has outperformed Singtel by a wide margin. The reason for this is more to do with the different market structures. Bharti's stellar performance was fuelled by the explosive growth in subscribers that the Indian telecom markets have seen. Penetration went up from just 12.8% in March'06 to 78.66% in March'12. On the other hand, Singapore has seen high levels of penetration over the same period. Therefore, the growth that Singtel has exhibited is typical of a more mature market. The question you may ask is whether Bharti can continue on its growth trend? Well, like we have said in our previous article that there is still scope to increase penetration. Therefore there would be growth but not at the stellar rates that we had seen in the past.
Though Bharti was able to deliver on growth front, however its relative underperformance in net margins as well as tougher operating conditions has hurt its returns.
Return on Equity
Net Debt to Equity
* As on end of December 2012
Bharti has much more debt on its books as compared to Singtel. One of the reasons behind this is the acquisition made by the company in Africa. How these operations pan out for the company is something that remains to be seen. In recent times, the debt has also gone up due to regulatory onetime costs.
As given above Bharti has delivered on growth but has failed to deliver in terms of returns. And this has reflected in the company's valuations as well.
Price to earnings*
Price to book value*
Price to sales*
* Based on trailing 12 months' data
Prices as on March 28, 2013
Stock price performance
Let's us now see how the stock prices of the two companies have performed.
Source: ACE Equity, Yahoo Finance
Bharti has managed to outperform Singtel for a large part of the time period. The outperformance is attributable to the growth in the Indian markets during this time. But in recent times, the relative performance of Bharti has been poor. Again, the reason for this could be found in the state of the Indian telecom markets. The following chart gives how the penetration levels in India have progressed over the years.
The above chart shows that the telecom industry in India is entering the maturity stage. If we look at the way the penetration level has moved, it would certainly appear that the telecom industry is in the top end of the S-curve. Overall tele-density in the country stood at 77.04% at the end of September 2012. Therefore the rate of increase in subscribers is only going to slowdown. This would mean that the kind of explosion that we had seen in the telecom sector in the past is unlikely to return at least on the subscriber front. The one thing that can drive growth is change and up gradation of technology. But given the government restrictions and regulations, this driver has not really kicked in as of now.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407