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Bharti vs. Singtel: Who delivered better performance? - Views on News from Equitymaster
 
 
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  • Apr 4, 2013

    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 It would also provide information on whether or not Bharti Airtel has superseded its Singapore counterpart in terms of performance.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?

    Financials

    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:

    Growth   Bharti Singtel
    Revenues % 31.1% 7.1%
    EBITDA % 26.1% 4.2%
    Net Profits % 1.0% 1.1%

    *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.

    Key Ratios   Bharti Singtel
    Return on Equity % 5.4% 17.7%
    Net Debt to Equity Times 1.3 0.4
    * 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.

    Valuations

    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.

    Valuation Table
    Valuations   Bharti Singtel
    Market cap USD M 20,344 45,783
    Price to earnings* Times 40.0 14.3
    Price to book value* Times 2.1 2.5
    Price to sales* Times 1.4 3.1
    EV/EBIDTA* Times 7.1 12.6
    * 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.

    Source: TRAI

    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.

     

     

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    More Views on News

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