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Bharti Airtel: Poor quarter, good year - Views on News from Equitymaster

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Bharti Airtel: Poor quarter, good year
Apr 29, 2009

Performance summary
  • Consolidated sales grow by 38% YoY during FY09, 30% YoY during 4QFY09. Growth for the full year led by a 39% YoY rise in revenues from the mobile services segment. Reported revenues lower by 2% as compared to our estimates.
  • Mobile subscriber base grows by 52% YoY during the year. Total number of mobile subscribers stood at around 94 m at the end of March 2009.
  • Operating margins contract by 1.2% YoY during the year owing to higher network operating costs (as percentage of sales).
  • Net profits grow by 23% YoY during FY09 and 8% YoY during 4QFY09. Higher interest costs hurt profits for the year. Reported profits lower by 4% as compared to our estimates.
  • The company has recommended its maiden dividend of Rs 2 per share (dividend payout of 5%) and has also announced a stock split in the ratio of 2:1, i.e. sub-division of existing equity shares of Rs 10 each (face value) into two equity shares of Rs 5 each.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 78,637 102,551 30.4% 270,122 373,521 38.3%
Expenditure 46,743 62,220 33.1% 158,610 223,794 41.1%
Operating profit (EBDIT) 31,894 40,332 26.5% 111,512 149,727 34.3%
Operating profit margin (%) 40.6% 39.3%   41.3% 40.1%  
Other income 663 405 -38.9% 2,796 1,524 -45.5%
Interest expense/(income) 3,045 3,987 30.9% 5,279 18,613 252.6%
Depreciation 9,350 13,246 41.7% 35,914 46,728 30.1%
Profit before tax 20,162 23,504 16.6% 73,116 85,910 17.5%
Minority interest 412 483 17.2% 1,000 1,852 85.2%
Tax 761 2,543 234.2% 8,162 5,468 -33.0%
Profit after tax/(loss) 18,989 20,477 7.8% 63,954 78,590 22.9%
Net profit margin (%) 24.1% 20.0%   23.7% 21.0%  
No. of shares       1,897.9 1,898.2  
Diluted Earnings per share (Rs)*         41.4  
P/E ratio (x)*         17.7  
* On a trailing 12 months basis

What has driven growth in FY09?
  • Bharti grew its net sales by 38% YoY during FY09. Its mobile services business grew by 39% YoY. The company has recorded this growth on the back of high subscriber additions during the year. However, given that the company added a large chunk of subscribers from the rural markets, its average revenue per user (ARPU) came under further pressure. But on the other hand, the average minutes of usage (MoU) increased on a year on year basis. The ARPU declined 11% YoY, while the MoU increased by 6% YoY. However, if we compare the 4QFY09 numbers to the 4QFY08 numbers, the ARPU and MoU have declined by 15% YoY and 4% YoY respectively. The management did clarify that the decline in MoU has been on account of two major reasons – the ‘crazy’ introductory offers from competitors, and higher penetration into rural markets (where mobile usage in usually lower as compared to the urban markets). In addition, the management has stated that while the company has a 24% markets share in terms of mobile subscribers; it has a market share of nearly 32% when it comes to revenues.

    Segment-wise performance*
      4QFY08 4QFY09 Change FY08 FY09 Change
    Mobile Services            
    Revenue (Rs m) 64,321 82,430 28.2% 218,697 304,189 39.1%
    % of total revenues 67.7% 64.7%   70.3% 64.3%  
    Minutes billed (m) 89,058 130,669 46.7% 284,398 459,187 61.5%
    Revenue per minute (Rs) 0.72 0.63 -12.7% 0.77 0.66 -13.9%
    Profit margin (EBIT) 35.5% 31.5%   39.2% 31.0%  
    Profit per minute (Rs) 0.26 0.20 -22.5% 0.30 0.21 -31.9%
    Telemedia Services#            
    Revenue (Rs m) 7,656 8,593 12.2% 28,615 33,426 16.8%
    % of total revenues 8.1% 6.7%   9.2% 7.1%  
    Minutes billed (m) 4,736 4,737 0.0% 18,390 19,331 5.1%
    Revenue per minute (Rs) 1.62 1.81 12.2% 1.56 1.73 11.1%
    Profit margin (EBIT) 43.8% 42.1%   40.0% 42.4%  
    Profit per minute (Rs) 0.71 0.76 7.9% 0.62 0.73 17.8%
    Long Distance Services            
    Revenue (Rs m) 12,609 17,621 39.7% 43,798 68,235 55.8%
    % of total revenues 13.3% 13.8%   14.1% 14.4%  
    Minutes billed (m) 11,248 11,690 3.9% 35,865 44,970 25.4%
    Revenue per minute (Rs) 1.12 1.51 34.5% 1.22 1.52 24.3%
    Profit margin (EBIT) 32.0% 45.1%   33.1% 44.4%  
    Profit per minute (Rs) 0.36 0.68 89.5% 0.40 0.67 66.7%
    Enterprise Services            
    Revenue (Rs m) 4,376 4,192 -4.2% 13,885 16,434 18.4%
    % of total revenues 4.6% 3.3%   4.5% 3.5%  
    Profit margin (EBIT) 57.0% 49.3%   46.3% 44.7%  
    Passive Infra. Services^            
    Revenue (Rs m) 6,023 14,579 142.0% 6,023 50,913 745.3%
    % of total revenues 6.3% 11.4%   1.9% 10.8%  
    Profit margin (EBIT) 37.1% 40.1%   37.1% 35.4%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations and other revenue;
    # Broadband & Telephone services;
    ^ Share of revenue in the demerged tower subsidiary - Bharti Infratel Ltd.

  • The other services lines of the company – Broadband & Telephone Services (these have been renamed as Telemedia Services, given the company’s foray into IPTV and DTH spaces), Long Distance Services (LDS) and Enterprise Services (ES) – also reported decent growth during the fiscal, with their sales growing by 17% YoY, 56% YoY and 18% YoY respectively. Revenue from the telecom tower subsidiary (Bharti Infratel) formed nearly 11% of the company’s consolidated revenue during the year.

  • Bharti recorded a 1.2% YoY decline in operating margins during FY09. This was on account of higher network operating costs (as a percentage of sales) that the company incurred during the quarter. These costs increased from 12% of sales in FY08 to 16.7% in FY09. The sharp rise in these costs was seemingly on the back of higher import costs of network equipments due to rupee’s depreciation against the US dollar during the year. This is the main reason behind the drop in EBIT margins of its mobile services segment during the year.

  • Bharti’s recorded a profit growth of 23% YoY growth during the year. This is much lower as compared to the growth in its operating profits. The reason behind this is on account of an Rs 13 bn loss (due to AS-11; clubbed with interest expenses) on exchange fluctuation and derivative accounting.

What to expect?
At the current price of Rs 732, the stock is trading at a multiple of 10.3 times our estimated FY11 earnings. In today’s conference call, the management stated that the industry’s competitive intensity has gone up significantly in the past few months. It added that while the new introductory offers from its peers are ‘crazy’, these may have impacted its business to a certain extent. However, it expects things to return to normal once such offers are off the market. On the regulatory front, the management stated that it is awaiting the new government to make the necessary decisions regarding 3G spectrum.

In terms of opportunity, the management is optimistic about the prospects in the rural and semi-urban markets as the level of teledensity is fairly low. It expects revenue growth to remain steady on account of two reasons – strong addition of subscribers and higher revenues from single customers (through value added services).

The company today announced its first ever equity dividend (of Rs 2 per share). While the management has not yet framed a dividend policy, it did state that this feature is likely to continue going forward. Keeping in mind that it has crossed its peak capex requirements (for spreading its presence across India), the company expects to generate free cash flows and subsequently reward its investors in return.

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