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  • May 2, 2012 - Bharti Airtel: Interest costs shadows the performance

Bharti Airtel: Interest costs shadows the performance
May 2, 2012

Bharti Airtel declared the results for the fourth quarter (4QFY12) and full year for the financial year 2011-12 (FY12). The company has reported a 14.9% YoY and 20% YoY increase in total revenues for the quarter and full year respectively. But it has reported a decline of 28.2% YoY and 29.6% YoY in net profits during the quarter and year respectively. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 14.9% YoY during the fourth quarter of the financial year 2011-2012(4QFY12). For FY12, net sales grew by 20% YoY.
  • Mobile subscriber base in India grew by 12% YoY during the quarter. Total count of subscribers stood at around 181 m at the end of March 2012. Total subscriber base on the network (including Asia and African operations) grew by 13.9% YoY during the quarter.
  • Operating margins dipped marginally by 0.3% YoY to 33.3%. For FY12, operating margins declined by 0.6% YoY to 33.2%.
  • Net profit witnessed a decline of 28.2% YoY during the quarter. This was due to higher interest costs as well as higher depreciation charges during the quarter. For FY12, net profits declined by 29.6% YoY.
  • The company has declared a dividend of Rs 1 per share (dividend yield of 0.3%)


Consolidated financial performance snapshot (IFRS)
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 163,042 187,388 14.9% 596,018 715,058 20.0%
Expenditure 108,212 125,059 15.6% 394,318 477,935 21.2%
Operating profit (EBDIT) 54,830 62,329 13.7% 201,700 237,123 17.6%
Operating profit margin (%) 33.6% 33.3%   33.8% 33.2%  
Other income - -   - -  
Interest expense/(income) 6,826 10,572 54.9% 21,813 38,185 75.1%
Depreciation 29,702 34,683 16.8% 102,066 133,681 31.0%
Share of (loss)/gain in associates - (18)   (57) (74)  
Exceptional items - -   (982) -  
Profit before tax 18,302 17,056 -6.8% 76,782 65,183 -15.1%
Tax 4,996 6,976 39.6% 17,790 22,602 27.0%
Profit after tax/(loss) 13,306 10,080 -24.2% 58,992 42,581 -27.8%
Minority interest 701 (21)   1,475 13  
Net profit 14,007 10,059 -28.2% 60,467 42,594 -29.6%
Net profit margin (%) 8.6% 5.4%   10.1% 6.0%  
No. of shares       3,797.3 3,798.1  
Diluted Earnings per share (Rs)*         11.21  
P/E ratio (x)*         28.3  
(*On a trailing 12-month basis)

What has driven performance in 4QFY12?
  • Bharti reported a revenue growth of 14.9% YoY during the quarter. This was achieved by growth in the revenues from all segments except for the tele-media segment which witnessed a decline of 0.2% YoY. Revenues from mobile services (including African operations), increased by 16% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 9.7% YoY and 9.9% YoY respectively. The company's digital TV business (DTH) reported a growth of 39.5% YoY during the quarter. The other operating revenues witnessed a decline of 6.6% 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 189 per user per month. The same figure stood at Rs 194 during 4QFY11 and at Rs 187 during 3QFY12. During 4QFY12, the average revenue per minute (ARPM) stood at 43.8 paisa as against 43.1 paisa and 44.6 paisa during 4QFY11 and 3QFY12 respectively. The minutes of usage (MoU) improved sequentially to 431 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 419 and 449 respectively.

  • The telemedia services segment reported a decline of 0.2% YoY during the quarter. Though the segment witnessed a 0.8% YoY growth in the average realized rate per minute, however its impact was offset by the 1% YoY decline in total billed minutes.

  • The enterprise segment witnessed a muted growth of 9.7 % YoY during the quarter. This was driven by the 11.1% YoY increase in the number of minutes billed. However, the average realized rate per minute declined by 1.3% YoY during the quarter.

    Segment-wise performance*
      4QFY11 4QFY12 Change
    Mobile Services-India & South Asia
    Revenue (Rs m) 95,224 105,096 10.4%
    % of total revenues 58.4% 56.1%  
    Minutes billed (m) 218,190 238,779 9.4%
    Revenue per minute (Rs) 0.44 0.44 0.9%
    EBITDA margin 33.6% 34.0%  
    EBITDA per minute (Rs) 0.15 0.15 2.1%
    Mobile Services-Africa
    Revenue (Rs m) 41,815 53,872 28.8%
    % of total revenues 25.6% 28.7%  
    Minutes billed (m) 14,915 19,131 28.3%
    Revenue per minute (Rs) 2.80 2.82 0.4%
    EBITDA margin 24.4% 27.8%  
    EBITDA per minute (Rs) 0.68 0.78 14.8%
    Telemedia Services
    Revenue (Rs m) 9,178 9,159 -0.2%
    % of total revenues 5.6% 4.9%  
    Minutes billed (m) 4,186 4,145 -1.0%
    Revenue per minute (Rs) 2.19 2.21 0.8%
    EBITDA margin 45.7% 41.0%  
    EBITDA per minute (Rs) 1.00 0.91 -9.6%
    Enterprise Services
    Revenue (Rs m) 10,221 11,209 9.7%
    % of total revenues 6.3% 6.0%  
    Minutes billed (m) 22,589 25,106 11.1%
    Revenue per minute (Rs) 0.45 0.45 -1.3%
    EBITDA margin 26.0% 14.6%  
    EBITDA per minute (Rs) 0.12 0.06 -44.9%
    Passive Infra. Services
    Revenue (Rs m) 22,010 24,183 9.9%
    % of total revenues 13.5% 12.9%  
    EBITDA margin 37.1% 38.6%  
    DTH (Direct to Home)
    Revenue (Rs m) 2,555 3,565 39.5%
    % of total revenues 1.6% 1.9%  
    EBITDA margin 6.2% 5.9%  
    Others
    Revenue (Rs m) 790 738 -6.6%
    % of total revenues 0.5% 0.4%  
    EBITDA (Rs) (1,724) (2,505)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • Bharti's operating margins stood at 33.3% during 4QFY12, which was marginally lower than the 33.6% seen during the same period last year. This was largely on account of higher access charges as well as higher network operating expenses. This offset the decline in employee charges as well as selling, marketing and administrative expense during the quarter (all as percentage of sales).

  • Net profits declined by 28.2% 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 higher tax outgo 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 1.36 at the end of March 2012 as compared to 1.48 at the end of December 2011 and 1.26 at the end of March 2011.

What to expect?
At the current price of Rs 317, the stock is trading at a multiple of 14.7 times our FY15 estimates for the company.

Going forward there are 3 main drivers that the management expects will drive the future growth for the company. The first would be 3G both in India as well as in Africa. Bharti has already launched 3G services in 8 to 9 of the African countries. In India it has tied up with other operators to offer 3G services in circles where it does not have a license. Though TRAI has recommended that these roaming agreements be cancelled, however, the matter is still sub judice. The second major driver for the company would be in the form of mobile commerce. It has already launched this under the tag of 'Airtel Money' both in India as well as in Africa. The third driver would be 4G services. Bharti has already launched the same in one circle and plans to launch it in the other three circles where it holds a license.

With regards to tariffs, the management has stated that it expects tariffs to go up to compensate the increasing operating expenses that all operators are currently facing. However, the level of competition has deterred operators from raising tariffs. They further stated that unless there is meaningful consolidation in the industry, tariffs would not really rise to the necessary levels.

The latest proposals by TRAI (Telecom Regulatory Authority of India) on the 2G license fee and auctions have come as a blow to the entire sector. Though these are just proposals and not the final thing, one thing is for sure that 2G licenses are set to become more expensive for the entire sector. However, we feel that Bharti would emerge as a winner despite these short term hiccups. Despite our very conservative estimates, we find that the stock still offers considerable upside for the next 2 to 3 years. Therefore, we maintain our 'Buy' view on the company.

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