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Bharti Infratel: Profitable days ahead - Views on News from Equitymaster

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Bharti Infratel: Profitable days ahead
May 5, 2014

Bharti Infratel has declared its results for the fourth quarter (4QFY14) for the financial year 2013-14. The company has reported a 4.3% YoY increase in total revenues and a 64.4% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 4.3% YoY during the fourth quarter of the financial year 2013-2014 (4QFY14). For the full financial year FY14, net sales increased by 5.4% YoY.
  • The operating margin improved from 37.1% in 4QFY13 to 41.3% in 4QFY14. For FY14, the operating margin increased by 3.6% YoY to 40.6%. The operating profit for 4QFY14 increased by 16.1% YoY.
  • The higher operating profit coupled with lower depreciation charges and lower interest costs led the net profit to increase by 64.4% YoY during the quarter. For FY14, net profits increased by 51.4% YoY.
  • Total towers on a consolidated basis stood at 83,368 at the end of the quarter. Total co-locations stood at 167,202. Average sharing factor improved by 4.2% YoY. Sharing revenue per tower increased by 1.5% YoY during the quarter.

Consolidated financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 26,736 27,899 4.3% 102,720 108,267 5.4%
Expenditure 16,805 16,373 -2.6% 64,670 64,266 -0.6%
Operating profit (EBDIT) 9,931 11,526 16.1% 38,050 44,001 15.6%
Operating profit margin (%) 37.1% 41.3%   37.0% 40.6%  
Other income 1,487 1,445 -2.8% 3,379 4,487 32.8%
Interest expense/(income) 1,067 826 -22.6% 3,945 3,997 1.3%
Depreciation 5,655 5,153 -8.9% 22,199 21,259 -4.2%
Exceptional items 22 -   22 -  
Profit before tax 4,718 6,992 48.2% 15,307 23,232 51.8%
Tax 1,845 2,268 22.9% 5,282 8,053 52.5%
Profit after tax/(loss) 2,873 4,724 64.4% 10,025 15,179 51.4%
Net profit margin (%) 10.7% 16.9%   9.8% 14.0%  
No. of shares         1889.3  
Diluted Earnings per share (Rs)*         8.0  
P/E ratio (x)*         27.4  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 4QFY14?
  • Bharti Infratel reported a revenue growth of 4.3% YoY during the quarter. This was achieved by the growth in number of towers as well as an improvement in the tenancy ratio during the quarter.

  • The average sharing factor (or tenancy ratio) improved to 1.99 in 4QFY14 as compared to 1.91 in 4QFY13. Even on a sequential basis, the factor saw an increase of 1.5% as it had stood at 1.96 in 3QFY14. The sharing revenue per tower increased by 1.5% YoY but the sharing revenue per customer declined by 2.3% YoY.

    Key Indicators (Consolidated)
      4QFY13 As % of sales 4QFY14 As % of sales
    Power & fuel 9,825 36.7% 9,921 35.6%
    Rent 2,816 10.5% 2,235 8.0%
    Employee related expenses 807 3.0% 852 3.1%
    Repairs & maintenance 2,322 8.7% 2,459 8.8%
    SG&A 1,035 3.9% 806 2.9%
    Total exp. 16,805   16,273  

  • The net profit saw a big jump of 64.4% YoY during the quarter. The higher operating profit, lower depreciation charges and interest costs helped the growth at the bottom line level.
What to expect?
At the current price of Rs 220, the stock is trading at a multiple of 27.4 times its trailing twelve months earnings.

Bharti Infratel has had an excellent year in FY14. While revenues have increased 5.4% YoY operating profits were up 15.6% Yoy and net profit were up 51.4% YoY. It is heartening to note that the company's free cash flow (up 48% YoY) has kept pace with the net profit.

In keeping with the decision the management took last quarter to pay out 60-80% of the post capex net profit (excluding dividend tax), the company has proposed a dividend of Rs 4.40 for the year. This would amount to 90% of net profits (including dividend tax).

The management has stated that the regulatory environment has improved significantly since the start of FY14. Also the recently concluded spectrum auction has provided further clarity regarding the plans of individual operators. The telecom companies in India are continuing to make significant investments primarily for data networks using 3G and 4G (LTE) technologies. The management believes that this will continue for the next few years at least, as the telecom industry in India is entering a new phase of data driven growth. Ever expanding need for data services from consumers will drive the growth of tower networks in the future.

The scenario has certainly improved for the company from an operational point of view as well as from a regulatory point of view. The risk reward ratio is slowly turning in favour of the company. However the company still faces serious regulatory risks. Also the stock is not available at a reasonable valuation. Keeping in mind all these factors we continue to maintain our 'Sell' view on the stock.

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