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Bharti Airtel: Resilient in a slowdown, but... - Views on News from Equitymaster
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Bharti Airtel: Resilient in a slowdown, but...
Jul 23, 2009

Performance summary
  • Despite the slowdown in the Indian economy and consumption demand, telecom remains a growth sector, and this was proved again by Bharti Airtel’s June quarter performance. The company grew its topline by 23% YoY during the quarter. Growth was again led by the mobile services business which saw its sales grow by 19% YoY.
  • Mobile subscriber base crossed 102 m by the end of June 2009, with the addition of around 8.4 m new subscribers during the quarter itself.
  • Average revenue per user (ARPU) declined by 20% YoY, which is a big fall by Bharti’s standards. Average minutes of usage (MOU) declined by 11% YoY.
  • Operating margins remain stable at around 40.6%.
  • Net profits grow by 22% YoY during the quarter, duly helped by higher interest income.


Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 1QFY09 1QFY10 Change
Sales 85,060 104,299 22.6%
Expenditure 50,375 61,991 23.1%
Operating profit (EBDIT) 34,685 42,309 22.0%
Operating profit margin (%) 40.8% 40.6%  
Other income 616 188 -69.6%
Interest expense/(income) (945) (3,555) 276.1%
Depreciation 9,972 14,372 44.1%
Profit before tax 26,275 31,680 20.6%
Minority interest 433 471  
Tax 4,175 4,729 13.3%
Profit after tax/(loss) 21,667 26,480 22.2%
Net profit margin (%) 25.5% 25.4%  
No. of shares 1,898.2 1,898.5  
Diluted Earnings per share (Rs)*   43.9  
P/E ratio (x)*   19.2  
* On a trailing 12 months basis

What has driven growth in 1QFY10?
  • Bharti witnessed a 23% YoY increase in revenues during 1QFY10. This was largely on the back of a strong growth in its mobile services division, which saw a revenue growth of 19% YoY and contributed to nearly 64% of sales. This was on the back of a 48% YoY growth in its mobile subscriber base, which stood at 102.4 m at the end of June 2008.

    During the quarter, the company added a total of 8.4 m subscribers. However, what has been disheartening is that it saw a sharp decline in ARPUs (average revenue per user) and MOUs (average minutes of usage). On a year on year basis, ARPUs were lower by nearly 20%. On a quarter on quarter basis i.e., on comparison to the March 2009 quarter, ARPUs were lower by almost 9%. Bharti’s MOUs also decreased by 11% YoY during the quarter. It may be noted that during the December 2008 and March 2009 quarters, MOUs had fallen by 4% QoQ each. A key reason for the decline in these figures in recent times is the company’s focus on rural markets.

    ARPUs and MOUs over the last 4 years
    Source: Company

    During the quarter, there was a 33% reduction in call termination charges (from 30 paisa to 20 paisa). Call termination charge is a fee which the company from where the call is originating has to pay to the call termination network. This combined with the impact on lower usage of mobile phones in rural markets led to a sharp reduction in ARPUs.

    Segment-wise performance*
      1QFY09 1QFY10 Change
    Mobile Services      
    Revenue (Rs m) 69,205 82,414 19.1%
    % of total revenues 71.2% 64.2%  
    Minutes billed (m) 105,217 140,713 33.7%
    Revenue per minute (Rs) 0.66 0.59 -11.0%
    EBIT margin 22.5% 23.4%  
    EBIT per minute (Rs) 0.15 0.14 -7.4%
    Telemedia Services#      
    Revenue (Rs m) 7,974 8,562 7.4%
    % of total revenues 8.2% 6.7%  
    Minutes billed (m) 4,842 4,746 -2.0%
    Revenue per minute (Rs) 1.65 1.80 9.6%
    EBIT margin 24.7% 20.8%  
    EBIT per minute (Rs) 0.41 0.37 -8.0%
    Long Distance Services      
    Revenue (Rs m) 15,751 18,155 15.3%
    % of total revenues 16.2% 14.1%  
    Minutes billed (m) 12,370 14,650 18.4%
    Revenue per minute (Rs) 1.27 1.24 -2.7%
    EBIT margin 37.3% 42.0%  
    EBIT per minute (Rs) 0.48 0.52 9.6%
    Enterprise Services      
    Revenue (Rs m) 4,258 3,286 -22.8%
    % of total revenues 4.4% 2.6%  
    EBIT margin 35.2% 31.0%  
    Passive Infra. Services^      
    Revenue (Rs m) 10,558 16,016 51.7%
    % of total revenues 10.9% 12.5%  
    EBIT margin 14.0% 8.4%  
    * 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.

  • Barring its enterprise services business, all the other segments reported decent growth in revenues during the quarter. Bharti’s passive infrastructure (telecom towers) business recorded a revenue growth of about 52% YoY as compared to the corresponding quarter last year. The segment’s contribution to total revenues also increased to 12.5% from 10.9% during 1QFY09. The other service lines of the company – Telemedia Services, Long Distance Services (LDS) reported a sales growth of about 7% YoY and 15%YoY respectively (all excluding inter-segmental eliminations and other revenues).

  • Bharti witnessed a marginal 0.2% YoY contraction in operating margins during the quarter. While the company was able to reduce cost (as a percentage of sales) of certain heads like access charges, license and spectrum fees and general & administration costs, its network and employee costs increased on a year on year basis. The increase in network costs was largely due to its larger base of towers and also power and fuel (diesel) costs.

  • Bharti’s net profits grew by 22% YoY during the quarter. While this growth is in line with the change in operating profits, it is slightly higher than the 21% YoY change in profit before tax. The growth in profits before tax was impacted by higher depreciation charges, which increased to 13.8% of sales during the quarter as compared to 11.7% during 1QFY09. However, losses were significantly mitigated as the company recorded a net finance income of Rs 3.6 bn as compared to a gain of Rs 0.9 bn during the corresponding quarter last year. The reasons behind the same were income on marketable securities and also on forex fluctuations.

What to expect?
At the current price of Rs 845, the stock is trading at a multiple of 11.4 times our estimated FY12 earnings. At the end of 1QFY09, the company had a presence in over 5,048 census town and 364,000 non-census towns and villages. In a period of one year, the coverage has increased to 5,067 census towns and over 423,000 non census towns and villages. According to the company’s management, Bharti covers nearly 82% of the population as compared to 74% last year. The rural market has been a strong focus for the company in the past. During its earnings conference call, the management did state that nearly 60% of additional customers were from rural areas.

Giving its outlook on the mobile services business, the management believes that the domestic market could have a 700 m rural customer base in the next 5 to 7 years. It expects the rural markets subscriber base to expand significantly on the assumption that rural penetration would reach a level of 40% in the next 5 years. It may be noted that currently it stands at about 10%. As such, its mobile services business will primarily focus on rural thrust & distribution over the long term. As for its enterprises business, the management has given some caution towards its growth as it is currently facing a slowdown due to delayed decision making and budget cuts of its corporates clients.

Further, the company’s management also mentioned that it is looking to focus on areas such as value added services, M-commerce, solution for large and small corporates, amongst others to drive its growth going forward. As regards to its talk for a merger with MTN, the management did not divulge any information on the same. However it did add that talks with the African firm are on. We maintain our positive view on the stock.

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