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Bharti Airtel: Sales inc. but profits decline - Views on News from Equitymaster
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Bharti Airtel: Sales inc. but profits decline
Jul 31, 2013

Bharti Airtel declared the results for the first quarter (1QFY14) for the financial year 2013-14. The company has reported a 9.3% YoY increase in total revenues but a 9.6% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 9.3% YoY during the first quarter of the financial year 2013-2014(1QFY14).
  • Mobile subscriber base in India grew by 2% YoY during the quarter. Total count of subscribers stood at around 190.9 m at the end of June 2013. Total subscriber base on the network (including South Asia and African operations) grew by 5% YoY during the quarter.
  • Operating margins improved by 2.7% YoY to 32.2% during the quarter.
  • The positive effect of operating margins was mitigated by the increase in interest costs as well as higher tax outflow during the quarter. There was an exceptional gain on account of the merger between Bharti Infratel Ventures Ltd (BIVL) and Indus Towers. However, the effect of this too was negated by the increase in taxes and minority interest, which was again related to the same merger. As a result net profits declined by 9.6% YoY. Excluding the exceptional items, net profits declined by around 7% YoY.

Consolidated financial performance snapshot (IFRS)
(Rs m) 1QFY13 1QFY14 Change
Sales 185,703 202,995 9.3%
Expenditure 130,847 137,546 5.1%
Operating profit (EBDIT) 54,856 65,449 19.3%
Operating profit margin (%) 29.5% 32.2%  
Other income - -  
Interest expense/(income) 7,367 11,676 58.5%
Depreciation 35,901 38,470 7.2%
Share of (loss)/gain in associates 706 822  
Exceptional items - 2,252  
Profit before tax 12,294 18,377 49.5%
Tax 4,543 9,684 113.2%
Profit after tax/(loss) 7,751 8,693 12.2%
Minority interest (129) (1,804)  
Net profit 7,622 6,889 -9.6%
Net profit margin (%) 4.1% 3.4%  
No. of shares 3,797.5 3,997.4  
Diluted Earnings per share (Rs)*   5.56  
P/E ratio (x)*   61.1  
* On a trailing 12 months basis; adjusted for exceptional items
What has driven performance in 1QFY14?
  • Bharti reported a revenue growth of 9.3% YoY during the quarter. This was achieved by growth in the revenues from all segments. Revenues from mobile services (including South Asia and African operations), increased by 8.6% YoY. The tele-media services segment recorded a tepid growth of 6.7% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 17.9% YoY and 8.9% YoY respectively. The company's digital TV business (DTH) reported a growth of 34% YoY during the quarter. The international operations (South Asia and Africa combined) grew by 4.6% YoY.

  • Coming to the key parameters relating to the company's mobile service business in India, the average revenue per user (ARPU) increased to Rs 200 per user per month. The same figure stood at Rs 185 during 1QFY13 and at Rs 193 during 4QFY13. The minutes of usage (MoU) remained flat sequentially at 455 minutes per subscriber per month. The same figure for the corresponding quarter last year stood at 433. During 1QFY13, the voice realization per minute increased by 2% YoY to 36.39 paisa as against 35.68 paisa in 1QFY12. On a sequential basis the growth was higher at 4% QoQ.

  • The growth continued on the data front as well. The data ARPU and usage increased by 59% YoY and 81% YoY respectively. On a sequential basis, the growth in ARPU and usage was 15% QoQ and 8% QoQ respectively.

  • The tele-media services segment reported a 6.7% YoY increase in revenues during the quarter. This was driven by the 7.3% YoY increase in the average realized rate per minute which was offset to some extent by the 0.6% YoY decline in the number of minutes billed.

  • From this quarter on the company would be reporting the combined results of its international operations. This includes the South East operations in Bangladesh and Sri Lanka as well as the operations in 17 countries of Africa. The international operations witnessed a growth of 4.6% YoY. The EBITDA margins for the business also improved to 25.4% from 24% in 1QFY13. The improvement in margins was for both African as well as the South Asian operations.

  • Voice ARPU for the African business declined by 21% YoY to US$ 4.5. On a sequential basis, ARPU declined by 7% QoQ. However, this seems to have had a positive impact on usage. The voice usage improved by 11% YoY and 8% QoQ. Data ARPU increased by 6% QoQ (data for 1QFY13 is not available). However, usage declined by 4% QoQ

    Segment-wise performance*
      1QFY13 1QFY14 Change
    MobileServices-India
    Revenue (Rs m) 104,635 116,013 10.9%
    % of total revenues 56.3% 57.2%  
    Minutes billed (m) 239,338 258,380 8.0%
    Revenue per minute (Rs) 0.44 0.45 2.7%
    EBITDA margin 29.9% 32.4%  
    EBITDA per minute (Rs) 0.13 0.15 11.5%
    Telemedia Services
    Revenue (Rs m) 8,889 9,484 6.7%
    % of total revenues 4.8% 4.7%  
    Minutes billed (m) 4,162 4,137 -0.6%
    Revenue per minute (Rs) 2.14 2.29 7.3%
    EBITDA margin 39.7% 39.7%  
    EBITDA per minute (Rs) 0.85 0.91 7.3%
    B2B (Formerlynterprise Services)
    Revenue (Rs m)  11,906 14,036 17.9%
    % of total revenues 6.4% 6.9%  
    Minutes billed (m) 25,603 26,675 4.2%
    Revenue per minute (Rs) 0.47 0.53 13.2%
    EBITDA margin 15.2% 19.7%  
    EBITDA per minute (Rs) 0.07 0.10 46.3%
    Passive Infra. Services
    Revenue (Rs m) 11,787 12,832 8.9%
    % of total revenues 6.3% 6.3%  
    EBITDA margin 44.5% 44.8%  
    DTH (Direct to Home)
    Revenue (Rs m) 3,658 4,900 34.0%
    % of total revenues 2.0% 2.4%  
    EBITDA margin -0.6% 15.5%  
    Internationaloperations (Africa & South Asia)
    Revenue (Rs m) 60,440 63,222 4.6%
    % of total revenues 32.5% 31.1%  
    EBITDA margin 24.0% 25.4%  
    Others (India )
    Revenue (Rs m) 808 791 -2.1%
    % of total revenues 0.4% 0.4%  
    EBITDA (Rs) (540) (321)  
    * As per IFRS numbers. Excluding inter-segment eliminations

  • Bharti's operating margins stood at 32.2% during 1QFY14, which was higher than the 29.5% seen during the same period last year. This was largely on account of the savings in access charges and SG&A expenses. This offset the marginal increase in other cost heads during the quarter (all as percentage of sales).

    Cost Breakdown
      1QFY13 As % of sales 1QFY14 As % of sales
    Licence fee & Spectrum charges 16,300 8.8% 18,219 9.0%
    Access charges 27,046 14.6% 26,961 13.3%
    Network operation 41,545 22.4% 46,700 23.0%
    Employee 8,917 4.8% 10,926 5.4%
    SG&A 37,039 19.9% 34,740 17.1%
    Total exp. 130,847   137,546  

  • Net profits (after minority interest) declined by 9.6% YoY during the quarter. As mentioned earlier there were exceptional items related to the merger of BIVL with Indus Towers during the quarter. Excluding these, net profits declined by 7% YoY. The decline was due to higher interest charges during the quarter.

  • The debt equity ratio improved to 1.29 times at the end of June 2013 as compared to 1.45 times at the end of March 2013. It must be recalled that the company had used the proceeds of its 5% stake sale to Qatar Investments for retiring some of its debt.

What to expect?

At the current price of Rs 340, the stock is trading at a multiple of 61.1 times its trailing twelve months earnings.

The company's performance has shown signs of improvement during the quarter at least on the key parameter. The improvement in the realized rate per minute was the most encouraging sign. The management stated that the improvement was due to the elimination of wasteful expenditures made on the selling & distribution front by the operators. It was also a reflection of getting higher yielding customers on the network and elimination of the low to zero yielding customers. Since the increase in realization was more to do with the elimination of expenditure rather than an increase in rates, the management is not seeing any negative elasticity in demand as of now. This was visible in the flat minutes of usage during the quarter.

On the data side too, the management is seeing a good growth both in India as well as in Africa. They expect this to be a main driver for future growth.

The management has stated that regulatory headwinds continue to hurt the overall sector. Issues like spectrum auction, 3G roaming agreements, excess spectrum charges, one time license fee, etc still need clarity. We believe that the current headwinds that the company and the sector as a whole are facing would continue to weigh on the company in the short to medium term. But they should clear up in the long term. There are already signs of improvement and over time things should smoothen out. In fact Bharti is best poised to reap returns in the event of consolidation in the Indian telecom markets. We reiterate that investors need to understand that the risk profile of the company is unusually higher than in the case of most blue chip stocks due to the high regulatory and operational risk. In our opinion, the stock of Bharti Airtel is unlikely to deliver spectacular returns in the short term. However, if an investor is willing to hold on to the stock for a long term perspective, the current valuations of the stock could provide returns commensurate with the increased risk. In this regard we reiterate our ‘Hold' view on the company.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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