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Bharti Airtel: Higher costs a dampener - Views on News from Equitymaster

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Bharti Airtel: Higher costs a dampener

Aug 3, 2011

Bharti Airtel declared the results for first quarter of the financial year 2011-12 (1QFY12). The company has reported 38.2% YoY increase in total revenues while the net profits declined by 27.7% QoQ during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 38.2% QoQ during the first quarter of 2011-2012(1QFY12).
  • Mobile subscriber base in India grew by 24% YoY during the quarter. Total count of subscribers stood at around 169 m at the end of June 2011. Total subscriber base on the network (including Asia and African operations) grew by 25% YoY during the quarter.
  • Operating margins declined by 3.4% YoY during the quarter owing to higher access charges as well as higher selling and marketing expenses (as percentage of sales).
  • Net profit witnessed a decline of 27.7% YoY during the quarter. This was due to higher depreciation charges, interest costs as well as higher tax expenses.

Consolidated financial performance snapshot (IFRS)
(Rs m) 1QFY11 1QFY12 Change
Sales 122,856 169,828 38.2%
Expenditure 77,419 112,769 45.7%
Operating profit (EBDIT) 45,437 57,059 25.6%
Operating profit margin (%) 37.0% 33.6%  
Other income - -  
Interest expense/(income) 4,198 8,550 103.7%
Depreciation 19,467 31,314 60.9%
Share of loss/(gain) inassociates (71) -  
Exceptional items (982) -  
Profit before tax 20,719 17,195 -17.0%
Tax 3,750 5,141 37.1%
Profit after tax/(loss) 16,969 12,054 -29.0%
Minority interest (153) 98  
Net profit 16,816 12,152 -27.7%
Net profit margin (%) 13.7% 7.2%  
No. of shares 3,797.5 3,797.3  
Diluted Earnings pershare (Rs)*   14.70  
P/E ratio (x)*   29.0  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 1QFY12?
  • Bharti reported a revenue growth of around 38.2% YoY during the quarter. This was achieved by growth in the revenues from mobile services (including African operations), which increased by 45.2% YoY growth. Revenues from the passive infrastructure services and tele-media services segments witnessed a decent growth of 11.5% YoY and 5.5% YoY respectively. The enterprises services segment witnessed a muted growth of 1.8% YoY during the quarter. The other operating revenues witnessed a healthy growth of 89.8% YoY during the quarter.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) declined to Rs 190 per user per month. The same figure stood at Rs 215 during 1QFY11 and at Rs 194 during 4QFY11. During 1QFY12, the average revenue per minute (ARPM) stood at 42.8 paisa as against 43.1 paisa and 45 paisa during 4QFY11 and 1QFY11 respectively. The minutes of usage (MoU) declined marginally to 445 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 449 and 480 respectively.

    While the ARPU and ARPM continued to decline, the rate of decline has come down as operators are no longer trying to aggressively slash tariffs to gain market share. The company has increased its tariffs recently in some of its circles. While this would help in improving ARPM, however, it remains to be seen as to how this would impact the MOUs as well as subscriber additions in the future.

  • Segment-wise performance*
      1QFY11 1QFY12 Change
    Mobile Services-India & South Asia
    Revenue (Rs m) 88,367 98,404 11.4%
    % of total revenues 68.0% 68.0%  
    Minutes billed (m) 195,197 228,331 17.0%
    Revenue per minute (Rs) 0.45 0.43 -4.8%
    EBITDA margin 36.1% 34.2%  
    EBITDA per minute (Rs) 0.16 0.15 -9.9%
    Mobile Services-Africa
    Revenue (Rs m) 9,582 43,783 356.9%
    % of total revenues 12.4% 38.8%  
    Minutes billed (m) 3,695 16,337 342.1%
    Revenue per minute (Rs) 2.59 2.68 3.3%
    EBITDA margin 27.3% 26.7%  
    EBITDA per minute (Rs) 0.71 0.71 0.9%
    Telemedia Services
    Revenue (Rs m) 8,960 9,457 5.5%
    % of total revenues 6.9% 6.5%  
    Minutes billed (m) 4,696 4,570 -2.7%
    Revenue per minute (Rs) 1.91 2.07 8.5%
    EBITDA margin 44.0% 45.5%  
    EBITDA per minute (Rs) 0.84 0.94 12.3%
    Enterprise Services
    Revenue (Rs m) 10,229 10,410 1.8%
    % of total revenues 7.9% 7.2%  
    Minutes billed (m) 20,377 22,997 12.9%
    Revenue per minute (Rs) 0.50 0.45 -9.8%
    EBITDA margin 24.9% 22.1%  
    EBITDA per minute (Rs) 0.12 0.10 -19.7%
    Passive Infra. Services
    Revenue (Rs m) 20,412 22,767 11.5%
    % of total revenues 15.7% 15.7%  
    EBITDA margin 35.5% 37.7%  
    Others
    Revenue (Rs m) 1,949 3,700 89.8%
    % of total revenues 1.5% 2.6%  
    EBITDA (Rs) (2,206) (2,017)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • The telemedia services segment reported a growth of 5.5% YoY during the quarter. The growth was driven by the 8.5% YoY growth in the average realized rate per minute, which offset the 2.7% YoY decline in total billed minutes.

  • The enterprise segment witnessed a muted growth of 1.8% YoY during the quarter as the 12.9% YoY increase in the number of minutes billed was partially offset by the 9.8% YoY decline in average realized rate per minute.

  • Bharti's operating margins stood at 33.6% during 1QFY12, as compared to 37.0% in 1QFY11. This was mainly due to higher selling and administration related expenses as well as higher access charges (as percentage of sales).

  • Net profits declined by 27.7% YoY during the quarter. This was on account of higher interest costs which more than doubled as compared to the same period last year. Profits were also negatively impacted by the higher depreciation charges as well as higher tax expenses during the quarter. The debt equity ratio stood at 1.26 at the end of June 2011.

What to expect?

At the current price of Rs 427, the stock is trading at a multiple of 14.8 times our FY14 estimates for the company.

As per the management, the Indian telecom industry has stabilized. As per them, all players are now exhibiting rational behavior in terms of pricing despite the intense competition in the market. The company has raised its tariffs in some of its circles. While it plans to closely watch the impact of this increase on subscriber additions as well as MOUs, the management has stated that this rise was essential to absorb the higher costs. Due to intense competition, the telecom sector has been absorbing the higher operating costs in the past quarter. However, the tariff rise is now essential for future sustainability. The management expects other players to follow suit. They do not expect any adverse regulatory actions on this move.

The management is upbeat about the opportunity on the 3G front. Bharti has already launched their 3G services in the circles in which it holds 3G spectrum. In most of the other circles it has tied up with operators like Vodafone and Idea to provide 3G services to its subscribers.

The tax rates for the quarter were higher than the previous year's. This was due to the fact that the tax holiday on circles launched before 1999 have now come to an end. As a result, the company will now face tax rates in the range of 23-25% going forward. We have already accounted for higher tax rates in our estimates.

With regards to Africa, the management has stated that the operations continue to deliver positive results. While the company has rationalized the excess premiums being charged in the tariffs, it still has not brought down the rates too much. The management plans to wait to bring down the costs before it brings down the tariffs. Otherwise there would be an adverse impact on the margins. The company continues to restructure the business in Africa and has stated that this process would be complete over the next few quarters.

Based on the valuations and the company's future growth prospects, we maintain our 'Buy' view on the stock.

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