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Bharti Airtel: Profits jump on African tower sale - Views on News from Equitymaster
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Bharti Airtel: Profits jump on African tower sale
Aug 6, 2015

Bharti Airtel has declared results for the first quarter of FY16. The company has reported a 2.9% YoY increase in total revenues and a 40.2% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 2.9% YoY during the 1QFY16. Continuing pressure in the African operations as well as lower inter connect and roaming rates were the reasons for the muted topline performance.
  • Mobile subscriber base in India grew by 10.1% YoY during the quarter. Total count of mobile subscribers in India stood at a little over 230.6 m at the end of June 2015. Total subscriber base on the network (including South Asia and African operations) grew by 10.7% YoY during the quarter.
  • Operating margins improved to 34.9% during the quarter. The operating profit grew by 6.8% YoY.
  • The company reported an other income figure of Rs 14,314 m. This is explained by the amount of Rs 22,687 m received by the company for divesting its tower assets in 5 African countries.
  • The net profit increased by 40.2% YoY. The net margin improved to 6.6% in the quarter compared to 4.8% seen in 1QFY15. It is important to note that the profit after tax but before exceptional items was down by 3.8% YoY.

Consolidated financial snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 230,055 236,808 2.9%
Expenditure 152,777 154,246 1.0%
Operating profit (EBITDA) 77,278 82,562 6.8%
Operating profit margin (%) 33.6% 34.9%  
Other income - -  
Interest expense/(income)  9,643 19,276 99.9%
Depreciation 40,365 40,404 0.1%
Share of (loss)/gain in associates  1,578 2,126 34.7%
Exceptional items (1,820) 14,314  
Profit before tax 27,028 39,322 45.5%
Tax 15,326 21,781 42.1%
Profit after tax/(loss) 11,702 17,541 49.9%
Minority interest 617 1,998 223.8%
Net profit 11,085 15,543 40.2%
Net profit margin (%) 4.8% 6.6%  
No. of shares   3,997.4  
Diluted Earnings per share (Rs)*   14.1  
P/E ratio (x)*   29.4  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 1QFY16?
  • Bharti reported a revenue growth of 2.9% YoY during the quarter. Revenues from mobile services (India) increased by 8.2% YoY largely due to a continued strong growth in data services. Mobile data revenues now contribute 19.2% of revenues of the company (on a standalone basis). The tele-media services segment continues to record growth. Revenues were up 6.7% YoY in this segment. Revenues from the B2B services were up an impressive 22.2% YoY. The digital TV business (DTH) business continued the good performance recording a growth of 15.8% YoY. This business is now positive at the EBIT level and has begun to generate free cash. The passive infrastructure service segment witnessed a growth of 4.6% YoY during the quarter.

  • Coming to the key parameters relating to the company's mobile service business in India, the average revenue per user (ARPU) decreased to Rs 198 per user per month from Rs 202 per user per month seen during 1QFY15. It was flat sequentially. The minutes of usage (MoU) decreased to 424 minutes per subscriber per month in 1QFY16 from 435 in 1QFY15. The voice realization per minute decreased by 8.3% YoY to 34.93 paisa in 1QFY16 as against 38.08 paisa in 1QFY15.

  • The robust growth in data usage continued in 1QFY16. The data usage per customer increased by 42.7% YoY. However, data realisation (per MB) continues to decrease. It fell by 8.8% YoY. The data ARPU increased by 30.2% YoY.

  • The international operations witnessed de-growth of 11.6% YoY. The EBITDA margins for the international operations fell to 18.6% in 1QFY16. In constant currency terms, revenues from the African business were up by just 1% YoY.

    Segment-wise performance*
    Mobile Services-India 1QFY15 1QFY16 Change
    Revenue (Rs m) 127,525 137,987 8.2%
    % of total revenues 55.4% 58.3%  
    Minutes billed (m) 270,827 290,802 7.4%
    Voice realization per min (Rs) 0.38 0.35 -8.3%
    Data realization per mb (Rs) 0.28 0.26 -8.8%
    EBITDA margin 37.2% 38.8%  
    EBITDA per minute (Rs) 0.18 0.18 5.1%
    Telemedia Services
    Revenue (Rs m) 10,705 11,427 6.7%
    % of total revenues 4.7% 4.8%  
    Minutes billed (m) 4,172 4,735 13.5%
    Revenue per minute (Rs) 2.57 2.41 -5.9%
    EBITDA margin 56.7% 59.4%  
    EBITDA per minute (Rs) 1.46 1.43 -1.5%
    B2B
    Revenue (Rs m) 16,111 19,690 22.2%
    % of total revenues 7.0% 8.3%  
    Minutes billed (m) 31,777 37,810 19.0%
    Revenue per minute (Rs) 0.51 0.52 2.7%
    EBITDA margin 20.2% 20.9%  
    EBITDA per minute (Rs) 0.10 0.11 6.2%
    Passive Infra. Services
    Revenue (Rs m) 13,328 13,946 4.6%
    % of total revenues 5.8% 5.9%  
    EBITDA margin 45.6% 48.7%  
    DTH (Direct to Home)
    Revenue (Rs m) 5,915 6,848 15.8%
    % of total revenues 2.6% 2.9%  
    EBITDA margin 24.3% 35.2%  
    International (Africa & South Asia)
    Revenue (Rs m) 74,056 65,480 -11.6%
    % of total revenues 32.2% 27.7%  
    EBITDA margin 23.2% 18.6%  
    Others (India)      
    Revenue (Rs m) 779 796 2.2%
    % of total revenues 0.3% 0.3%  
    EBITDA (Rs) (360) (488)  
    *As per IFRS numbers. Excluding inter-segment eliminations

  • Bharti's operating margins improved to 34.9% during 1QFY16, compared to 33.6% seen during the same period last year. This was largely on account of the savings in all cost heads as percentage of sales.

    Cost Breakdown
      1QFY15 As % of sales 1QFY16 As % of sales
    Access charges 27,889 12.1% 27,419 11.6%
    Licence fee & Spectrum charges 21,925 15.5% 23,101 14.6%
    Network operations 51,236 36.3% 51,548 32.7%
    Employee costs 11,680 8.3% 12,115 7.7%
    Admin & others 18,071 12.8% 16,422 10.4%
    Sales & Marketing 21,976 15.6% 23,641 15.0%
    Total expenses 152,777   154,246  

  • At the net level, the one-off gain from the African tower sale resulted in a 40.2% YoY jump in the bottomline.
What to expect?
At the current price of Rs 414.3, the stock is trading at a multiple of 29.4 times its trailing twelve months earnings.

Bharti Airtel delivered a decent performance in 1QFY16. The total subscriber base stands at 318 m making the company the third largest telco in the world. The growth was muted in the quarter due to lower voice RPM which in turn was due to the impact of lower interconnect and roaming rates as well as the higher service tax rate. On the other hand growth in data usage continues unabated. Data ARPU was up 30.2% YoY. Subscriber addition also remains robust. The management has re-iterated that tariffs will have to rise for long term industry sustainability. The company has takes a few minor data tariffs hikes selectively and has so far not witnessed a fall in usage.

Bharti completed the sale of 12,500 towers in 5 African countries. The consideration received will be used to reduce the debt on the balance sheet. The net debt currently stands at about US$ 10.7 bn. The tower assets in 5 other African countries are also up for sale and the company hopes to find a buyer in the next few months.

In an important strategic move, the company has decided to exit 4 countries in the African continent. Bharti has begun talks with Orange in this regard. The management did not provide any more details about the talks but did clarify that should the deal go through, the proceeds would be used to reduce debt further. However, they stated that they are not looking to exit Africa and are in the continent for the long haul.

The management's efforts to reduce to weighted average cost of debt on the balance sheet by replacing high cost debt with lower cost global bonds has had a positive impact on the bottomline. However, the move comes with additional foreign exchange risk. In the quarter, the company raised US$ 1 bn at 4.375% interest via a 10 year bond listed on the Singapore stock exchange. With this the total forex debt of the company stands at about US$ 6 bn. Bharti also has tied up with a leading bank in China for an External Commercial Borrowing (ECB) agreement. The management has also initiated the process for listing the company's shares in the American stock exchanges via ADRs. They clarified there would be no equity dilution due to this move.

The company has received the spectrum that it won during the Feb-March 2015 actions. Bharti now has a pan-India 3G footprint and the company is aggressively rolling out 3G services in those areas where it is currently lagging other telcos. In addition to this, the company has a launched 4G services in 45 towns and cities across the country. Bharti is running pilot projects in these areas to prepare for a grand national 4G launch to compete with Reliance Jio (RJio). For this purpose the company will also add around 1,000 additional retail stores across the country in FY16.

The total full year capex has been maintained at US$ 3 bn (US$ 700-800 m for Africa). However, we believe the company's capex needs could rise going forward.

In the performance review of our June 2015 stock select report we had changed our view on the stock to hold after factoring in higher capex requirements, uncertain future of the African operations and the looming threat of RJio. We had advised investors not to buy any more of the stock. We will inform investors about the future course of action after updating our financial estimates for 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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