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Bharti Airtel: Increased costs shadow performance - Views on News from Equitymaster

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Bharti Airtel: Increased costs shadow performance

Aug 10, 2012

Bharti Airtel declared the results for the first quarter (1QFY13) for the financial year 2012-13 (1QFY13). The company has reported a 14% YoY in total revenues but a 37.3% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 14% YoY during the first quarter of the financial year 2012-2013(1QFY13).
  • Mobile subscriber base in India grew by 11% YoY during the quarter. Total count of subscribers stood at around 187 m at the end of June 2012. Total subscriber base on the network (including Asia and African operations) grew by 13% YoY during the quarter.
  • Operating margins dipped by 3.4% YoY to 30.2% during the quarter
  • Lower operating margins coupled with higher cost of depreciation led net profits to decline by 37.3% YoY during the quarter.

Consolidated financial performance snapshot (IFRS)
(Rs m) 1QFY12 1QFY13 Change
Sales 169,828 193,619 14.0%
Expenditure 112,769 135,132 19.8%
Operating profit (EBDIT) 57,059 58,487 2.5%
Operating profit margin (%) 33.6% 30.2%  
Other income - -  
Interest expense/(income) 8,550 8,211 -4.0%
Depreciation 31,314 37,571 20.0%
Share of (loss)/gain in associates - (76)  
Exceptional items - -  
Profit before tax 17,195 12,629 -26.6%
Tax 5,141 4,878 -5.1%
Profit after tax/(loss) 12,054 7,751 -35.7%
Minority interest 98 (129)  
Net profit 12,152 7,622 -37.3%
Net profit margin (%) 7.2% 3.9%  
No. of shares 3,797.5 3,797.5  
Diluted Earnings per share (Rs)*   10.02  
P/E ratio (x)*   26.1  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 1QFY13?
  • Bharti reported a revenue growth of 14% YoY during the quarter. This was achieved by growth in the revenues from all segments except for the tele-media segment which witnessed a decline of 0.2% YoY. Revenues from mobile services (including African operations), increased by 15.6% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 14.4% YoY and 5.6% YoY respectively. The company's digital TV business (DTH) reported a growth of 24.7% YoY during the quarter. The other operating revenues also witnessed a growth of 3.3% 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 185 per user per month. The same figure stood at Rs 190 during 1QFY12 and at Rs 189 during 4QFY12. During 1QFY13, the average revenue per minute (ARPM) stood at 42.7 paisa as against 42.8 paisa and 43.8 paisa during 1QFY12 and 4QFY12 respectively. The minutes of usage (MoU) improved sequentially to 433 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 431 and 445 respectively.

  • The telemedia services segment reported a decline of 0.2% YoY during the quarter. This was on account of the 8.9% YoY decline in total billed minutes in the segment.

  • The enterprise segment witnessed a growth of 14.4 % YoY during the quarter. This was driven by the 11.3% YoY increase in the number of minutes billed as well as the 2.7% YoY growth in the average realized rate per minute.

    Segment-wise performance*
      1QFY12 1QFY13 Change
    Mobile Services-India & South Asia      
    Revenue (Rs m) 98,404 106,848 8.6%
    % of total revenues 57.9% 55.2%  
    Minutes billed (m) 228,331 247,860 8.6%
    Revenue per minute (Rs) 0.43 0.43 0.0%
    EBITDA margin 34.2% 30.3%  
    EBITDA per minute (Rs) 0.15 0.13 -11.3%
    Mobile Services-Africa      
    Revenue (Rs m) 43,783 57,586 31.5%
    % of total revenues 25.8% 29.7%  
    Minutes billed (m) 16,337 19,651 20.3%
    Revenue per minute (Rs) 2.68 2.93 9.3%
    EBITDA margin 25.1% 25.8%  
    EBITDA per minute (Rs) 0.67 0.76 12.3%
    Telemedia Services      
    Revenue (Rs m) 9,457 9,442 -0.2%
    % of total revenues 5.6% 4.9%  
    Minutes billed (m) 4,570 4,162 -8.9%
    Revenue per minute (Rs) 2.07 2.27 9.6%
    EBITDA margin 45.5% 40.3%  
    EBITDA per minute (Rs) 0.94 0.92 -2.8%
    B2B (Formerly nterprise Services)      
    Revenue (Rs m) 10,410 11,906 14.4%
    % of total revenues 6.1% 6.1%  
    Minutes billed (m) 22,997 25,603 11.3%
    Revenue per minute (Rs) 0.45 0.47 2.7%
    EBITDA margin 22.1% 16.5%  
    EBITDA per minute (Rs) 0.10 0.08 -23.4%
    Passive Infra. Services      
    Revenue (Rs m) 22,767 24,048 5.6%
    % of total revenues 13.4% 12.4%  
    EBITDA margin 37.7% 36.5%  
    DTH (Direct to Home)      
    Revenue (Rs m) 2,934 3,658 24.7%
    % of total revenues 1.7% 1.9%  
    EBITDA margin 1.7% -0.6%  
    Revenue (Rs m) 791 817 3.3%
    % of total revenues 0.5% 0.4%  
    EBITDA (Rs) (2,067) (2,495)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • Bharti's operating margins stood at 30.2% during 1QFY13, which was lower than the 33.6% seen during the same period last year. This was largely on account of higher access charges as well as higher network operating expenses. This offset the decline in employee charges as well as the license fee and spectrum charges during the quarter (all as percentage of sales).

  • Effective tax rates were higher during the quarter as the tax rates for India and Asia region have gone up due to the end of tax holidays in the region.

  • Net profits declined by 37.3% YoY during the quarter. This was on account of lower operating margins during the quarter. Profits were also negatively impacted by the higher depreciation charges as well as loss attributable to associates.

  • The debt equity ratio stood at 1.5 times at the end of June 2012 as compared to 1.36 times at the end of March 2012 and 1.26 times at the end of June 2011.

What to expect?
At the current price of Rs 262, the stock is trading at a multiple of 13.4 times our FY15 estimates for the company.

The current quarter is representative of the hyper competition in Indian telecom coupled with the impact of regulatory policies. Due to the competition in the market, telcos like Bharti have found it difficult to pass on the cost of increase in service tax that the government had proposed in the Budget. As a result, rate per minute decline due to which revenue growth has remained muted. The decline in RPM could not be compensated by proportionate increase on the 3G side due to the sharp cut in 3G tariffs. Even in the African markets, realized rate per minute has declined. But unfortunately for the company, it was not compensated by a proportionate increase in the average minutes of usage per subscriber.

Regulatory clouds in the form of spectrum charges as well as spectrum auction continue to haunt Indian telcos and Bharti is no exception to this. At the same time, it also has to deal with the cancellation of its 3G roaming pacts with telecom operators in circles where it does not have a 3G license. These clouds would continue to mar operational performance in the short term. But they should clear up in the long term. In fact Bharti is best poised to reap returns in the event of consolidation in the Indian telecom markets.

One thing that the regulatory proposals have made clear is the need for more funds in order to apply for new spectrum as well as for the renewal of existing spectrum licenses. The company is already burdened with heavy debt related to its African acquisition as well as 3G license. However, the time frame for this is yet to be decided. If the proposed listing of its telecom tower business does take place, then the need for funds would be taken care of.

In light of the regulatory risks as well as competition, we have revised our estimates. With our very conservative estimates, we arrived at a target price of Rs 525 per share. We find that the stock still offers considerable upside for the next 2 to 3 years. It is important to note that we have not given the company any valuation for its tower arm. Any return earned on the listing of the same would be additional. Therefore, we maintain our 'Buy' view on the company.

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Mar 25, 2019 09:11 AM


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