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Bharti Airtel: Higher costs drags profits
Aug 11, 2010

Bharti Airtel has announced its 1QFY11 results. The company has reported a 17% YoY growth in sales and a 32% YoY decline in profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by 17.4% YoY during 1QFY11. The growth was led by a 28.1% YoY growth in the passive infrastructure services. Revenues from the mobile services segment (79% of sales) increase by 16% YoY. Bharti has started to consolidate its African operations from this quarter onwards. Excluding sales from the African mobile operations, revenue from the mobile segment grew by 4.7% YoY.
  • Mobile subscriber base grows by 33% YoY during the quarter. Total count of subscribers stood at around 137 m at the end of June 2010.
  • Operating margins decline by 5.2% YoY during the quarter owing to higher network operating and selling and administration costs (as percentage of sales).
  • Net profit drops by 32% YoY during the quarter. Lower operating margins, higher interest and depreciation costs led to the drop in net income. It was also negatively impacted by the acquisition costs related to the African operations.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 1QFY10 1QFY11 Change
Sales 104,143 122,308 17.4%
Expenditure 61,169 78,168 27.8%
Operating profit (EBDIT) 42,974 44,140 2.7%
Operating profit margin (%) 41.3% 36.1%  
Other income 111 548 393.7%
Interest expense/(income) (1,284) 4,198  
Depreciation 14,754 19,467 31.9%
Share of loss/(gain) in associates - (72)  
Exceptional items (132) (233)  
Profit before tax 29,483 20,718 -29.7%
Tax 4,305 3,750 -12.9%
Profit after tax/(loss) 25,178 16,968 -32.6%
Minority interest (433) (153) -64.7%
Net profit 24,745 16,815 -32.0%
Net profit margin (%) 23.8% 13.7%  
No. of shares 1,898.5 3,797.5  
Diluted Earnings per share (Rs)*   22.32  
P/E ratio (x)*   14.3  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 1QFY11?
  • Bharti reported a revenue growth of 17.4% YoY during the quarter. On a quarter on quarter basis, revenues are higher by 13.8%. The growth in revenues was achieved by a 28.1% YoY growth in the passive infrastructure services segment. The mobile service segment (7% of total revenues) grew by 16% YoY during the quarter. If the African mobile revenue is excluded, this segment grew by 4.7% YoY during the quarter. The growth was led by an expansion of the customer base. However average revenue per user (ARPU) declined by 22.7% YoY. On a quarter on quarter basis, the decline in ARPU was by 2.3%.

  • Coming to the key parameters relating to the companyís mobile service business, the average revenue per user (ARPU) stood at about Rs 215 per month. The same figure stood at Rs 278 during 1QFY10 and at Rs 220 during 4QFY10. During 4QFY10, the average revenue per minute (ARPM) stood at 45 paisa as against 47 paisa and 58 paisa during 4QFY10 and 1QFY10 respectively. The minutes of usage (MoU) continued to grow and stood at 480 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 468 and 478 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 growth in MOU is a healthy sign as it indicates that the company is gaining back the share of minutes that it had lost during the aggressive price war that was seen last year.

    Segment-wise performance*
      1QFY10 1QFY11 Change
    Mobile Services#      
    Revenue (Rs m) 84,301 97,820 16.0%
    % of total revenues 69.4% 70.2%  
    Minutes billed (m) 140,713 190,396 35.3%
    Revenue per minute (Rs) 0.60 0.51 -14.2%
    EBIT (Rs) 25,770 22,889 -11.2%
    Profit margin (EBIT) 30.6% 23.4%  
    Profit per minute (Rs) 0.18 0.12 -34.4%
    Telemedia Services      
    Revenue (Rs m) 8,551 8,960 4.8%
    % of total revenues 7.0% 6.4%  
    Minutes billed (m) 4,746 4,696 -1.1%
    Revenue per minute (Rs) 1.80 1.91 5.9%
    EBIT (Rs) 1,797 1,910  
    Profit margin (EBIT) 21.0% 21.3%  
    Profit per minute (Rs) 0.38 0.41 7.4%
    Enterprise Services      
    Revenue (Rs m) 11,627 10,186 -12.4%
    % of total revenues 9.6% 7.3%  
    Minutes billed (m) 14,650 20,377 39.1%
    Revenue per minute (Rs) 0.79 0.50 -37.0%
    EBIT (Rs) 2,196 1,450  
    Profit margin (EBIT) 18.9% 14.2%  
    Profit per minute (Rs) 0.15 0.07 -52.5%
    Passive Infra. Services      
    Revenue (Rs m) 15,937 20,412 28.1%
    % of total revenues 13.1% 14.7%  
    EBIT (Rs) 1,327 2,572  
    Profit margin (EBIT) 8.3% 12.6%  
    Others      
    Revenue (Rs m) 1,027 1,949 89.8%
    % of total revenues 0.8% 1.4%  
    EBIT (Rs) (2,780) (3,817)  
    Profit margin (EBIT) -270.7% -195.8%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations and other revenue
    # Includes African mobile operations

  • The telemedia services segment reported a subdued growth of 4.8% YoY during the quarter. The enterprise segment on the other hand witnessed a decline of 12.4% YoY during the quarter due to lower average revenue per minute as the long distance segment witnessed aggressive price competition with operators slashing tariffs.

  • Bhartiís operating margins stood at 36.1% during 1QFY11, as compared to 41.3% in 1QFY10. This 5.2% YoY decline in margins was mainly due to higher network operating costs (on the back of expansion), which stood at nearly 22.3% of sales during the quarter (20.4% in 1QFY10). Operating margins were also impacted by higher selling and administration costs.

  • Profits declined by 32% YoY during the quarter. This decline was due to higher depreciation expenses related to expansion and costs related to the acquisition of the African operations. It was also impacted by higher interest costs related to debt taken to fun the African operations as well as the 3G and BWA related expense.

What to expect?
At the current price of Rs 320, the stock is trading at a multiple of 11.3 times our estimated FY13 earnings (Research Pro subscribers please click here).

1QFY11 represented a quarter with several developments. Bharti concluded the acquisition of Zainís operations in 15 countries in Africa. It also won 3G spectrum in 13 circles and BWA spectrum in 4 circles. Bharti has taken on debt in its books to fund these investments and the net debt (total debt less cash) stands at ` 602.6 bn. Bharti has also acquired the operations of Telecom Seychelles for US$ 62 m.

On the domestic front, this quarter saw customers returning to incumbent operators. This has led to higher minutes of usage (MOU). The growth in MOUs for Bharti was also attributable to the growth in the subscriber base as well as due to the elasticity effect seen from lower prices. On the pricing front, rate of decline in prices has slowed down. The management does not expect any major price competition and expects pricing to remain stable in the coming quarters.

Bharti is taking steps to establish itself as one of the leading telecom operators in the world. While competitive pressures, expansion of African operations and regulatory issues in India, will lead to short term pressures on the company. However, in the long run Bharti will emerge as a much stronger company once the dust settles. We maintain our positive view on the stock from a 2 to 3 years perspective.

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