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Bharti Infratel: Decent quarter - Views on News from Equitymaster

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Bharti Infratel: Decent quarter

Oct 28, 2013

Bharti Infratel declared its results for the second quarter (2QFY14) for the financial year 2013-14. The company has reported a 5% YoY increase in total revenues and a 12% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 5% YoY during the second quarter of the financial year 2013-2014(2QFY14). For the six months ended September 2013 (1HFY14), net sales increased by 6.7% YoY.
  • Operating margins improved from 37.4% in 2QFY13 to 40% in 2QFY14. For 1HFY14, operating margins increased by 3% YoY to 39.9%.
  • Higher operating margins coupled with lower depreciation charges led net profits to increase by 12% YoY during the quarter. For 1HFY14, net profits increased by 37.7% YoY.
  • Total towers on a consolidated basis stood at 82,476 at the end of the quarter. Total co-locations stood at 159,997. Average sharing factor improved by 1% YoY. However sharing revenue per tower declined by 1% YoY during the quarter.
Consolidated financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 25,555 26,837 5.0% 49,720 53,057 6.7%
Expenditure 16,004 16,108 0.6% 31,356 31,865 1.6%
Operating profit (EBDIT) 9,551 10,729 12.3% 18,364 21,192 15.4%
Operating profit margin (%) 37.4% 40.0%   36.9% 39.9%  
Other income 672 569 -15.3% 1,262 2,125 68.4%
Interest expense/(income) 1,033 1,335 29.2% 1,882 2,379 26.4%
Depreciation 5,528 5,326 -3.7% 10,924 10,854 -0.6%
Exceptional items - -   - -  
Profit before tax 3,662 4,637 26.6% 6,820 10,084 47.9%
Tax 1,186 1,863 57.1% 2,209 3,734 69.0%
Profit after tax/(loss) 2,476 2,774 12.0% 4,611 6,350 37.7%
Minority interest - -   - -  
Net profit 2,476 2,774 12.0% 4,611 6,350 37.7%
Net profit margin (%) 9.7% 10.3%   9.3% 12.0%  
No. of shares         1,888.8  
Diluted Earnings per share (Rs)*         6.23  
P/E ratio (x)*         24.7  
What has driven performance in 2QFY14?
  • Bharti Infratel reported a revenue growth of 5% YoY during the quarter. This was achieved by the growth in number of towers as well as an improvement in the tenancy ratio during the quarter.

  • The average sharing factor (or tenancy ratio) improved to 1.93 in 2QFY14 as compared to 1.91 in 2QFY13. Even on a sequential basis, the factor saw an increase as it had stood at 1.91 in 1QFY14. The sharing revenue per tower as well as the sharing revenue per sharing customer declined by 1% YoY and 2.1% YoY respectively. The reason for this was the merger of Bharti Infratel Ventures Ltd with Indus Towers which took place in 1QFY14. Post this, the IRU (Indefeasible Right to Use) agreement between Bharti Infratel Ventures Ltd and Indus ceases to exist. This is the reason for the decline on a YoY basis.

    Key Indicators (consolidated)
      2QFY13 2QFY14 YoY Change 1QFY14 QoQ Change
    Total Towers (Nos.) 80,656 82,476 2.3% 82,321 0.2%
    Total Co-locations(Nos.) 154,296 159,997 3.7% 158,038 1.2%
    Average sharing factor  1.91 1.93 1.0% 1.91 1.0%
    Sharing revenue per tower per month (Rs) 66,287 65,608 -1.0% 65,222 0.6%
    Sharing revenue per sharing operator (Rs)  34,711 33,996 -2.1% 34,079 -0.2%

  • Bharti Infratel's operating margins stood at 40% during 2QFY14, which was higher than the 37.4% seen during the same period last year. This was largely on account of the savings in every cost head except for that of power & fuel and employee costs which saw a marginal increase during the quarter (all as percentage of sales).

    Cost Breakdown
      2QFY13 As % of sales 2QFY14 As % of sales
    Power & fuel 9,627 37.7% 10,407 38.8%
    Rent 2,610 10.2% 2,215 8.3%
    Employee related expenses 834 3.3% 928 3.5%
    Repairs & maintenance 2,100 8.2% 2,041 7.6%
    SG&A 833 3.3% 517 1.9%
    Total exp. 16,004   16,108  

  • Net profits increased by 12% YoY during the quarter. The higher operating margins as well as lower depreciation charges helped the growth at the bottom line level. However the impact of this was mitigated to some extent by the higher interest expenses as well as lower other income during the quarter.

What to expect?

At the current price of Rs 154, the stock is trading at a multiple of 24.7 times its trailing twelve months earnings.

The management continues to remain optimistic of the future prospects for the company. Their optimism is based on improving scenario for the telecom operators. The management stated that since operators are seeing an improvement in realized rates per minutes; there is expected to be an improvement in their business economics. This in turn would drive them to rollout operations at a faster tick which bodes well for the tower companies. In addition to this the phenomenal growth being seen on the data side would also drive network expansion and rollouts by the operators.

The company has a huge cash balance of Rs 29.5 bn (including short term investments) at the end of September 2013. The management plans to use part of this cash for either making an acquisition or for paying out a higher dividend to the shareholders at the end of the year. It is exploring opportunities for acquisition both in India as well as in Asia. The decision for the dividend would be taken at the end of the year.

While the scenario seems to be improving for the company from an operations point of view, however, we still believe that the risk reward ratio is still skewed for the company. This is because there are proposals by the telecom regulator to bring the tower companies under the license as well. This would entail a license fees. Though the proposals have not been finalized as of now, however this is an indication of how dicey the regulatory scenario is. Therefore we continue to maintain our ‘Sell' view on the stock.

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