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Bharti Airtel: Maintains margins in tough times - Views on News from Equitymaster
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Bharti Airtel: Maintains margins in tough times
Oct 30, 2009

Performance summary
  • Sales grow by 19% YoY during 1HFY10, 16% YoY during 2QFy10. Growth during the first half led by the mobile services and passive infrastructure businesses, which reported growth of 15% YoY and 43% YoY respectively.
  • Mobile subscriber base stood at over 110 m at the end of September 2009, higher by about 43% YoY.
  • During the quarter, the average revenue per user (ARPU) declined by 24% YoY and by 9% QoQ (as compared to 1QFY10). Average minutes of usage (MOU) declined by 15% YoY and 6% QoQ (as compared to 1QFY10).
  • Operating margins remain stable at around 40.7%.
  • Net profits grow by 28% YoY during 1HFY10. Growth in bottomline on the back of a stable operating performance and interest income.


Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 89,236 103,552 16.0% 174,296 207,851 19.3%
Expenditure 53,284 61,325 15.1% 103,659 123,316 19.0%
Operating profit (EBDIT) 35,951 42,226 17.5% 70,637 84,535 19.7%
Operating profit margin (%) 40.3% 40.8%   40.5% 40.7%  
Other income 292 379 30.0% 907 567 -37.6%
Interest expense/(income) 10,996 1,591 -85.5% 10,050 (1,965)  
Depreciation 11,022 14,997 36.1% 20,993 29,369 39.9%
Profit before tax 14,226 26,018 82.9% 40,500 57,698 42.5%
Tax (2,921) 2,961   1,254 7,690 513.4%
Profit after tax/(loss) 17,147 23,057 34.5% 39,247 50,008 27.4%
Minority interest (465) (509) 9.4% (899) (980) 9.1%
Share of gain/ (loss) in associate - (6)   - (6)  
Net profit 16,681 22,542 35.1% 38,348 49,021 27.8%
Net profit margin (%) 19.2% 22.3%   22.5% 24.1%  
No. of shares         3,796.8  
Diluted Earnings per share (Rs)*         23.5  
P/E ratio (x)*         13.0  
* On a trailing 12 months basis

What has driven growth in 2QFY10?
  • Bharti’s revenues increased by 16% YoY during 2QFY10 and by 19% YoY during 1HFY10. Growth was largely on the back of a 36% YoY increase in the company’s passive infrastructure business (13% of revenues) and an 11% YoY increase in its mobile services business (contributing to nearly 63% of revenues). The growth in the mobile services segment was on the back of a 43% YoY increase in its mobile subscriber base, which stood at over 110 m at the end of the quarter. It may be noted that during the preceding quarter, the figure stood at 102.4 m.

  • Similar to the trend that the industry has been witnessing, Bharti saw a drop in key figures such as average revenue per user (ARPU), average rate per minute (ARPM) and minutes of usage (M0U). While ARPUs dropped by 9% QoQ, they dropped by a sharp 24% as compared to the corresponding quarter in the previous year. On the other hand, the ARPM dropped by 3.4% (Rs 0.56 during 2QFY10) on a quarter on quarter basis and by 11.1% YoY as compared to 2QFY09. MOUs dropped by 5.9% QoQ and 14.4% YoY. All these factors put together has led to the company to grow its mobile services revenues at a slower pace, despite seeing an almost 50% YoY increase in subscriber base. As per the management, the key reason for the decline in these figures is due to higher number of customers from rural markets.

    Segment-wise performance*
      2QFY09 2QFY10 Change
    Mobile Services      
    Revenue (Rs m) 72,994 81,230 11.3%
    % of total revenues 63.2% 62.8%  
    Minutes billed (m) 115,834 143,680 24.0%
    Revenue per minute (Rs) 0.63 0.57 -10.3%
    EBIT margin 21.8% 22.3%  
    EBIT per minute (Rs) 0.14 0.13 -8.3%
    Telemedia Services      
    Revenue (Rs m) 8,436 8,555 1.4%
    % of total revenues 7.3% 6.6%  
    Minutes billed (m) 5,002 4,796 -4.1%
    Revenue per minute (Rs) 1.69 1.78 5.8%
    EBIT margin 26.7% 21.9%  
    EBIT per minute (Rs) 0.45 0.39 -13.2%
    Enterprise Services      
    Revenue (Rs m) 20,775 21,584 3.9%
    % of total revenues 18.0% 16.7%  
    Minutes billed (m) 13,633 15,598 14.4%
    Revenue per minute (Rs) 1.52 1.38 -9.2%
    EBIT margin 37.0% 43.2%  
    EBIT per minute (Rs) 0.56 0.60 6.1%
    Passive Infra. Services^      
    Revenue (Rs m) 12,279 16,642 35.5%
    % of total revenues 10.6% 12.9%  
    EBIT margin 8.9% 7.4%  
    Others      
    Revenue (Rs m) 926 1,305 41.0%
    % of total revenues 0.8% 1.0%  
    EBIT margin -169.9% -222.0%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations and other revenue;
    # Broadband & Telephone services; ^ Share of revenue in the demerged tower subsidiary - Bharti Infratel Ltd.

  • As for the company’s other segments viz. telemedia and enterprise segment, these too reported subdued numbers. While revenues from the former increased by 1% YoY, the latter segment saw its revenues grow by about 4% YoY. However, as can be seen from the above table, their share to revenues dropped on a year on year basis. As per the company, the reason behind the slow growth in its telemedia segment is the lower pricing of its fixed line business. However, it also added that the broadband business has been seeing good growth. As for the enterprise segment, (which caters to corporate clients) it saw a slow growth due to pricing pressure in its data services business.

  • Bharti witnessed a marginal 0.2% YoY expansion in operating margins during 1HFY10. Barring network operating costs, the company was able to reduce costs on all expense head (as a percentage of sales). Bharti’s net profits grew by 35% YoY during the quarter and by 28% YoY during 1HFY10. As compared to operating profits, the increase in bottomline has been higher on account of lower finance charges (net of all financial gains). The finance income was largely related to income on marketable securities.

What to expect?
At the current price of Rs 306, the stock is trading at a multiple of 9.4 times our estimated FY12 earnings. Giving its view on the industry, the management believes that it is currently at a point of ‘inflection’. While growth continues to been seen in terms of a high increase in subscriber level, the industry is also facing shortage of spectrum and is seeing an increase in competition.

Regarding the latter, the management believes that this phenomenon is not something new. The industry might get a bit disrupted in the short run, but it believes that over the long run, the larger and well established players will emerge stronger. It may be true that the irrational pricing by the new entrants (in order to gain market share) has hampered the plans and projections of some of the bigger firms, the company’s management believes that such kind of action will lead to irreparable damages. In addition, the management believes all that the new entrants have to offer is pricing.

Bharti also stated that it is not looking to start a price war and believes that its offerings do deserve a certain amount of premium in the market. However, it will be competitive with the top three players of the industry. We believe this is a positive for the company as it is not looking to compromise on margins. The management also believes that on account of offering attractive tariff schemes, the lower end of the customer chain (mainly in urban areas) which can also be termed as bargain seekers are opting for such types of schemes. As per the company’s management, it is banking on its brand and overall customer experience to help attract customers.

Bharti’s first half numbers have been in line with our full year estimates and as such we maintain our view on the company from a long term perspective.

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