Bharti Airtel: Forex losses weigh on profits - Views on News from Equitymaster

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Bharti Airtel: Forex losses weigh on profits

Oct 30, 2013

Bharti Airtel declared the results for the second quarter (2QFY14) for the financial year 2013-14. The company has reported a 10% YoY increase in total revenues but a 29% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 10% YoY during the second quarter of the financial year 2013-2014(2QFY14). For the six months ended September 2013 (1HFY14), revenues were up by 9.6% YoY.
  • Mobile subscriber base in India grew by 4% YoY during the quarter. Total count of subscribers stood at around 193.5 m at the end of September 2013. Total subscriber base on the network (including South Asia and African operations) grew by 7% YoY during the quarter.
  • Operating margins improved by 1.4% YoY to 32% during the quarter. For 1HFY14, operating margins increased to 32.1% from 30.1% seen during the same period last year.
  • The positive effect of operating margins was mitigated by the increase in interest costs as well as higher tax outflow during the quarter. Interest costs were higher due to forex losses as well as unrealized mark-to-market losses on investments. As a result net profits declined by 29% YoY. For 1HFY14, net profits were down by 19% YoY.

Consolidated financial performance snapshot (IFRS)
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 194,085 213,428 10.0% 379,790 416,423 9.6%
Expenditure 134,716 145,107 7.7% 265,563 282,653 6.4%
Operating profit (EBDIT) 59,369 68,321 15.1% 114,227 133,770 17.1%
Operating profit margin (%) 30.6% 32.0%   30.1% 32.1%  
Other income - -   - -  
Interest expense/(income) 9,250 16,111 74.2% 16,617 27,787 67.2%
Depreciation 36,891 39,394 6.8% 72,793 77,864 7.0%
Share of (loss)/gain in associates 982 1,652   1,688 2,474  
Exceptional items - (819)   - 1,433  
Profit before tax 14,210 13,649 -3.9% 26,505 32,026 20.8%
Tax 7,195 8,634 20.0% 11,739 18,318 56.0%
Profit after tax/(loss) 7,015 5,015 -28.5% 14,766 13,708 -7.2%
Minority interest 197 105   68 (1,699)  
Net profit 7,212 5,120 -29.0% 14,834 12,009 -19.0%
Net profit margin (%) 3.7% 2.4%   3.9% 2.9%  
No. of shares       3,797.5 3,997.4  
Diluted Earnings per share (Rs)*         5.24  
P/E ratio (x)*         67.7  
* On a trailing 12 months basis; adjusted for exceptional items
What has driven performance in 2QFY14?
  • Bharti reported a revenue growth of 10% YoY during the quarter. This was achieved by growth in the revenues from all of its segments. Revenues from mobile services (including South Asia and African operations), increased by 9.3% YoY. The tele-media services segment recorded a decent growth of 9.1% YoY. Revenues from the enterprise services and digital TV business (DTH) witnessed a robust growth of 20.7% YoY and 28.8% YoY respectively. The passive infrastructure service segment witnessed a relatively muted growth of 3.5% YoY during the quarter. However this should be viewed in light of the lower IRU revenues this quarter following the merger of Bharti Infratel Ventures Ltd (BIVL) with Indus Towers that had taken place last quarter (1QFY14).

  • Coming to the key parameters relating to the company's mobile service business in India, the average revenue per user (ARPU) declined to Rs 192 per user per month. The same figure stood at Rs 177 during 2QFY13 and at Rs 200 during 1QFY14. The minutes of usage (MoU) declined sequentially to 437 minutes per subscriber per month in 2QFY14 from 455 in 1QFY14. The same figure for the corresponding quarter last year stood at 417. Given that the second quarter is traditionally a weaker quarter; the sequential declines in ARPU and MOU are not much of a concern. During 2QFY14, the voice realization per minute increased by 3.7% YoY to 36.74 paisa as against 35.43 paisa in 2QFY13. On a sequential basis the growth was higher by 1% QoQ.

  • The growth continued on the data front as well. The data ARPU and usage increased by 62.8% YoY and 73.7% YoY respectively. On a sequential basis, the growth in ARPU and usage was 11% QoQ and 14% QoQ respectively.

  • The tele-media services segment reported a 9.1% YoY increase in revenues during the quarter. This was driven by the 7.8% YoY increase in the average realized rate per minute as well as the 1.3% YoY increase in the number of minutes billed.

  • The international operations witnessed a growth of 17.9% YoY. The EBITDA margins for the business also improved to 25.8% from 25.3% in 2QFY13. The improvement in margins was for both African as well as the South Asian operations.

  • Voice ARPU for the African business declined by 14.5% YoY to US$ 4.7. On a sequential basis, ARPU increased by 4.4% QoQ. However, this did not impact usage. The voice usage improved by 6.7% QoQ and 3.6% YoY. Data ARPU increased by 50% YoY while usage too went up by a similar level. The management has expressed that they expect growth to continue in Africa even at stable tariffs. This would be largely driven by the new vale added revenue streams as well as by Airtel Money that has been launched.

    Segment-wise performance*
      2QFY13 2QFY14 Change
    Mobile Services-India
    Revenue (Rs m) 108,906 113,541 4.3%
    % of total revenues 56.1% 53.2%  
    Minutes billed (m)  234,224 251,322 7.3%
    Voice realization per min (Rs) 0.35   0.37 3.7%
    Data realization per mb (Rs) 0.32   0.30 -6.5%
    EBITDA margin 30.7% 33.5%  
    EBITDA per minute (Rs)  0.14   0.15 6.1%
    Telemedia Services
    Revenue (Rs m) 8,940 9,757 9.1%
    % of total revenues 4.6% 4.6%  
    Minutes billed (m) 4,156 4,209 1.3%
    Revenue per minute (Rs)  2.15   2.32 7.8%
    EBITDA margin 41.4% 37.1%  
    EBITDA per minute (Rs) 0.89   0.86 -3.4%
    B2B (Formerly nterprise Services)
    Revenue (Rs m) 13,934 16,825 20.7%
    % of total revenues 7.2% 7.9%  
    Minutes billed (m)  27,337 28,451 4.1%
    Revenue per minute (Rs)  0.51 0.59 16.0%
    EBITDA margin 14.8% 19.3%  
    EBITDA per minute (Rs) 0.08 0.11 51.6%
    Passive Infra. Services
    Revenue (Rs m) 12,173 12,602 3.5%
    % of total revenues 6.3% 5.9%  
    EBITDA margin 44.6% 43.0%  
    DTH (Direct to Home)
    Revenue (Rs m) 3,937 5,072 28.8%
    % of total revenues 2.0% 2.4%  
    EBITDA margin 0.8% 12.7%  
    International operations (Africa & South Asia)
    Revenue (Rs m)  63,450  74,795 17.9%
    % of total revenues 32.7% 35.0%  
    EBITDA margin 25.3% 25.8%  
    Others (India )
    Revenue (Rs m) 928 767 -17.3%
    % of total revenues 0.5% 0.4%  
    EBITDA (Rs)  (378) (698)  
    * As per IFRS numbers. Excluding inter-segment eliminations

  • Bharti's operating margins stood at 32% during 2QFY14, which was higher than the 30.6% seen during the same period last year. This was largely on account of the savings in access charges and SG&A expenses. This offset the marginal increase in other cost heads during the quarter (all as percentage of sales).

    Cost Breakdown
      2QFY13 As % of sales 2QFY14 As % of sales
    Licence fee & Spectrum charges 16,469 8.5% 19,565 9.2%
    Access charges 29,524 15.2% 27,475 12.9%
    Network operation 42,132 21.7% 49,143 23.0%
    Employee 9,580 4.9% 12,206 5.7%
    SG&A 37,011 19.1% 36,718 17.2%
    Total exp.  134,716   145,107  

  • Net profits (after minority interest) declined by 29% YoY during the quarter. The positive movement in the operating margins was offset by the increase in depreciation charges and interest costs during the quarter. The company recorded losses of Rs 3,419 m on account of forex restatement and derivative losses. In addition to this there were mark-to-market losses of Rs 2,084 m on the investment portfolio which largely comprises of debt instruments. These items were included in the finance costs which led to the steep increase during the quarter.

  • The debt equity ratio improved to 1.27 times at the end of September 2013 as compared to 1.45 times at the end of March 2013. It must be recalled that the company had used the proceeds of its 5% stake sale to Qatar Investments for retiring some of its debt.

What to expect?

At the current price of Rs 355, the stock is trading at a multiple of 67.7 times its trailing twelve months earnings.

The company's performance has shown signs of improvement during the current quarter as well. The management stated that the improvement in realizations should continue as there is scope to remove discounted and free minutes further. This is why there has not been an adverse impact of elasticity as of now. However they reiterated that they have no plans on increasing headline tariffs just yet. As far as competition on pricing is concerned, the management expects this to remain low. This is because of the quantum of investment required by all operators towards spectrum charges, expansion and rollout of networks, etc. In addition to that the increase in input costs has made further cutting of tariffs difficult.

On the data side too, the management is seeing a good growth both in India as well as in Africa. They expect this to be a main driver for future growth.

There are already signs of improvement in the business economics and over time things should smoothen out further. However the regulatory overhang continues to cloud the sector as a whole and Bharti is no exception to it. But in the long term Bharti is best poised to reap returns in the event of consolidation in the Indian telecom markets. We reiterate that investors need to understand that the risk profile of the company is unusually higher than in the case of most blue chip stocks due to the high regulatory and operational risk. We are currently reviewing our estimates of the company and will come out a with a detailed recommendation report on it shortly.

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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