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Bharti Airtel: Stellar bottomline performance - Views on News from Equitymaster
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Bharti Airtel: Stellar bottomline performance
Oct 31, 2014 | Updated on Nov 1, 2014

Bharti Airtel has declared results for the second quarter of the financial year 2014-15. The company has reported a 7.1% YoY increase in total revenues and a 170.2% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 7.1% YoY during the second quarter of the financial year 2014-2015 (2QFY15) on the back of robust growth across segments.
  • Mobile subscriber base in India grew by 9.5% YoY during the quarter. Total count of subscribers stood at around 224.66 m at the end of September 2014. Total subscriber base on the network (including South Asia and African operations) grew by 8.4% YoY during the quarter.
  • Operating margins improved by 1.5% YoY to 33.7% during the quarter. The operating profit grew by 12.1% YoY.
  • The net profit increased by 170.2% YoY. The net margin improved to 6.1% in the quarter compared to 2.4% seen in 2QFY14.

Consolidated financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 213,428 228,617 7.1% 416,423 458,672 10.1%
Expenditure 144,699 151,564 4.7% 282,185 304,341 7.9%
Operating profit (EBITDA) 68,729 77,053 12.1% 134,238 154,331 15.0%
Operating profit margin (%) 32.2% 33.7%   32.2% 33.6%  
Other income - -   - -  
Interest expense/(income) 16,519 10,264 -37.9% 28,255 19,907 -29.5%
Depreciation 39,394 38,530 -2.2% 77,864 78,895 1.3%
Share of (loss)/gain in associates 1,652 1,709 3.5% 2,474 3,287 32.9%
Exceptional items (819) (1,750)   1,433 (3,570)  
Profit before tax 13,649 28,218 106.7% 32,026 55,246 72.5%
Tax 8,634 14,765 71.0% 18,318 30,091 64.3%
Profit after tax/(loss) 5,015 13,453 168.3% 13,708 25,155 83.5%
Minority interest (105) (379)   1,699 238  
Net profit 5,120 13,832 170.2% 12,009 24,917 107.5%
Net profit margin (%) 2.4% 6.1%   2.9% 5.4%  
No. of shares         3,997.4  
Diluted Earnings per share (Rs)*         10.2  
P/E ratio (x)*         39.2  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven the performance in 2QFY15?
  • Bharti reported a revenue growth of 7.1% YoY during the quarter. This was achieved by growth in the revenues from most of its segments. Revenues from mobile services (India), increased by a robust 11.3% YoY. The tele-media services segment continued to record good growth. Revenues were up 14.4% YoY in this segment. Revenues from the B2B services were flat but the digital TV business (DTH) business continues to fire on all cylinders recording a growth of 23.5% YoY. The passive infrastructure service segment witnessed a growth of 9.1% YoY during the quarter. The impact of the lower IRU revenues following the merger of Bharti Infratel Ventures Ltd (BIVL) with Indus Towers that had taken place in 1QFY14 is now behind the company.

  • Coming to the key parameters relating to the company's mobile service business in India, the average revenue per user (ARPU) increased to Rs 198 per user per month from Rs 192 per user per month seen during 2QFY14. The same figure stood at Rs 202 during 1QFY15. The minutes of usage (MoU) decreased sequentially to 418 minutes per subscriber per month in 2QFY15 from 435 in 1QFY15. The same figure for the corresponding quarter last year stood at 437. The voice realization per minute increased by 2.4% YoY to 37.69 paisa as against 36.69 paisa in 2QFY14. On a sequential basis however, it was down by 1%.

  • The robust growth in data usage continued in 2QFY15. The data usage per customer increased by 31.2% YoY. However, data realisations decreased by 11.1% YoY. Data ARPU increased by 16.7% YoY. On a sequential basis, the growth in ARPU and usage per customer were 8.3% QoQ and 13.9% QoQ respectively. However, data realisations were down 4.9% QoQ.

  • The international operations witnessed de-growth of 2.6% YoY. The EBITDA margins for the business too fell slightly to 22.5% from 25.8% in 2QFY14. This was due to various issues the company faced in Africa (explained below).

    Segment-wise performance
    Mobile Services-India  2QFY14 2QFY15 Change
    Revenue (Rs m) 113,541 126,342 11.3%
    % of total revenues 53.2% 55.3%  
    Minutes billed (m) 251,322 263,905 5.0%
    Voice realization per min (Rs) 0.37 0.38 2.4%
    Data realization per mb (Rs) 0.30 0.27 -11.1%
    EBITDA margin 33.5% 36.5%  
    EBITDA per minute (Rs) 0.33 0.37 9.0%
    Telemedia Services
    Revenue (Rs m)  9,757 11,160 14.4%
    % of total revenues 4.6% 4.9%  
    Minutes billed (m)  4,209  4,363 3.7%
    Revenue per minute (Rs) 2.32  2.56 10.3%
    EBITDA margin 37.1% 40.2%  
    EBITDA per minute (Rs) 0.86  1.03 19.5%
    B2B (Formerly Enterprise Services)
    Revenue (Rs m) 16,825 17,037 1.3%
    % of total revenues 7.9% 7.5%  
    Minutes billed (m) 28,451 32,133 12.9%
    Revenue per minute (Rs) 0.59 0.53 -10.3%
    EBITDA margin 19.3% 23.9%  
    EBITDA per minute (Rs) 0.11  0.13 11.4%
    Passive Infra. Services
    Revenue (Rs m) 12,602 13,744 9.1%
    % of total revenues 5.9% 6.0%  
    EBITDA margin 43.0% 45.9%  
    DTH (Direct to Home)
    Revenue (Rs m)  5,072  6,263 23.5%
    % of total revenues 2.4% 2.7%  
    EBITDA margin 12.7% 24.4%  
    International operations (Africa & South Asia)
    Revenue (Rs m) 74,795 72,849 -2.6%
    % of total revenues 35.0% 31.9%  
    EBITDA margin 25.8% 22.5%  
    Others (India)
    Revenue (Rs m) 767 725 -5.5%
    % of total revenues 0.4% 0.3%  
    EBITDA (Rs) (290) (567)  
    * As per IFRS numbers. Excluding inter-segment eliminations

  • Bharti's operating margins stood at 33.7% during 2QFY15, which was higher than the 32.2% seen during the same period last year. This was largely on account of the savings in most cost heads as percentage of sales.
    Cost Breakdown
      2QFY14 As % of sales 2QFY15 As % of sales
    Access charges 27,475 19.5% 28,078 17.8%
    Licence fee & Spectrum charges 19,157 13.6% 21,559 13.7%
    Network expenses 49,143 34.8% 51,425 32.6%
    Employee costs 12,206 8.6% 11,909 7.5%
    Sales & Marketing 21,963 15.6% 22,321 14.1%
    Admin & other 14,755 10.4% 16,272 10.3%
    Total expenses 144,699   151,564  

  • At the net level, lower interest costs and depreciation combined with the strong operating performance and a lower tax rate; resulted in a huge 170.2% YoY jump in the bottomline.
What to expect?

At the current price of Rs 398.3, the stock is trading at a multiple of 39.2 times its trailing twelve months earnings.

The momentum in data services continues to remain strong. This has driven the topline in the India business. The data ARPU has reached 150 and this is almost the same as the voice ARPU at 158. However, the management stated that for sustained business performance, pricing power will have to return to the industry. This will only be possible if sufficient spectrum is made available to operators to enable sensible bidding. Spectrum auctions are to be held in Feb 2015.

The management maintained the capex guidance for FY15 at US$ 2.2-2.8 bn. However, they were not willing to discuss the same for FY16 just yet.

In the African business the company has managed to reduce the net loss to US$ 124 m in the quarter. The company has sold off a large part of its tower assets in the continent to reduce debt and increase profitability. These measures will have a positive impact on the African operations in the medium to long term. However, in the short term, the company faces pressure at the topline in Africa. The Ebola crisis in West Africa and the political problems in Nigeria have to an extent dampened revenue growth in the quarter. The management though sounded confident that these problems were short term in nature and the continuous brand building exercise by the company is showing positive results. The company will continue to develop telecom infrastructure in the continent.

The company's debt to EBITDA ratio currently stands at 2.06 times. The management has stated that the company may end the year with a debt to EBITDA ratio of about 2.35 times before reducing it in FY16.

The Loop Mobile deal continues to remain in regulatory limbo and the management was unwilling to discuss it until clarity emerges on this front.

We have updated our estimates for the company from a FY17 perspective. Our revised target price is Rs 544. We had changed our view on the stock to hold, in our September Stock Select report. Keeping in mind the valuations and near term concerns surrounding the African business, we re-iterate the same view.

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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