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Bharti Airtel: Taxes hurt profits - Views on News from Equitymaster

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Bharti Airtel: Taxes hurt profits

Nov 7, 2012

Bharti Airtel declared the results for the second quarter (2QFY13) for the financial year 2012-13. The company has reported a 17.4% YoY in total revenues but a 29.8% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 17.4% YoY during the second quarter of the financial year 2012-2013(2QFY13). For the six months ended September 2012 (1HFY13), consolidated net sales increased by 15.7% YoY.
  • Mobile subscriber base in India grew by 8% YoY during the quarter. Total count of subscribers stood at around 186 m at the end of September 2012. Total subscriber base on the network (including Asia and African operations) grew by 11% YoY during the quarter.
  • Operating margins dipped by 2.3% YoY to 31.3% during the quarter. For 1HFY13, operating margins declined to 30.8% from 33.6% seen during the same period last year.
  • Lower operating margins coupled with higher cost of depreciation led net profits to decline by 29.8% YoY during the quarter. Profits were also impacted negatively by the increase in tax outflow during the quarter.

Consolidated financial performance snapshot (IFRS)
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 172,764 202,830 17.4% 342,592 396,449 15.7%
Expenditure 114,613 139,322 21.6% 227,382 274,454 20.7%
Operating profit (EBDIT) 58,151 63,508 9.2% 115,210 121,995 5.9%
Operating profit margin (%) 33.7% 31.3%   33.6% 30.8%  
Other income - -   - -  
Interest expense/(income) 11,186 10,219 -8.6% 19,736 18,430 -6.6%
Depreciation 31,839 38,560 21.1% 63,153 76,131 20.6%
Share of (loss)/gain in associates - -   - (76)  
Exceptional items - -   - -  
Profit before tax 15,126 14,729 -2.6% 32,321 27,358 -15.4%
Tax 4,900 7,714 57.4% 10,041 12,592 25.4%
Profit after tax/(loss) 10,226 7,015 -31.4% 22,280 14,766 -33.7%
Minority interest 44 197   142 68  
Net profit 10,270 7,212 -29.8% 22,422 14,834 -33.8%
Net profit margin (%) 5.9% 3.6%   6.5% 3.7%  
No. of shares       3,797.5 3,797.5  
Diluted Earnings per share (Rs)*         9.22  
P/E ratio (x)*         30.0  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 2QFY13?
  • Bharti reported a revenue growth of 17.4% YoY during the quarter. This was achieved by growth in the revenues from all segments except for the tele-media segment where revenues remained more or less flat. Revenues from mobile services (including African operations), increased by 10.5% YoY. Revenues from the enterprise services and passive infrastructure service segments witnessed a decent growth of 26.2% YoY and 7.6% YoY respectively. The company's digital TV business (DTH) reported a growth of 25.7% YoY during the quarter. The other operating revenues also witnessed a growth of 10.1% YoY during the quarter.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) declined to Rs 177 per user per month. The same figure stood at Rs 183 during 2QFY13 and at Rs 185 during 1QFY13. During 2QFY13, the average revenue per minute (ARPM) stood at 42.6 paisa as against 43.2 paisa and 42.7 paisa during 2QFY12 and 1QFY13 respectively. The minutes of usage (MoU) declined sequentially to 417 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 433 and 423 respectively.

  • The telemedia services segment reported flat revenues during the quarter. This was on account of the 9.6% YoY decline in total billed minutes in the segment which offset the 10.6% increase in revenue per minute.

  • The enterprise segment witnessed a growth of 26.2 % YoY during the quarter. This was driven by the 14.7% YoY increase in the number of minutes billed as well as the 10% YoY growth in the average realized rate per minute.

    Segment-wise performance*
      2QFY12 2QFY13 Change
    Mobile Services-India & South Asia
    Revenue (Rs m) 97,827 111,170 13.6%
    % of total revenues 56.6% 54.8%  
    Minutes billed (m) 224,734 243,134 8.2%
    Revenue per minute (Rs) 0.44 0.46 5.0%
    EBITDA margin 33.7% 31.0%  
    EBITDA per minute (Rs) 0.15 0.14 -3.3%
    Mobile Services-Africa
    Revenue (Rs m) 57,586 60,512 5.1%
    % of total revenues 33.3% 29.8%  
    Minutes billed (m) 17,950 23,646 31.7%
    Revenue per minute (Rs) 3.21 2.56 -20.2%
    EBITDA margin 26.2% 27.2%  
    EBITDA per minute (Rs) 0.84 0.70 -17.3%
    Telemedia Services
    Revenue (Rs m) 9,528 9,529 0.0%
    % of total revenues 5.5% 4.7%  
    Minutes billed (m) 4,598 4,156 -9.6%
    Revenue per minute (Rs) 2.07 2.29 10.6%
    EBITDA margin 44.2% 42.4%  
    EBITDA per minute (Rs) 0.92 0.97 6.1%
    B2B (Formerly nterprise Services)
    Revenue (Rs m) 11,042 13,934 26.2%
    % of total revenues 6.4% 6.9%  
    Minutes billed (m) 23,824 27,337 14.7%
    Revenue per minute (Rs) 0.46 0.51 10.0%
    EBITDA margin 21.5% 15.4%  
    EBITDA per minute (Rs) 0.10 0.08 -21.0%
    Passive Infra. Services
    Revenue (Rs m) 23,766 25,567 7.6%
    % of total revenues 13.8% 12.6%  
    EBITDA margin 37.5% 37.5%  
    DTH (Direct to Home)
    Revenue (Rs m) 3,135 3,937 25.6%
    % of total revenues 1.8% 1.9%  
    EBITDA margin 3.7% 0.8%  
    Others (India & South Asia)
    Revenue (Rs m) 859 946 10.1%
    % of total revenues 0.5% 0.5%  
    EBITDA (Rs) (1,969) (2,249)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue from Africa

  • Bharti's operating margins stood at 31.3% during 2QFY13, which was lower than the 33.7% seen during the same period last year. This was largely on account of higher access charges as well as higher network operating costs and selling and administrative expenses. This offset the marginal decline in employee charges as well as the license fee and spectrum charges during the quarter (all as percentage of sales).

  • Effective tax rates shot up substantially during the quarter.

  • Net profits declined by 29.8% YoY during the quarter. This was on account of lower operating margins during the quarter. Profits were also negatively impacted by the higher depreciation charges as well as higher tax rates.

  • The debt equity ratio stood at 1.43 times at the end of September 2012 as compared to 1.36 times at the end of March 2012 and 1.5 times at the end of June 2012.

What to expect?
At the current price of Rs 277, the stock is trading at a multiple of 30 times its trailing twelve months earnings.

The company's performance has continued to languish in the current quarter as well. It faced a decline in not just the African markets but also in its core Indian markets. The net loss attributable to Africa has widened. At the same time hyper competition coupled with increasing costs have hurt the business back home. The Indian markets have seen saturation in recent times. With most operators withdrawing free benefits, subscribers have been surrendering their multiple mobile connections. This has led to a decline in overall telecom subscriber base in the country and has hurt all operators including Bharti.

The operators have been stressing on the need for tariff increases. However they have been selective with their approach towards hikes given the intensity of competition in the country. As per the management of Bharti operators would come out with concrete plans of tariff increases only post the 2G auction which is scheduled to start in the coming week. The increased cost of spectrum as well as the huge quantum of spectrum fee that most operators would be forced to pay would justify and therefore warrant the need for tariff hikes.

Though the company has seen a decent traction on the data side however data growth in the country is still at a nascent stage. However the management is optimistic that data would be the long term driver for the company and the industry as a whole. In lines with this it has already invested heavily on the data front. The benefits of this would be visible in the time to come.

We believe that the current headwinds that the company and the sector as a whole are facing, would continue to mar operational performance in the short term. But they should clear up in the long term. In fact Bharti is best poised to reap returns in the event of consolidation in the Indian telecom markets. As a result investors will have to be a little patient with the stock, for the best stocks in the telecom sector will reaps gains only once the sector overcomes the regulatory risks, which will take some time

In light of the regulatory risks as well as competition, we had revised our estimates and had arrived at a target price of Rs 525 per share. We find that the stock still offers considerable upside for the next 2 to 3 years. It is important to note that we have not given the company any valuation for its tower arm. Any return earned on the listing of the same would be additional. Therefore, we maintain our ‘Buy' view on the company.

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