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Bharti Airtel: Africa darkens bottom line - Views on News from Equitymaster
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Bharti Airtel: Africa darkens bottom line
Nov 8, 2011

Bharti Airtel declared the results for second quarter of the financial year 2011-12 (2QFY12). The company has reported 13.4 YoY increase in total revenues but a 38.2% YoY decline in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 13.4% QoQ during the second quarter of the financial year 2011-2012(2QFY12). For the half year ended September 2011 (1HFY12), net sales grew by 24.5% YoY.
  • Mobile subscriber base in India grew by 21% YoY during the quarter. Total count of subscribers stood at around 172 m at the end of September 2011. Total subscriber base on the network (including Asia and African operations) grew by 22% YoY during the quarter.
  • Operating margins remained flat during the quarter at 33.7%. For 1HFY12, operating margins declined by 1.6% YoY to 33.6%.
  • Net profit witnessed a decline of 38.2% YoY during the quarter. This was due to higher depreciation charges as well as higher interest costs during the quarter. For 1HFY12, net profits declined by 32.9% YoY.

Consolidated financial performance snapshot (IFRS)
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 152,319 172,764 13.4% 275,158 342,592 24.5%
Expenditure 100,941 114,613 13.5% 178,360 227,382 27.5%
Operating profit (EBDIT) 51,378 58,151 13.2% 96,798 115,210 19.0%
Operating profit margin (%) 33.7% 33.7%   35.2% 33.6%  
Other income - -   - -  
Interest expense/(income) 3,319 11,186 237.0% 7,517 19,736 162.6%
Depreciation 25,790 31,839 23.5% 45,257 63,153 39.5%
Share of loss/(gain) inassociates (2) -   (56) -  
Exceptional items - -   (982) -  
Profit before tax 22,267 15,126 -32.1% 42,986 32,321 -24.8%
Tax 5,678 4,900 -13.7% 9,428 10,041 6.5%
Profit after tax/(loss) 16,589 10,226 -38.4% 33,558 22,280 -33.6%
Minority interest 23 44   (130) 142  
Net profit 16,612 10,270 -38.2% 33,428 22,422 -32.9%
Net profit margin (%) 10.9% 5.9%   12.1% 6.5%  
No. of shares       3,797.5 3,797.3  
Diluted Earnings per share (Rs)*         13.03  
P/E ratio (x)*         30.6  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 2QFY12?
  • Bharti reported a revenue growth of around 13.4% YoY during the quarter. This was achieved by growth in the revenues from mobile services (including African operations), which increased by 14% YoY. Revenues from the passive infrastructure services, enterprise services and tele-media services segments witnessed a decent growth of 12.3% YoY, 5.5% YoY and 4.5% YoY respectively. The company's digital TV business (DTH) reported a growth of 85.6% YoY during the quarter (the company has started reporting the segment separately from this quarter onwards). The other operating revenues witnessed a healthy growth of 43.9% 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 183 per user per month. The same figure stood at Rs 202 during 2QFY11 and at Rs 190 during 1QFY12. During 2QFY12, the average revenue per minute (ARPM) stood at 40 paisa as against 44.4 paisa and 42.8 paisa during 2QFY11 and 1QFY12 respectively. The minutes of usage (MoU) declined marginally to 423 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 445 and 454 respectively.

    Bharti's ARPU and ARPM have continued to decline despite the fact that the company has raised promotional tariffs in some of its key circles. However, the effect of this move is still not visible in its numbers.

    Segment-wise performance*
      2QFY11 2QFY12 Change
    Mobile Services-India & South Asia
    Revenue (Rs m) 88,189 97,827 10.9%
    % of total revenues 68.1% 68.4%  
    Minutes billed (m) 196,196 224,734 14.5%
    Revenue per minute (Rs) 0.45 0.44 -3.2%
    EBITDA margin 35.3% 33.7%  
    EBITDA per minute (Rs) 0.16 0.15 -7.7%
    Mobile Services-Africa
    Revenue (Rs m) 38,906 47,032 20.9%
    % of total revenues 38.5% 41.0%  
    Minutes billed (m) 16,337 17,950 9.9%
    Revenue per minute (Rs) 2.38 2.62 10.0%
    EBITDA margin 23.2% 26.2%  
    EBITDA per minute (Rs) 0.55 0.69 24.6%
    Telemedia Services
    Revenue (Rs m) 9,118 9,528 4.5%
    % of total revenues 7.0% 6.7%  
    Minutes billed (m) 4,791 4,598 -4.0%
    Revenue per minute (Rs) 1.90 2.07 8.9%
    EBITDA margin 46.8% 44.2%  
    EBITDA per minute (Rs) 0.89 0.92 2.8%
    Enterprise Services
    Revenue (Rs m) 10,467 11,042 5.5%
    % of total revenues 8.1% 7.7%  
    Minutes billed (m) 20,723 23,824 15.0%
    Revenue per minute (Rs) 0.51 0.46 -8.2%
    EBITDA margin 24.9% 21.5%  
    EBITDA per minute (Rs) 0.13 0.10 -21.0%
    Passive Infra. Services
    Revenue (Rs m) 21,161 23,766 12.3%
    % of total revenues 16.3% 16.6%  
    EBITDA margin 37.1% 37.5%  
    DTH (Direct to Home)
    Revenue (Rs m) 1,689 3,135 85.6%
    % of total revenues 12.9% 21.6%  
    EBITDA margin -36.2% 3.7%  
    Others
    Revenue (Rs m) 597 859 43.9%
    % of total revenues 0.5% 0.6%  
    EBITDA (Rs) (2,114) (1,969)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • The telemedia services segment reported a growth of 4.5% YoY during the quarter. The growth was driven by the 8.9% YoY growth in the average realized rate per minute, which offset the 4% YoY decline in total billed minutes.

  • The enterprise segment witnessed a muted growth of 5.5% YoY during the quarter as the 15% YoY increase in the number of minutes billed was partially offset by the 8.2% YoY decline in average realized rate per minute.

  • Bharti's operating margins stood at 33.7% during 2QFY12, which was flat on a year-on-year basis. The increase in sales was offset by a proportionate increase in operating expenses during the quarter. Operating expenses were higher on account of higher access charges related to the 3G roaming agreements with other operators. Operating expenses were also higher on account of higher network operating expenses during the quarter (all as percentage of sales).

  • Net profits declined by 38.2% YoY during the quarter. This was on account of higher interest costs which more than doubled as compared to the same period last year. Profits were also negatively impacted by the higher depreciation charges as well as forex losses (as opposed to forex gains in the previous period) during the quarter. The debt equity ratio stood at 1.39 at the end of September 2011 as compared to 1.26 at the end of June 2011.

What to expect?
At the current price of Rs 398, the stock is trading at a multiple of 13.7 times our FY14 estimates for the company.

As per the management, the Indian telecom industry has stabilized. As per them, all players are now exhibiting rational behavior in terms of pricing despite the intense competition in the market. The company has raised its tariffs in some of its circles. They stated that the benefit of this would be visible in the coming quarters.

The management is also upbeat about the new proposals by the telecom regulator. They feel that the simpler norms on spectrum sharing as well as the new M&A rules would help bring about the much needed consolidation in the intensely competitive telecom industry.

With regards to Africa, the management has stated that the operations continue to deliver positive results. While the company has rationalized the excess premiums being charged in the tariffs, it still has not brought down the rates too much. The management plans to wait to bring down the costs before it brings down the tariffs. Otherwise there would be an adverse impact on the margins. The company continues to restructure the business in Africa and has stated that this process would be complete over the next few quarters. The current quarter saw margins for the Africa business dip down. However, this was mainly on account of fluctuations in the forex rates.

Based on the valuations and the company's future growth prospects, we maintain our 'Buy' view on the stock.

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