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Bharti Airtel: African debt weighs on profits
Nov 10, 2010

Bharti Airtel has announced its 2QFY11 results. The company has reported a 47% YoY growth in sales and a 27% YoY decline in profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 46.6% YoY during 2QFY11. The growth was led by a 24.1% YoY growth in the passive infrastructure services as well as a full quarter consolidation of the African operations. Revenues from the mobile services (67% of sales) segment, excluding African operations, increased by 6.2% YoY.
  • Mobile subscriber base grows by 30% YoY during the quarter. Total count of subscribers stood at around 143 m at the end of September 2010.
  • Operating margins declined by 7.8% YoY during the quarter owing to higher access charges, employee costs and selling and administration costs (as percentage of sales).
  • Net profit drops by 32% YoY during the quarter. Lower operating margins, higher interest and depreciation costs led to the drop in net income. It was also negatively impacted by the acquisition costs related to the African operations.


Consolidated financial performance snapshot (IFRS)
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 103,785 152,150 46.6% 207,928 274,458 32.0%
Expenditure 60,781 100,941 66.1% 122,082 178,360 46.1%
Operating profit (EBDIT) 43,004 51,209 19.1% 85,846 96,098 11.9%
Operating profit margin (%) 41.4% 33.7% -7.8% 41.3% 35.0%  
Other income 190 169 -11.1% 301 700 132.6%
Interest expense/(income) 2,084 3,319   800 7,517  
Depreciation 15,244 25,790 69.2% 29,998 45,257 50.9%
Share of loss/(gain) in associates (6) (2)   (6) (56)  
Exceptional items - -   - (982)  
Profit before tax 25,860 22,267 -13.9% 55,343 42,986 -22.3%
Tax 2,753 5,678 106.2% 7,058 9,428 33.6%
Profit after tax/(loss) 23,107 16,589 -28.2% 48,285 33,558 -30.5%
Minority interest (477) 23 -104.8% (910) (130) -85.7%
Net profit 22,630 16,612 -26.6% 47,375 33,428 -29.4%
Net profit margin (%) 21.8% 10.9%   22.8% 12.2%  
No. of shares 3,796.3 3,797.5   3,796.3 3,797.5  
Diluted Earnings per share (Rs)*         20.97  
P/E ratio (x)*         15.6  
* On a trailing 12 months basis; adjusted for exceptional items

What has driven performance in 2QFY11?
  • Bharti reported a revenue growth of 46.6% YoY during the quarter. On a quarter on quarter basis, revenues are higher by 24.4%. The growth in revenues was achieved by a 24.1% YoY growth in the passive infrastructure services segment. The mobile service segment, excluding African operations, grew by 6.2% YoY during the quarter. The growth was led by an expansion of the customer base. However it was offset by the 19.8% YoY decline in average revenue per user (ARPU). On a quarter on quarter basis, the decline in ARPU was by 6%.

  • Coming to the key parameters relating to the company's mobile service business, the average revenue per user (ARPU) stood at about Rs 202 per month. The same figure stood at Rs 252 during 2QFY10 and at Rs 215 during 1QFY11. During 2QFY11, the average revenue per minute (ARPM) stood at 44 paisa as against 45 paisa and 56 paisa during 1QFY11 and 2QFY10 respectively. The minutes of usage (MoU) ended their upward trend and ended at 454 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 480 and 450 respectively.

    While the ARPU and ARPM continued to decline, the rate of decline has come down as operators are no longer trying to aggressively slash tariffs to gain market share. The decline in MOU, however, is a concern as it indicates that new operators are most probably capturing a larger pie of minutes.

    Segment-wise performance*
      2QFY10 2QFY11 Change
    Mobile Services-India & South Asia      
    Revenue (Rs m) 82,902 88,045 6.2%
    % of total revenues 68.4% 67.2%  
    Minutes billed (m) 144,134 196,196 36.1%
    Revenue per minute (Rs) 0.58 0.45 -22.0%
    EBITDA (Rs) 33,310 30,964 -7.0%
    EBITDA margin 40.2% 35.2%  
    EBITDA per minute (Rs) 0.23 0.16 -31.7%
    Mobile Services-Africa      
    Revenue (Rs m)   38,906  
    % of total revenues   38.5%  
    Minutes billed (m)   12,782  
    Revenue per minute (Rs)   3.04  
    EBITDA (Rs)   9,311  
    EBITDA margin   23.9%  
    EBITDA per minute (Rs)   0.73  
    Telemedia Services      
    Revenue (Rs m) 8,543 9,118 6.7%
    % of total revenues 7.1% 7.0%  
    Minutes billed (m) 4,796 4,791 -0.1%
    Revenue per minute (Rs) 1.78 1.90 6.8%
    EBITDA (Rs) 3,646 4,200 15.2%
    EBITDA margin 42.7% 46.1%  
    EBITDA per minute (Rs) 0.76 0.88 15.3%
    Enterprise Services      
    Revenue (Rs m) 11,355 10,424 -8.2%
    % of total revenues 9.4% 8.0%  
    Minutes billed (m) 15,598 20,723 32.9%
    Revenue per minute (Rs) 0.73 0.50 -30.9%
    EBITDA (Rs) 3,141 2,571 -18.1%
    EBITDA margin 27.7% 24.7%  
    EBITDA per minute (Rs) 0.20 0.12 -38.4%
    Passive Infra. Services      
    Revenue (Rs m) 17,049 21,161 24.1%
    % of total revenues 14.1% 16.2%  
    EBITDA (Rs) 5,831 7,858 34.8%
    EBITDA margin 34.2% 37.1%  
    Others      
    Revenue (Rs m) 1,290 2,260 75.2%
    % of total revenues 1.1% 1.7%  
    EBITDA (Rs) (2,463) (2,714)  
    * As per IFRS numbers. Excluding inter-segment eliminations and other revenue

  • The telemedia services segment reported a growth of 6.7% YoY during the quarter. The enterprise segment on the other hand witnessed a decline of 8.2% YoY during the quarter due to lower average revenue per minute as the long distance segment witnessed aggressive price competition with operators slashing tariffs.

  • Bharti's operating margins stood at 33.7% during 2QFY11, as compared to 41.4% in 2QFY10. This 7.8% YoY decline in margins was mainly due to higher access charges, higher employee costs as well as higher selling and administration related expenses (as percentage of sales). Operating margins were also impacted by the consolidation of the African operations.

  • Profits declined by 26.6% YoY during the quarter. This decline was due to higher depreciation expenses related to expansion and costs related to the acquisition of the African operations. It was also impacted by higher interest costs related to debt taken to fund the African operations as well as the 3G and BWA related expense.

What to expect?
At the current price of Rs 328, the stock is trading at a multiple of 11.6 times our estimated FY13 earnings (Research Pro subscribers please click here).

The management stated that the reason for lower margins during the quarter was mainly higher than expected costs in Africa. Logistics as well as higher labor costs have pulled down the margins. However, going forward, the company will be focusing on higher network utilization as well as adopting the outsourcing model to bring down costs. However, these levers will take 2-3 quarters to play out.

The company also sees 3G as a major opportunity. The management expects 3G to be a major growth driver as it would lead to an increase in data related revenues as well as decongestion of the 2G networks.

We maintain our positive view on the company from a 2-3 year perspective.

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