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Bharti Airtel: Decent show in a messy year - Views on News from Equitymaster

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Bharti Airtel: Decent show in a messy year

Apr 28, 2010

Bharti Airtel has announced its FY10 results. The company has reported a 12% YoY and 17% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Consolidated sales grow by 12% YoY during FY10, 5% YoY during 4QFY10. Growth for the full year led by a 38% YoY rise in revenues from the passive infrastructure segment. Revenues from the mobile services segment (63% of sales) increase by 7% YoY. Actual sales higher by about 4% as compared to our full year estimates.
  • Mobile subscriber base grows by 36% YoY during the year. Total count of subscribers stood at around 128 m at the end of March 2010.
  • Operating margins decline by 0.5% YoY during the year owing to higher network operating costs (as percentage of sales).
  • Net profit drops by 1% YoY during 4QFY10, grows by 17% YoY during FY10. Higher interest income aids profit growth during the year. However, higher tax expenses curbs growth during the year. Actual profit for the year higher by 7% as compared to our estimates.
  • Exceptional items during the year and quarter relate to acquisition related costs such as advisory and professional fees directly attributable to the acquisitions in Bangladesh and Africa.
  • Recommends dividend of Re 1 per share (yield of 0.3%)

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales 102,551 107,394 4.7% 373,521 418,295 12.0%
Expenditure 62,220 66,658 7.1% 223,794 252,576 12.9%
Operating profit (EBDIT) 40,332 40,736 1.0% 149,727 165,718 10.7%
Operating profit margin (%) 39.3% 37.9%   40.1% 39.6%  
Other income 405 432 6.7% 1,524 1,225 -19.6%
Interest expense/(income) 3,987 (1,747)   18,613 (5,030)  
Depreciation 13,246 16,711 26.2% 46,728 61,994 32.7%
Share of loss/(gain) in associates - (32)   - (48)  
Exceptional items - (976)   - (976)  
Profit before tax 23,504 25,195 7.2% 85,910 108,954 26.8%
Tax 2,543 4,378 72.1% 5,468 15,339 180.5%
Profit after tax/(loss) 20,960 20,817 -0.7% 80,442 93,615 16.4%
Minority interest (483) (576) 19.3% (1,852) (1,984) 7.1%
Net profit 20,477 20,241 -1.2% 78,590 91,631 16.6%
Net profit margin (%) 20.0% 18.8%   21.0% 21.9%  
No. of shares       1,898.2 3,797.5  
Diluted Earnings per share (Rs)*         24.4  
P/E ratio (x)*         12.1  
* On a trailing 12 months basis

What has driven performance in FY10?
  • Bharti reported a revenue growth of 12% YoY during FY10. Revenue during 4QFY10 grew by 5% YoY. On a quarter on quarter basis, revenue is higher by 4%. The company was able to achieve a decent rise in revenue during the year on account of 38% YoY rise in its passive infrastructure business. This segment contributed to nearly 14% of revenues (not adjusting for inter-segment eliminations). The company’s largest revenue contributor, mobile services segment, witnessed a 7% YoY growth in revenue. This segment contributed to nearly 63% of sales (similar to last year). However, it must be noted that the lackluster growth of this segment was despite a good 36% YoY increase in its subscriber base. At the end of March 2010, the wireless subscriber base stood at about 128 m.

  • Coming to the key parameters relating to the company’s mobile service business, the average revenue per user (ARPU) stood at about Rs 220 per month. The same figure stood at Rs 305 during 4QFY09 and at Rs 230 during 3QFY10. During 4QFY10, the average revenue per minute (ARPM) stood at 47 paisa as against 52 paisa and 63 paisa during 3QFY10 and 4QFY09 respectively. However, the surprising factor this quarter was the jump in the minutes of usage (MoU), which stood at 468 minutes per subscriber per month. The same figure for the preceding quarter and corresponding quarter last year stood at 446 and 485 respectively. While on a yearly basis, these parameters have performed badly, the scenario is not so bad on a quarter on quarter basis.

    While the fall in MoU on a year on year basis is on the back of the tariff war that started around last year, a lower decline in the same on a quarter on quarter basis indicates some amount of easing out. However, this is the case so far. The management has indicated that the pressure on tariffs (due to market forces) continue in the coming quarters, it will definitely match its peers’ rates.

    Discussing about the surprising element of this quarter, the MoU, in the mobile space, Bharti’s management did indicate that the jump in volumes in on the back of various reasons. The key being the 8.8 m net addition in subscribers (the company’s highest in a quarter ever). In addition to this, the management also shared that its latest mobile plan (which provides customers an option to choose between the per-second and per-minute plan) has also been accepted well. To put things in perspective, the total minutes billed during the quarter (mobile services segment) stood at about 173 bn as against 153 bn and 131 bn during 3QFY10 and 4QFY09 respectively.

    Segment-wise performance*
      4QFY09 4QFY10 Change FY09 FY10 Change
    Mobile Services            
    Revenue (Rs m) 82,430 82,271 -0.2% 304,189 325,717 7.1%
    % of total revenues 64.4% 61.8%   63.9% 62.6%  
    Minutes billed (m) 130,669 172,797 32.2% 459,187 610,431 32.9%
    Revenue per minute (Rs) 0.63 0.48 -24.5% 0.66 0.53 -19.5%
    Profit margin (EBIT) 22.7% 19.1%   22.6% 21.3%  
    Profit per minute (Rs) 0.14 0.09 -36.7% 0.15 0.11 -24.1%
    Telemedia Services            
    Revenue (Rs m) 8,593 8,516 -0.9% 33,426 34,194 2.3%
    % of total revenues 6.7% 6.4%   7.0% 6.6%  
    Minutes billed (m) 4,737 4,515 -4.7% 19,331 18,633 -3.6%
    Revenue per minute (Rs) 1.81 1.89 4.0% 1.73 1.84 6.1%
    Profit margin (EBIT) 23.0% 21.1%   24.5% 22.0%  
    Profit per minute (Rs) 0.42 0.40 -4.6% 0.42 0.40 -4.7%
    Enterprise Services            
    Revenue (Rs m) 21,478 21,031 -2.1% 83,418 84,386 1.2%
    % of total revenues 16.8% 15.8%   17.5% 16.2%  
    Minutes billed (m) 14,462 19,048 31.7% 54,677 66,340 21.3%
    Revenue per minute (Rs) 1.49 1.10 -25.7% 1.53 1.27 -16.6%
    Profit margin (EBIT) 39.1% 38.5%   41.5% 40.6%  
    Profit per minute (Rs) 0.58 0.43 -26.7% 0.63 0.52 -18.5%
    Passive Infra. Services            
    Revenue (Rs m) 14,579 19,182 31.6% 50,913 70,082 37.6%
    % of total revenues 11.4% 14.4%   10.7% 13.5%  
    Profit margin (EBIT) 1.7% 10.1%   6.3% 9.0%  
    Revenue (Rs m) 971 2,099 116.3% 4,000 5,860 46.5%
    % of total revenues 0.8% 1.6%   0.8% 1.1%  
    Profit margin (EBIT) -183.7% -192.2%   -171.5% -228.2%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations and other revenue

  • As for the company’s other business like telemedia and enterprise services, these reported subdued numbers during FY10. While revenue from the former increased by 2% YoY, the latter saw its revenue rise by about 1% YoY. Revenue of both these segments marginally dropped during the quarter. •

  • Bharti’s operating margins stood at 39.6% during FY10, as compared to 40.1% in FY09. This 0.5% YoY decline in margins was mainly due to higher network operating costs (on the back of expansion), which stood at nearly 21.3% of sales during the year (16.7% in FY09). On the bottomline front, the company was able to grow at a faster pace. Profits grew by 17% YoY during FY10. This was mainly due to interest income earned during the year as against interest expenses during FY09. However, a higher tax outgo curbed the profit growth during the year. The effective tax rate stood at about 14% during the year. The management expects it to be at levels of 15-16% in FY11.

What to expect?
At the current price of Rs 295, the stock is trading at a multiple of 10.1 times our estimated FY12 earnings. FY10 was one of the most difficult years for the Indian telecom industry. With about thirteen players present in the industry (and more likely to join), competition reached a new level. However, the company’s management during its earnings call did indicate that the pressures are reversing. This is probably considering the slowdown in the decline of its key parameters. Also with the strong jump in the minutes billed, the management did mention that a large portion of the increment in usage is coming from the smaller towns, which is a big positive.

As for the growth driver for the future, as obvious as it may be, it would come from rural India. It is believed that rural penetration still stands at just around 20%. We believe Bharti’s wide distribution network will only give it an advantage over its peers. Another positive indicator is that of the non-voice and non-SMS revenue contributing to the company’s topline. The management expects this trend to continue.

On the Zain deal, the management expects it to close before time (sometime in mid-May to be precise). As such, it did not divulge a lot of information on the same. However, once the deal is sealed, it will hold another conference call. All it has to say currently is that the due diligence process is coming along well. We maintain our positive view on the stock from a 2 to 3 years perspective.

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