Mart to Market: Bharti’s dream run continues

Mart to Market: Bharti’s dream run continues
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First Published: Fri, Jul 27 2007. 12 30 AM IST
Updated: Fri, Jul 27 2007. 12 30 AM IST
Bharti Airtel Ltd reported single-digit operating profit growth for the first time in six quarters. Ebitda (earnings before interest, taxes, depreciation and amortization) rose 9.2% sequentially to Rs2,446.6 crore in the quarter ended 30 June. But it must be noted that the company took a hit of about Rs70 crore on account of a change in accounting policy. Adjusted for this, growth would be in double-digits. Even without this adjustment, revenues and earnings were higher than consensus estimates compiled by Bloomberg.
Year-on-year (y-o-y) revenue growth continued to be robust at more than 50%, aided by an 85% jump in subscriber base. Growth is being driven by increased coverage—Bharti’s network now covers 62% of the Indian population, compared with 46% a year ago. Average revenue per user (Arpu) fell 11% to Rs390 as lower value pre-paid customers continued to dominate new subscriber additions. But the fall in Arpu hasn’t affected profitability. Instead, Bharti’s operating margin has risen from 39% in the year-ago June quarter to 41.4% currently. Ebitda rose 63% y-o-y, as a result. Net profit growth was even more impressive at 100%, as finance income jumped owing to forex fluctuations.
Growth was driven by the firm’s wireless business, which now accounts for 72% of gross revenues and 75% of gross Ebitda. A year ago, it accounted for 67% of revenues and 68% of profit. Non-mobile businesses, which includes broadband, fixed-line services, long-distance and enterprise services, grew revenues and profit by about 30% y-o-y.
Apart from its steady growth, Bharti’s valuations have gotten an additional trigger thanks to its decision to hive-off its tower business. Analysts say that this business accounts for almost 20% of the firm’s valuation. Excluding this, Bharti trades at an enterprise value/Ebitda multiple of 17 times, based on trailing earnings, within its recent historical band. Bharti’s shares have beaten market returns in each of the previous four calendar years. Going by its financial performance, it looks set to repeat the feat once again this year. Already, its year-till-date returns of 47% are about three times that of the Nifty.
Maruti Udyog Ltd’s (MUL) June quarter results were a pleasant surprise and the stock responded by rising 3.9% in a weak market. Automobile stocks have started moving up tentatively in the belief that the central bank is done with its rate hikes and as a result the outlook would improve for interest-rate sensitive sectors. Will MUL’s results fuel the optimism?
The number of vehicles sold during the quarter rose 17% from the year-ago period, while revenues rose 26%, indicating a substantial rise in realizations as MUL sold more high-end vehicles that not only boosted revenues, but also fattened margins.
For instance, the June sales numbers for MUL show that while sales of Maruti 800 continue to decline, it’s offset by a 38% rise in the more profitable A2 segment (slightly larger and more advanced small cars) and a 46% growth in the A3 segment (inexpensive small sedans), thanks to the launch of the SX4. The upshot has been that operating margin, at 14.6%, was flat compared with the year-ago period, but well above the March quarter’s 12.4%.
The MUL management had pointed out that the decline in profitability during the March quarter was the result of higher commodity prices on the one hand, and the high overheads at the new Manesar plant on the other. As volumes rise at the plant, economies of scale will be realized. This quarter, there has been an all-round improvement, with a decline in raw material costs, other expenses and employee costs as a percentage of sales, compared with the previous quarter.
The bottom line was also boosted by much higher other income, with analysts attributing it to foreign exchange gains on account of imports. The rise in other income contributed a lot to the company’s 32% rise in profit before tax (PBT), y-o-y. If other income had remained at the same level as in the year-ago period, the rise in PBT would have been a less spectacular 23%.
With interest rates topping out, it’s likely that the worst is already behind MUL. The company has new launches and capital expenditure plans lined up, and it will slowly become a major exporter, and a research and development hub for Suzuki. But that’s in the future.
In the short-term, the June quarter results indicate that the company has been able to not only maintain volume growth despite rising interest rates, but also improve margins.
Write to us at marktomarket@livemint.com
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First Published: Fri, Jul 27 2007. 12 30 AM IST