Just when it had seemed like Bharti Airtel Ltd’s shares were beginning to narrow the valuation gap with those of Idea Cellular Ltd, the rupee spoiled the show for the company, depreciating by another 10% since early August. As of March, Airtel had foreign currency debt of around $10 billion, at least 80% of which was denominated in dollars. The 10% depreciation in the rupee against the dollar will increase the company’s liability in rupee terms by at least Rs.5,000 crore. According to an analyst with a domestic institutional brokerage, Airtel’s debt would rise to Rs.67,500-70,000 crore from Rs.58,380 crore at the end of June if the rupee stays at 67 per dollar.
On 31 July, when Airtel reported better-than-expected results, it had seemed that the company’s shares may outperform those of Idea. Especially so because Idea’s shares had already rallied sharply and their valuations were rich. But this trend played out for only four trading sessions after the results were announced, with Airtel shares rising by 5% and Idea’s declining by 1%. Soon after, the rupee’s free-fall led to further underperformance in Airtel’s shares.
In the past two years, Airtel has underperformed Idea by over 50%.
Airtel’s June-quarter results were promising, with revenue per minute increasing by 4% and volumes growing by 2%. Blended average revenue per user grew by 4% and earnings before interest, tax, depreciation and amortization rose by 12% sequentially. South-East Asian operations turned in better-than-expected results as well, although the much larger African operations continued to disappoint.
While the results didn’t warrant significant earnings upgrades, they did result in an improvement in sentiment, especially given the string of disappointing results in the past. Meanwhile, Airtel’s recently released annual report shows that its stand-alone operating cash flow after interest charges increased from Rs.10,150 crore in fiscal year 2012 to Rs.12,270 crore in the year ended March, according to Edelweiss Research. This was despite a drop in pre-tax profit. What’s worrying, however, is that goodwill accounted for over 80% of the company’s net worth. Further erosion in reserves could result in the company ending up with negative tangible net worth. Some of these concerns seem to be reflected in Airtel’s shares.