India’s largest mobile phone operator, Bharti Airtel Ltd, reported decent consolidated results, growing revenues by 8.5% sequentially and maintaining operating profit margin at March quarter levels despite falling tariffs. On a year-on-year basis, however, profit growth fell to the lowest in at least nine quarters.
In early trades on Thursday, the Bharti Airtel stock rose 5.6% on the back of the strong consolidated numbers, but gave up all of those gains and ended 4.4% lower on the National Stock Exchange. The fall could be because of the drop in margins of the mainstay wireless business, says an analyst with a foreign brokerage firm who asked not to be quoted.
The wireless segment’s margins are not comparable with earlier periods because of the hiving off of its tower infrastructure business earlier this year. Since February, the wireless segment pays fees to this unit for using tower infrastructure, against the earlier practice where the tower operations were part of the wireless segment. As a results, margins have come down. Similarly, accounting of carrier fees for long-distance calls has changed. This has impacted margins of the wireless segment, while raising the profitability of the long-distance carrier business.
But, even after adjusting for these changes, margins of the wireless segment have declined due to falling tariffs and higher fuel costs, which have impacted network operating costs. The company hasn’t disclosed how much the impact was, but alluded to the hit on profitability on account of falling tariffs and higher fuel costs.
The average realized rate of wireless traffic fell by 7.2% to 65 paise per minute, the sharpest drop in the past five quarters. Last quarter’s drop was largely owing to cuts in national roaming and long-distance rates. What’s heartening is that the drop in tariffs has resulted in a significant increase in average usage by customers, which inched up by 5.4% quarter-on-quarter.
Since the December quarter, average minutes of use by customers has improved by 12.8% even while the average realized rate has dropped by 13.4%. According to an analyst, the company’s strategy seems to be to drive volume growth and subscriber additions by lowering tariffs, especially in the light of new regulations where new spectrum is allotted only when a company reaches a threshold of subscriber numbers with existing capacity.
The drive for more subscribers also seems to be increasing capital expenditure for the company. Although the company has hived off much of its tower infrastructure to Indus Towers, in partnership with Vodafone and Idea Cellular Ltd, its capex estimates for the year continue to be high at $3.5 billion (Rs14,700 crore). Indus Towers hosts the infrastructure for 16 major circles the company operates in and has a separate capex plan for expanding towers, and this is not included in the estimate given by the company. This is pretty much in line with what the company spent in fiscal 2008, when it had to spend on tower infrastructure even in these 16 circles.
Profit growth could be impacted in the future owing to these constraints. Last quarter’s year-on-year growth in profit before tax was 26%. To add to all this, investors also have to stomach the risk of an unusually dynamic regulatory environment.
It’s no wonder the dream run of Bharti Airtel shares has ended.
Reliance Industries’ refining margins disappoint
The net profit of Reliance Industries Ltd (RIL) for the June quarter has been below expectations. Growth in net profit has been 13.2%, well below the 23.9% growth during the March quarter. At the Ebitda (earnings before interest, tax, depreciation and amortization) level, profit growth has been in single digit, 7.9%. That’s not all: The notes to RIL’s accounts say foreign exchange differences from borrowings for fixed-asset acquisitions have not been accounted for under the Accounting Standard 11 of the Institute of Chartered Accountants of India, the accounting regulator. Had RIL followed it, the net profit would have been Rs3,170 crore, lower than the Rs3,630 crore a year ago. Analysts say RIL follows the Companies Act for adding foreign exchange difference back to the fixed assets acquired through forex loans.
Yet, RIL’s rise in net turnover has been substantial, with year-on-year growth at 40.8%, driven by higher crude oil prices. The problem lies in the Ebitda margin, which has dipped from 16.1% in the March quarter to 14.7%. A key disappointment has been in the gross refining margin (GRM), which, at $15.70 (Rs659) per barrel, is only slightly above the March quarter’s $15.50. The market was expecting it to be around $16.5, assuming the same premium over the benchmark Singapore refining margins as in the March quarter. Contrast Chennai Petroleum Corp. Ltd, whose GRM for the quarter were $15.89 a barrel, up from $9.59 in the March quarter.
Ebit (earnings before interest and tax) margins in the refining segment have accordingly moved down from 9.9% in the March quarter to 9.3%. As a result of firm petrochemical prices, Ebit margins in the petrochemical segment improved from 10.4% to 10.6% in the same period despite a sharp rise in the price of naphtha and an increase in gas prices.
Analysts say the June quarter was a very strong period for refining margins and margins are likely to be lower in future as a result of additional capacity coming on stream in China. While falling crude oil prices will lead to lower feedstock prices for Reliance’s petrochemical business, the outlook is uncertain, as new polymer capacity comes on stream in West Asia at the same time as global growth slows.
The RIL scrip is expensive compared with its regional peers, but the commissioning of the Reliance Petroleum refinery and news flow from exploration and production will drive the stock.
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