The good news in Bharti Airtel’s 29% profit fall
3 min read 30 Oct 2013, 11:08 AM ISTInvestors seem happy with the 15.1% increase in Ebitda during the September quarter
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Evidently, investors in the Indian markets aren’t fixated with the net profit of a company. Bharti Airtel Ltd reported a 29% decline in its September quarter net profit, making it the 15th successive quarter of year-on-year decline in net profit. Still, BhartiAirtel’s shares rose 5.23% on Wednesday, making it the top gainer among Nifty stocks. Investors were pleased with the 15.1% increase in earnings before interest, tax, depreciation and amortization (Ebitda). In the process, they ignored the sharp jump in provisioning for taxes and finance costs, owing to mark-to-market losses and a one-time regulatory levy in the company’s international operations.
Bharti Airtel’s Ebitda margin has risen by 144 basis points on a year-on-year basis, thanks largely to a 284 basis points jump in margins of the India wireless business. One basis point is a hundredth of a percentage point. On a sequential basis, India wireless revenues fell 2.1%, owing to a 2.7% drop in the total number of voice minutes carried on the company’s network. This isn’t surprising, especially after Idea Cellular Ltd reported a 5.8% decline in volumes last week. The July-September quarter is a seasonally weak one for the telecom industry, besides which telcos have been trying to reduce the number of free minutes provided to customers. Of course, as one analyst puts it, based on the performance of the two companies last quarter, it appears that Idea has been more aggressive in weeding out free minutes, and that Bharti Airtel has been relatively more interested in preserving volume share.
This also seems to be borne out from the difference in the rate of improvement in realizations of the two companies. Bharti Airtel reported a 0.97% increase in its voice revenue per minute (RPM), while Idea managed a 2.17% increase. In the past two quarters, Idea’s voice RPM has increased 7.34%, while Bharti Airtel’s has risen by 4.98%. Of course, it remains to be seen if there is a secular trend and whether investors should be worried at all about a capping of gains from higher tariffs.
For now, investors are pleased with Bharti Airtel’s operating margin improvement, especially since Idea had reported a 60 basis points drop in margins. Last quarter, Ebitda margin of the India wireless business rose by 106 basis points sequentially, on the back of a 185 basis points increase in the June quarter. Another positive was the brisk pace of growth in mobile data revenues, which jumped around 20% sequentially and accounted for over 7% of consolidated revenue. In addition, Bharti Airtel’s enterprise business grew at a healthy pace, with Ebitda growing 17.3% sequentially.
Importantly, the Africa business, which has struggled in the past, reported a 5.4% increase in revenue in dollar terms and a 6.2% increase in Ebitda sequentially. Credit Suisse said in a note to its clients that Bharti Airtel’s Africa business is becoming increasingly self-reliant on a cash basis, and it estimated that the cash support from India to meet interest payment on acquisition debt has come down from $60 million per quarter to $25 million. Of course, on a year-on-year basis, growth in the African business continues to be sluggish at 2.7% (in constant currency). Besides, results of the first six months of this financial year included a one-off licence fee levy of ₹ 87 crore and a jump in withholding taxes in the international business, which point to the risks involved with the African acquisition.
In fact, this has been one of the reasons Bharti Airtel shares have underperformed those of Idea Cellular in recent years. In that backdrop, the company’s better-than-expected September quarter results provide some respite. Also, as Credit Suisse analysts point out, Bharti Airtel’s return on capital employed has risen from 5.6% at the end of the March quarter to 6.3% at the end of September.
Of course, gains will be limited because telcos continue to face a host of uncertainties. The company will need billions of dollars to renew its mobile permits, beginning with the upcoming sale of airwaves in three metros, besides which it will also require funds to buy additional third and fourth generation airwaves to expand its data offerings. The 3G spectrum sharing case is yet to be settled, and could potentially impact data revenues if the apex court endorses the government’s and sector regulator Telecom Regulatory Authority of India’s stance that the roaming agreements between the three incumbent operators are illegal.
