Bharti Airtel has touched a new two-year low and suddenly we see almost every analyst rushing to downgrade the company. June 2012 quarter results provided them the perfect opportunity to do so. With reports being titled as ‘Not worthy of a medal’ and ‘The wait for good things gets longer’, analysts have lowered the company’s rating, price target and financial projections. Goldman Sachs has removed Bharti Airtel from its Asia Pacific Buy list.
While telecom stocks across the board have been hit on account of macro headlines, Bharti Airtel’s performance has deteriorated on account of its own aggression and hunger for market share.
We take a look at 10 reasons why the company trades at its two year low:
1. Bharti Airtel’s net profit has declined for every quarter in the past two and a half years. Profits which peaked at Rs 2,044 crore in fourth quarter of FY10 have slipped to Rs 775 crore in June 2012 quarter.
2. An annual report study by CLSA shows that Bharti’s debt jumped six times in FY11 and by another 12 per cent in FY12 to Rs 69,300 crore.
3. Seventy per cent of its debt is dollar-denominated and 91 per cent of the debt is on a floating rate basis. A five per cent move in the rupee impacts the profit before tax by seven per cent. Also, a 100 basis point change in interest rate changes pre-tax profit by seven per cent.
4. Nearly 28 per cent of the debt (Rs 19,300 crore) either needs to be paid back by FY13 or rolled over.
5. Earnings before interest and tax (EBIT) margins have crashed from slightly above 30 per cent in early FY10 to 10.8 per cent in June 2012.
6. Return on Capital Employed (ROCE) has plummeted from 32 per cent in early FY08 to 7.2 per cent.
7. CLSA says that Bharti depreciates its network equipment over three-20 years (average 10 years) versus five to seven years for other players in Asia. There is thus a risk of step-up in depreciation rates or a one-time write-off at a time when its profitability is falling.
8. Investment in Africa continues to remain a puzzle. Against an expectation of a recovery, the company disappointed the market with margins falling by two percentage points in Q1 FY13. Further, the company’s management has given a cautious outlook on Africa.
9. Rather than deleveraging, regulatory payments and its capital expenditure of nearly Rs 10,000 crore will increase more debt to the company’s books, adding further pressure on its profitability.
10. Its high investments in Africa, 3G and 4G have not resulted in strong growth, which was built in by analysts, thus resulting in lower actual performance.