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Bharti: Signals getting weaker

Hyper competition is likely to impact the company?s margins and profits in the current quarter as well

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's June 2012 quarter performance is among its worst in many quarters. Its net profit fell 24.2 per cent sequentially, which is the fifth consecutive quarterly decline and the highest profit fall in 20 quarters.

Margins and profits were also below Street expectation. With the current quarter (September) being a weak one and likely continuation of aggressive pricing strategies, the near-term outlook for the country's largest mobile services company Bharti Airtel, continues to be muted. Not surprisingly, Bharti’s stock fell the most (down 6.6 per cent) on Wednesday after the results. The stock, which has underperformed the Sensex in the last one year, is likely to trail in the near-term.

Since January, the company has been banking on lower prices to boost its (RMS), which has led to deteriorating operating metrics for all the players. Though Bharti's RMS and subscriber growth are improving, aggressive pricing, regulations and jump in sales and marketing expenses took a toll on its performance in the June 2012 quarter. The company's Ebitda margins fell by 300 basis points (bsp) to 30 per cent and net profit declined 24 per cent to Rs 762 crore compared to the March 2012 quarter.
 

MARGIN PRESSURES
in Rs crore  Q1’ FY13 % chg q-o-q FY13E % chg y-o-y
Total revenues  19,350 3.3 81,805 1.1
Ebitda  5,848 -6.2 26,178 10.6
Ebitda (%) 30.2 -305 bps 32.0 -110 bps
Net profit  762 -24.2 6,135 -1.2
E: Estimates                                                      Source: Company, Analyst reports 

“With SG&A expenses going up, you would expect the company to report higher revenue growth but at eight per cent sequential growth, it is in line with industry growth of 7-10 per cent, which is a disappointment,” says an analyst at a foreign brokerage house. On the Africa operations, the company indicated it would take longer than earlier estimates to achieve revenue and Ebitda targets of $5 billion and $2 billion, respectively.

Analysts estimate the company (current revenues of $4 billion) will reach the targets only by FY14. The poor performance, coupled with a lack of clarity on its India strategy are the key reasons for the Street’s disappointment.
 

MORE TALK, LESS MONEY
  Bharti Vodafone Idea
Q1' FY13 % chg q-o-q Q1' FY13 % ch q-o-q Q1' FY13 % ch q-o-q
ARPU (Rs) 185 -2.1 180 0.6 156 -2.5
ARPM (Rs) 0.43 -2.5 0.55 -1.6 0.41 -2.5
MoU 433 0.5 324 1.9 379

-

MoU is Minutes of Usage  Source: Company, Analyst reports 

Trai, competitive pressures
Driven by subscriber growth, Bharti’s consolidated revenues grew three per cent sequentially to Rs 19,350 crore. In addition to the lower tariffs, Trai’s guidelines banning processing fee on combo vouchers and service tax hit the top line and margins. The impact of the Trai action is estimated to be Rs 250-300 crore on the company’s top line.

“While subscriber growth has been appreciable, it has been negated by a 2.5 per cent fall in average revenue per minute,” says an analyst. Higher branding costs, trade commissions coupled with increase in network costs weighed on margins, which coupled with higher depreciation () led to the fall in net profit.

Eyeing higher market share
The key to improvement in operating metrics for Bharti and the rest of the market will be the easing of competitive intensity, which isn’t expected to happen anytime soon. Bharti is also not letting its guard down after aggressively reducing tariffs in January.

Chief Executive Officer (India & South Asia), in an investor concall said, the company consciously took the aggressive pricing route to improve its revenue market share despite the risk to Ebitda margins. Instead of being the last to effect changes, as was the case earlier, the company will now be ‘mark-to-market’ as far as the pricing strategy is concerned. While the short-term goal is to protect revenue market share, over the longer term the Bharti management says it will keep changing its strategy to achieve the balance between maintaining its Ebitda margins and market share.

For now, the company’s subscriber market share is estimated to have gone up by 30 bps sequentially to 20.05 per cent (Trai is yet to report the RMS numbers) as of June 30, which though has come at a high cost. In a first-take note post results, analysts wrote, “Bharti results indicate its strategy of gaining market share by spending more on SG&A (advertisements, distribution commissions, etc) and spending more on network opex is materially impacting its profitability. Even the recovery in revenue market share is below our expectations.”

IPO plans
To ease its debt burden of over $12 billion, it plans to raise equity by listing its tower subsidiary, Bharti Infratel — a 10 per cent stake sale would help raise $700-750 million. However, analysts say given the tough market situation and the lack of investor appetite, it is unlikely it will be able to raise funds in the current financial year.

Goldman Sachs analysts estimate the company would need to raise about $4.5 billion if it were to bring down its net debt-Ebitda ratio from 2.8 times to 1.5 times (the norm across Asian telecom companies). This suggests Bharti will have to do more if it wants to bring down debt to these levels.

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