Result Analysis: Bharti's profitability under stress in Q3

While Bharti has managed to grow revenues, higher expenses hurt bottom line

What’s good for consumers isn’t necessarily a very good thing for companies. Bharti’s third quarter performance shows that while it has managed to grow revenues, maintaining profitability is increasingly becoming a challenge. In Q3, Bharti grew its revenues by 7% to Rs 18,477 crore over the September 2011 quarter. Its earnings before interest, tax, depreciation and amortization grew 2.5% sequentially, and analysts feel its EBIDTA growth is beginning to come under stress. Its net profit declined by 16.6% y-o-y and 1.5% q-o-q to Rs 1,011.3 crore.

Analysts say the reason behind the profit contraction is primarily higher sales, general and administrative expenses (SG&A). Bharti reported a higher than expected SG&A of Rs 3,465 crore compared to estimates of Rs 3,116.7 crore. The impact of this higher SG&A spend has hurt the bottom line by Rs 235 crore. The company’s EBITDA margins too have contracted sequentially from 33.6% in Q2 to 32.2% in Q3.

The company seems to be under stress operationally too. For starters, the high SG&A spends are not yielding the kind of gains they should as total usage seems to be stagnant. The minutes-under-usage reflects the growth of the company, but this has largely remained static or flat for Bharti, says Dhananjay Sinha, equity strategist at Emkay Global. After contracting in the second quarter, total minutes under usage in the network grew by a modest 2% in the third quarter to 252.97 billion. The company’s subscriber base in India has grown 15% annually. However, the increase in mobile revenues in India was fueled by a one% improvement in average revenues per minute (ARPM).

According to Microsec Securities, “On a sequential basis as well, Bharti’s ARPM rose to Rs 0.446 compared with Rs 0.436 a quarter earlier. Consequently, the company’s ARPU (average revenue per user) improved by Rs 4 sequentially to Rs 187 during the quarter.”

The stock rallied after the Supreme Court cancelled all 2G licences issued after 2008 as the market expected the competitive intensity to come off, but not all analysts are of this opinion. Telecom is a price-sensitive business and the competitive intensity will continue to prevail believe many others. Given the contraction in profit after tax, analysts are cutting their EPS estimates for FY12.