DSIJ Mindshare

Bharti Airtel: Drop This Call

Telecom was touted to be a sunrise sector a couple of years ago, but has failed to deliver as expected. Within a span of two years, the scenario has changed so badly that the sentiments towards the sector are anything but positive now.

The sector has not seen good times for quite some time, especially with all the flak from the 2G scam hitting it hard. The sentimental change towards the telecom sector can also be attributed to the intense competitiveness among incumbents, which has led to a severe pressure on the margins of players. Also, companies are yet to capitalise on the much-hyped 3G launch, which has seen a huge debt pile-up on their books. There are certain ongoing issues on the regulatory front too, especially with regard to the 2G spectrum. The auction dates have been postponed by the Supreme Court from 31st August, 2012 to 11th January, 2013 with two discomfiting caveats – the failure to adhere to the new schedule would invite contempt action against officials and the possible imposition of heavy penalties on the Union government.

In this midst of all this, Bharti Airtel, which was being looked upon as the flag bearer of the sector at one point of time, has been among the worst hit. Bharti has been severely beaten down since September 2010, declining by as much as 32.51 per cent and underperforming the Sensex (which went down by 13.38 per cent over the same period).

What ails Bharti and what should investors be doing with the stock in the current scenario? Here are some quick updates that could either help boost the strength of your call or drop the counter in favour of something much better and safer.

Bharti is the only Indian company that has international operations spanning across 17 African countries through Zain Telecom and also in Sri Lanka and Bangladesh through its subsidiaries there. So, how well is the company performing of late?[PAGE BREAK]

Q1FY13 Financial Results

India & South Asia
Bharti’s topline growth in case of its businesses in India and the South Asia (SA) stood at a measly 1.7 per cent on a QoQ basis. There has been a significant decrease in its EBITDA margin, which stood at 30.3 per cent for Q1FY13 as against 34.2 per cent for Q1FY12.

Inspite of a decent addition to the subscriber base, there has been a decline in the average revenue per user (ARPU), which stood at Rs 185 during Q1FY13 as against Rs 190 during the same quarter last year. It has added the highest number of subscribers in the region among its peers, but that has not benefited it much due the increasing competitiveness and the decreasing ARPU. The average realisation rate (ARR) has also moved southward to Rs 42.70 in Q1FY13 as against Rs 43.80 for Q4FY12.

Mobile Business Performance In India And South Asia
ParticularsQ1FY12Q2FY12Q3FY12Q4FY12Q1FY13
Revenue (Rs/Cr) 9840 9783 10176 10510 10685
Revenue Growth (% QoQ) 3.6 -0.6 4 3.3 1.7
EBITDA Margin (%) 34.2 33.7 33.8 34 30.3
Subscribers (Millions) 169.2 172.8 175.7 181.3 187.3
Minutes Of Use (Mins) 445 423 419 431 433
Monthly Churn (%) 6.4 7.2 7.9 8.8 8.8
Non-Voice Revenue (% of Revenue) 15.6 16.1 15.8 16.2 16.3
ARPU (Rs) 190 183 187 189 185
ARR (Paisa/Min) 42.8 43.2 44.6 43.8 42.7

[PAGE BREAK]

Q1FY13 Financial Results


Africa
The company’s African business witnessed some improvement in its financial performance, with the topline growing by 8.89 per cent on a YoY basis to USD 1066 million for Q1FY13 as against USD 979 million during Q1FY12. There has been a slight increase in the EBITDA margin, which stands at 25.8 per cent for Q1FY13 as against 25.2 per cent during the same quarter last year. The ARPU stands at USD 12.9 in the first quarter of this fiscal as against USD 10.6 YoY.

Mobile Business Performance In Africa
ParticularsQ1FY12Q2FY12Q3FY12Q4FY12Q1FY13
Revenue (USD/Mn) 979 1,030 1,057 1,071 1,066
Revenue Growth (% QoQ) 5.9 5.3 2.6 1.3 -0.4
EBITDA Margin (%) 25.2 26.2 26.7 27.8 25.8
Subscribers (Millions) 46.3 48.4 50.9 53.1 55.9
Minutes Of Use (Mins) 121 128 125 122 120
Monthly Churn (%) 6.3 6.1 5.4 5.3 5.1
Non-Voice Revenue (% Of Revenue) 10.6 10.7 9.4 10.6 12.9
ARPU (USD) 7.3 7.3 7.1 6.8 6.5
ARR (US¢/Min) 6 5.7 5.7 5.6 5.4
[PAGE BREAK]

Valuation & Outlook

On the valuation front, the scrip discounts its trailing 12- onth earnings by 24.45x and the EV/EBITDA stands at 8.11x. The valuation suggests that the stock is trading a tad lower than Idea Cellular but higher than Reliance Communications.

The valuation may look fair, but what really needs to be looked at while deciding on whether to buy into the counter now or not is the serious concerns on the margin front. Bharti’s margins are likely to remain depressed, as the competitive intensity is very much on the higher side.

What also acts as a big negative for the stock is the fact that FIIs have been decreasing their holdings in the stock. The FII holding stood at 16.87 per cent at the end of Q1FY13 as against 17.59 per cent at the end of Q1FY12.

In the present circumstances, nothing seems to be in favour of the company and the stock, and even a contrarian bet could land you in trouble by resulting in wealth erosion. It is best that you avoid the counter for now and try to get out of the stock if you hold it. We believe that the stock can be bought back at a reasonable time in the future, once the outlook improves.

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