Bharti Airtel’s performance dented by rising costs and capex

Bharti Airtel’s results tell a different story, based on whether you compare it with the previous quarter or June 2008. Its performance seems to have improved compared to March but has deteriorated when compared to a year ago. It does appear that Bharti’s operating performance in 2009-10 will be lower, compared to the previous year.

Bharti Airtel’s cost of doing business went up sharply, lowering its operating profitability during the quarter. If the telecom major still reported a sharp jump in its net profits, it was primarily due to non-operating income. But its core business of providing mobile services is doing extremely well, with the other businesses like telemedia, enterprise services and others like DTH.

Comparision has been done with June 2008 quarter, using US GAAP Financials. Wherever previous quarter financials have been used, it is mentioned separately.

  • Bharti Airtel’s sales during the June 2009 quarter rose by 17.2% to Rs 9,942 crore, with services income rising by 16%. Overall sales grew by 1.2% over the previous quarter. Net profit increased by 25% to Rs 2,565 crore.
  • The telecom company’s operating expenditure has undergone change, chiefly due to higher license fees (up 19%), sharply higher network costs (up by 47.4%) and employee costs (up by 17%), thereby nullifying the effect of lower access charges (down by 8%). On the positive side, while expenses are up by 19% over last year’s level, it is down by 4% compared to the previous quarter.
  • Depreciation has also shot up sharply, up by 40%, due to higher capital expenditure. During June 2009, capex was Rs 2,709 crore and the balance sheet figure of property and equipment has increased by 22% as of June 2009, over last year.
  • Revenues from mobile services have increased by 19% while segment profit increased by 23%. This is the biggest segment, contributing to 83% of sales. But revenues from the second biggest segment, enterprise services grew by only 8% but still managed to grow segment profit by 18%. In telemedia services, revenues grew by 7% but segment profits declined by 10%.
  • But among segments, its new businesses have been running up losses, mainly on the DTH front. It incurred a segment loss of Rs 278 crore in ‘others’, which pulled down margins.
  • On the business front, net additions to mobile subscribers grew by 2% over the March 2009 quarter. But the mobile subscriber base has increased by 9% on a sequential basis. In line with past trends, Bharti’s average revenue per user has been going down. The decline is quite severe in the June 2009 quarter, at Rs 278 per user compared to Rs 305 in the previous quarter and Rs 350 a year ago. The composition of Bharti’s incremental subscriber base is largely coming from non-census towns, which could explain why the per user revenue is headed down. The company’s non voice revenue in mobile services contributed 9.3% to revenues, same as the previous quarter.
  • The company has been pointing towards strong volume growth as an indicator of the strength of its business. Mobile minutes grew by 34% during the quarter while total minutes billed grew by 31%. Telemedia services saw a decline in volumes.
  • In sum, Bharti’s profitability during the quarter has been affected by higher costs and depreciation though this was visible in the March 2009 quarter too. Its operating profit grew by 17% but depreciation costs took away nearly 9 percentage points off that growth. Still, a sharp jump in interest income (as defined by Bharti) due to derivative income and exchange fluctuations, contributed to a 25% increase in net profit.

The market was not sure of how to react to its results. The stock went down from its previous close of Rs 814, to a low of Rs 795 and from there settled higher at Rs 823, down 1%. The company had indicated a capex plan of $2.2bn for 2009-10, and that will keep up the pressure on its depreciation outgo. If the derivative income and exchange fluctuations are not around, the pressure will reflect in its net profits as well.

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