Bharti Airtel: This is why bulls still have a reason to stay put

Non-India mobile business helps report better-than-expected performance

Bharti Airtel’s all-in-one approach to its telecom business is paying off at a time its bread-and-butter domestic mobile telephony business is under attack from Reliance Jio. 

Revenues and profitability from its subsidiaries and ancillary businesses have helped Bharti stay in the game.

This is clearly visible in Bharti Airtel’s results for the July-September 2017 quarter (Q2). While its consolidated net profit fell 76.5 per cent year-on-year (y-o-y) to Rs 343 crore in Q2, from Rs 1,462 crore a year ago, it was ahead of the Street’s estimates of Rs 272 crore. 

Its better-than-expected profitability was due to a good show from its non-India mobile operations — Africa mobile business, enterprise, DTH service and South Asia operations ex-India.

On the other hand, Bharti’s India mobile business, which accounts for 55 per cent of its revenues, continues to suffer from price erosions, amid a steady rise in operational and finance costs.

This will surely cheer the bulls on the Dalal Street, which have pushed-up the Bharti Airtel stock price to an eight-year high early this week. 

Consolidated revenues at Rs 21,777 crore were down 11.7 per cent y-o-y in Q2, but were slightly ahead of the Street’s estimates of Rs 21,730 crore.

Bharti’s India mobile business continues to face the heat of Jio-induced price war, but the industry seems to be settling down to a new equilibrium as the number of financially viable operators is now shrinking fast. This is reflected in Bharti’s numbers, with a sequential improvement in the pace of revenue decline. Revenue decline in Q2 was the lowest in the last three quarters, helped by a fourfold rise in mobile data traffic and a steady growth in voice traffic. The average revenue per user at Rs 145 (down 5.8 per cent sequentially) was a tad ahead of estimates. However, pricing pressure means India mobile revenues were down 16.8 per cent y-o-y.

Operating profit margins also seem to have stabilised, though they are still lower than the peak levels of 2007 and 2008. Consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) margin at 36.5 per cent was down 180 basis points (bps) y-o-y, but was up 30 bps sequentially, led by higher margins of its non-India mobile business.

On the downside, the financial burden continues to grow with a sequential and y-o-y rise in consolidated net debt and interest payment. Interest payment accounts for nine per cent of revenues, up from 7.2 per a year ago and 8.4 per cent in the June quarter. The interest coverage ratio declined to four times in Q2, down from 5.1 times a year ago and 4.4 times in Q1 of 2017-18.

This makes Bharti Airtel a risky but worthwhile bet for investors looking at expected gains from consolidation in one of the world’s largest telecom markets. Any monetisation of tower business could help going forward.

At its current stock price, Bharti Airtel is trading at 2.6 times its book value, up from last two-year average of 2.1 times, but a discount to its 15-year median valuation ratio of around three times.