Bharti Airtel: Long distance call

Bharti Airtel's ARPUs are falling, but higher volumes will ensure improved profitability

Since the middle of June when the stock markets had collapsed, Bharti has been one of the key contributors in the subsequent rally.

The Bharti stock has gained 61 per cent, while the Sensex has risen by 44 per cent. Between June and September, the company has improved its mobile market share by 30 basis points to 21.4 per cent.

And though the average revenue per user (ARPU) declined 1 per cent sequentially, mobile services revenues grew 16.23 per cent, aided by the 17 per cent growth in additional subscribers.

However, the growth in non-mobile services, which contributed 32 per cent of the revenues, was lower at 10.8 per cent q-o-q.

This was because its growth in broadband and telephone services was curtailed at 1.2 per cent. The company had reversals and bad debt of Rs 53.2 crore during the quarter. Total revenues improved by 13 per cent over June 2006 quarter and operating profit grew at a faster clip of 13.34 per cent.

Operating profit margin improved by 10 basis points q-o-q to 39.1 per cent, aided by higher margins in the mobile business.

The country's net mobile additions in the September quarter grew faster than China's net adds. The growth of mobile penetration is expected to remain robust going forward. Yes, the ARPUs are falling, but higher volumes will ensure improved profitability.

Also, monthly usage per customer has risen 2 per cent q-o-q to 451 minutes. One area of concern though is that Bharti's capex during the first half was $1.2 billion, and could go above the $1.8-2 billion guidance for the year, as the management is not going to shy from investing more if required.

Bharti has also indicated that it may acquire GSM companies in emerging markets. At the net profit level, Bharti has surprised analysts' estimates. The stock trades at 27 times estimated FY07 EPS and 20 times estimated FY08 EPS, which is not cheap.

Suzlon: Wind energy

Suzlon Energy has reported an impressive growth in its September 2006 quarter results, thanks to a pick up in orders from export markets, but higher operating costs have hampered profitability this time.

Its consolidated operating profit expanded 42.85 per cent y-o-y in Q2 FY07, as compared to a 85.75 per cent growth in its income from operations.

However, last quarter's results are not strictly comparable with a year earlier, as the Belgium-based Hansen Transmissions acquisition was included in Q2. Suzlon's operating profit fell 525 basis points y-o-y to 17.25 per cent in the last quarter. This pressure on margins was owing to staff costs jumping a whopping 630 per cent y-o-y in the last quarter, due to Hansen's wage bill.

This pressure on margins resulted in the Suzlon stock falling 5 per cent to Rs 1293.5 on Friday, in contrast to the bullish sentiment on the Street.

Senior company officials explained that they implemented exports orders for 172 MW in the last quarter, a growth of 191 per cent on a y-o-y basis. In the domestic market, where Q2 is a slack season because of monsoons, it implemented 216 MW orders in Q2 FY07, as compared to 228 MW a year earlier.

Going forward, its Rs 6637.87-crore order book at the end of Q2 FY07 will provide growth momentum. The company is also expanding its capacity from 1,500 mw to 4,200 mw, which is expected to be competed by June 2007.

The stock gets a discounting of 30 times estimated FY07 earnings, but with declining margins and an 18.4 per cent EPS growth in Q2, the valuation appears high.