Bharti Airtel: Towering show

Strong non-mobile business boosted Bharti margins

Bharti Airtel has rung in a good set of numbers for the December quarter with operating margins up by a strong 170 basis points q-o-q at 40.8 per cent.

The increase in margins has been driven by a strong performance of the non-mobile space, which comprises enterprise and broadband segments. Margins for this space, as a whole, were up at 37.9 per cent in the quarter.

In particular, the domestic and international long distance business, which contributes around 20 per cent to revenues and operating profit saw operating margins of 43 per cent, up 270 basis points q-o-q.

A combination of the growth in top line as also a control on costs has brought in more efficiencies. Revenues were up 12.5 per cent q-o-q to Rs 4912.9 crore, driven by 16 per cent q-o-q growth in the subscriber base, and while the average revenue per user (ARPU) for the quarter was lower at 427 compared with Rs 438 in the September quarter, the average minutes per user was up at 467 minutes.

According to the management, the low variable costs for the non-mobile space have helped keep costs in check. For the company as a whole, network operating costs have remained virtually flat compared with the September quarter "" despite a 4 per cent increase in coverage""as have sales and administration expenses.

While mobile operations continue to grow at a brisk pace, the broadband business too has done well in the December quarter with Bharti now having a presence in 94 cities. With a planned capital expenditure of $2.5 billion for FY08, Bharti hopes to be able to cover more than 60 per cent of the population compared with around 54 per cent at present.

The company plans to join hands with other players to form a tower sharing company. It is diversifying its revenue sources by launching an IPTV service in the next quarter and has applied for a DTH licence.

At the current price of Rs 690, the stock trades at a multiple of 23 times estimated FY08 earnings and should continue to outperform the market.

Cementing gains

For Grasim it was another quarter of strong performance in cement and fibre and pulp. Consolidated net sales improved by 46 per cent y-o-y in the December 2006 quarter and operating profit was up 135 per cent. Operating profit margins were up a huge 1139 basis points y-o-y at 30.23 per cent.

In the September quarter too, its operating margin was up 865 basis points to 26.4 per cent. In the cement division, which accounts for over 70 per cent of its revenues, sales volumes improved by 5 per cent, but the average realisation was up a huge 49 per cent y-o-y to Rs 2,918 per tonne. Segment profit of this division grew 325 per cent.

Viscose staple fibre (VSF) realisations improved by 24 per cent, with a volume growth of 2 per cent. Natural gas supply continues to be a problem in the sponge iron business, but this segment turned in a profit at the PBIT level in Q3 FY07, compared with a loss in Q3 FY06 as well as Q2 FY07.

The reason for the improved performance in sponge iron was 50 per cent growth in sales volumes. Better price realisations in cement and VSF helped in mitigating the 40 per cent increase in freight and handling expenses, which went up 40 per cent y-o-y.

The VSF plant is operating at 103 per cent capacity. In order to capitalise on the strong VSF outlook, Grasim is increasing the capacity by 18.5 per cent to 315,725 tonne a year by FY08.

Cement sales are also going to be buoyant, and the company expects the sponge iron situation to improve by December 2007 as the gas situation improves.

The stock was down 3.5 per cent along with other cement stocks on Tuesday as the government abolished export duty on cement.

However, analysts do not expect the duty cut to have any significant impact on domestic manufacturers. Grasim trades at an attractive 13 times estimated FY07 earnings and 11-12 times FY08 earnings.