Analysis: Bharti Airtel Q3 disappoints, analysts remain cautious

Most analysts maintain a neutral rating on Bharti Airtel with Idea Cellular as a preferred bet in the telecom pack

High interest costs, forex fluctuation and tax provisions dented Bharti Airtel’s performance in the quarter ended December 2012, with the net profit coming in 72 per cent lower year-on-year (y-o-y) at Rs 284 crore, as compared to Rs 1,011 crore in the previous corresponding period. The decline marks the 12th consecutive quarter of decline in net profit for the company.

Finance costs surged 69 per cent during the December quarter to Rs 1,332 crore from a year ago period, and income tax expense rose 20 per cent. Total revenues, however, rose 9.5 per cent to Rs 20,239 crore in the period under review from Rs 18,477 crore in the year-ago period.

"The result was very much in line with the expectations. It was more off satisfactory on operating/EBITDA level and wireless segment in India and Africa. The disappointment came in from the Forex losses and the tax provisions which were on the higher end. Also depreciation charges and interest expense added to the disappointment," said A K Prabhakar, Senior Vice President - Equity Research, Anand Rathi Securities.

“The results are in-line with our expectations, especially the mobility segment’s numbers. The performance of Africa has been below expectations and the overall numbers were impacted by interest costs and tax outgo. While we are positive on the Indian operations, there are concerns regarding the African operations. Going by the results, we expect the African operations to weigh on Bharti’s performance over the next couple of quarters. In the telecom pack, Idea Cellular is our preferred pick,” says an analyst with a domestic brokerage.

Stock Strategy

Most analysts remain cautious on the telecom space given the policy framework. The markets also gave a thumbs-down to the results with the stock slipping over 2 per cent in intra-day deals.

“The outlook on the Indian telecommunication services sector remains negative for 2013 considering increasing regulatory costs for incumbent and new operators. The issue of regulatory uncertainty has now been replaced by increasing costs, which will impact the financial profile of most operators, including incumbents over the short-to-medium term,” states a January 18 India Ratings Report on the telecom sector.

“A stable outlook may result from significant tariff hikes by operators to offset additional regulatory charges, leading to an improvement in their business and financial profiles or a reversal of negatively impacting regulatory decisions taken so far by the government,” it adds.

Notes Ankita Somani, telecom analyst, Angel Broking, “Going ahead, we expect Bharti’s margins to improve due to tariff hike and drop in advertising spend. However, regulatory concerns will continue for a while. Decline in ARPM (average revenue per minute) was a dampener. The reported profit was much less than our expectations; though operationally the results were okay. We maintain a neutral rating on the stock for now.”

Revenue and margins should improve going ahead, feels Prabhakar of Anand Rathi. He is also cautious on the stock for now and maintains a neutral outlook.

"Elevated costs are likely to exert pressure on Bharti's margins in the next one – two quarters. I do not see tariff hikes mitigating the rising costs. However, in FY14 we do see some recovery at the EBIDTA level," says Ravindra Agrawal, a telecom analyst with HDFC Securities.

“I would prefer Idea Cellular in the telecom pack, as it is better placed on operational leverage and has lower debt. Also, Idea is completely focused on mobile business, which will play to its advantage. My suggestion would be to shift stance to Idea from Bharti Airtel,” Agrawal recommends.