Airtel: Margin for improvement

With a healthy topline growth, the company will increase its capex to around $3.5 billion in FY08 from $2 billion.

Bharti Airtel has managed to increase its operating profit margin by 130 basis points sequentially to 41.8 per cent in the September 2007 quarter, while maintaining its market share on a q-o-q basis.

What helped improve the operating margin is the fact that selling, general and administrative expenses dropped 100 basis points q-o-q as a percentage of revenues.

Topline growth at 7.3 per cent q-o-q was slightly lower than the 9.5 per cent growth in Q1 FY08, but still healthy. Average revenue per user was down 6.3 per cent sequentially to Rs 366, while minutes of usage dropped almost 2 per cent to 469 as penetration in rural India increased.

The September quarter was the first quarter to include the full impact of the new lifetime schemes at Rs 495, which were launched in the previous quarter.

The non-mobile business saw its operating profit rising nearly 20 per cent q-o-q, and helped in the overall operating profit growth of 10.8 per cent. Mobile operating profit growth was slightly subdued at 8.6 per cent.

All the segments did improve profitability - mobile services margin improved by 40 basis points q-o-q, while the non-mobile services margin went up 270 basis points.

Enterprise services - corporates did well with a 25 per cent plus sequential growth. The long-distance business, where the margin had declined 140 basis points in Q1 due to falling tariffs and the appreciating rupee, was able to maintain the same margins as in Q1.

Bharti will invest around $3.5 billion in FY08 compared with a capex of $2 billion in FY07. Analysts are a bit worried about the declining ARPUs and minutes of usage going forward, but the broadband and telephone business has turned in a 750 basis point EBITDA margin improvement q-o-q.

In Q3 FY08, it will launch IPTV and demerge the tower business as well. In Q4, it will roll out DTH services.

The stock declined over 6 per cent on Thursday due to news reports that the technical arm of DoT had recommended a steep increase in spectrum usage charges for GSM providers seeking spectrum beyond 6.2 MHz.

The Bharti stock trades at 25 times estimated FY08 earnings and 20 times FY09 earnings and should be an outperformer.

Tata Power: Managing high input costs

Though Tata Power sold higher units of electricity on a y-o-y basis in the September 2007 quarter, a higher cost structure put pressure on its margins. As a result, its core operating profit grew 6.7 per cent y-o-y to Rs 261.4 crore in the last quarter, while its net revenue expanded 12.6 per cent to Rs 1350.5 crore.

Its operating profit margin also declined 100 basis points y-o-y to 19.4 per cent in Q2 FY08. Reliance Energy's operating profit margin also declined 48 basis points y-o-y to 11.75 per cent in Q2 FY08.

Meanwhile, Tata Power sold 3.81 billion units in the last quarter, an impressive growth of 7.5 per cent y-o-y. Its realisations were also estimated at Rs 3.51 per unit in Q2 FY08, a rise of 7 per cent y-o-y.

However, the company had to grapple with the cost of fuel jumping 27.6 per cent y-o-y to Rs 780.8 crore in the last quarter, which was not fully offset by higher unit realisations in the last quarter.

Tata Power is implementing several expansion projects currently. However, for the short term, Tata Power's ability to manage input costs will remain crucial.

At Rs 1230, the stock trades at 40 times estimated FY08 earnings, given the current investor euphoria for the power sector, coupled with its holdings in group companies in telecom such as Tata Teleservices, VSNL and others.