Bharti: Hot line

A 9.5% rise in revenues helped margins

Even as it has grown its market share to 23.5 per cent at the end of the June quarter, Bharti Airtel has managed to maintain its operating profit margins at 41.4 per cent, compared with the March quarter.

The strong margins are the result of a 9.5 per cent q-o-q rise in revenues to Rs 5,905 crore and despite falling average revenue per user of 4 per cent to Rs 390.

What has helped is that the minutes of use have remained flat at 478 minutes, despite a fifth of the telco's subscriber base of 43 million, now coming from rural areas.

The top line growth should be seen in the context of falling roaming tariffs - tariffs were cut last quarter -which impacted revenues by about Rs 65 crore.

Moreover, the accounting method for lifetime prepaid has been changed from this quarter, with the amortisation for the subscription now being done over a longer period of 24 months compared with 18 months earlier-that too has impacted revenues somewhat. Approximately 34 per cent of Bharti's pre-paid subscriptions are accounted for by lifetime schemes worth Rs 495.

Long distance revenues were down 9.3 per cent sequentially and margins too were lower by 140 basis points because of a reduction in tariff. Besides, with the rupee appreciating, the telco took a hit on incoming calls into India.

The impact should not be as harsh in the subsequent quarters unless the rupee appreciates by an equivalent amount. The broadband business is faring well and the company says it will launch IPTV services by the end of March 2008.

With the tower business being hived off into a subsidiary and the management not ruling out a stake for either financial or strategic investors, there could be some unlocking of value, though some of it is already in the price.

Nonetheless, the fact that Bharti continues to grow at a brisk pace and is able to maintain margins should ensure earnings growth of 35 per cent CAGR between FY07 and FY10. At the current price of Rs 925, the stock trades at 27 times estimated FY08 earnings.

SAIL: Margin blues

Steel Authority of India (SAIL) has focused on expanding the sales of higher value products in the June 2007 quarter, but higher operational costs put pressure on its operating profit margins.

As a result, operating profit (excluding other income and interest earned) grew merely 1.9 per cent y-o-y to Rs 2382.88 crore in the last quarter, while its net sales expanded 6.3 per cent y-o-y to Rs 8039.47 crore.

Its operating profit margin declined 130 basis points y-o-y to 29.6 per cent in Q1 FY08. The pressure on margins was owing to employee costs as a percentage of net sales rising 230 basis points y-o-y to 18 per cent in the last quarter.

The company sold 2.5 million tonne in Q1 FY08 compared with 2.45 million tonne a year earlier.

Its realisations were estimated at Rs 32,157 per tonne in the last quarter, a growth of 4.2 per cent y-o-y.

In July, SAIL has lowered prices of its flat steel products by Rs 500 to 1000 a tonne. However, the company is expected to minimise the resulting margin pressure via cost reductions and operational synergies.

Meanwhile, demand for steel products is traditionally sluggish during the monsoon season. The stock trades at less than 9 times estimated FY08 earnings.

With contributions from Shobhana Subramanian and Amriteshwar Mathur