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| Bharti: Profitability under stress | | Sequential margin contraction despite waning competition surprises analysts |
| Malini Bhupta / Mumbai Feb 09, 2012, 00:39 IST |
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 Bharti’s shares, which jumped five per cent after the Supreme Court judgment last week, fell 6.6 per cent after the company announced its third quarter results on Wednesday. Though revenues have grown, profitability remains an issue. Revenue rose seven per cent sequentially to Rs 18,477 crore and Ebitda by 2.5 per cent over the September quarter. However, analysts say Ebitda growth is beginning to come under stress. Net profit declined 16.6 per cent annually and 1.1 per cent sequentially, to Rs 1,011.3 crore.
According to analysts, the primary reason for the contraction is the higher cost of sales, general and administrative expenses (SG&A). Bharti reported a higher-than-expected SG&A of Rs 3,465 crore compared to an estimated Rs 3,100 crore. It had intended to return to an Ebitda margin of 40 per cent in FY13. Instead, operating margins contracted to 32.2 per cent, compared to 33.6 per cent in the second quarter. According to Barclays Capital: “Bharti surprised us with the sequential margin decline. We note this is largely a fixed-cost business, which is exhibiting strong price improvement and continuous revenue growth. In this environment of declining competition, margins should have exhibited a more positive trend.”
Operationally, too, the company seems under stress. For starters, the high SG&A spends are not yielding the kind of gains they should, says Dhananjay Sinha, equity strategist at Emkay Global. The company’s total minutes under usage seem to be stagnant. After contracting in the second quarter, they have largely remained flat in the third quarter, at 253 billion. In contrast, rival Idea has seen network minutes grow seven per cent.
Another important measure is average revenue per minute (ARPM). Says Microsec Securities, “On a sequential basis, too, Bharti’s ARPM rose to Rs 0.446, compared to Rs 0.436 a quarter earlier. Consequently, average revenue per user improved by Rs 4 sequentially to Rs 187.”
Though the stock rallied after the Supreme Court judgment, as the market expected the competitive intensity to come off, not all analysts second this view. Telecom is a price-sensitive business and competitive intensity will continue to prevail, many believe. Given the contraction in profit after tax, analysts are cutting the EPS estimates for FY12.
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