Stock Review: Bharti Airtel

BHARTI Airtel continued to report pressure on its profitability during the June 2010 quarter following a further fall in per minute revenue from its network. A major concern for the country's largest mobile operator is that the falling profitability of its wireless operations is not offset in equal measure by its other business segments.

   Bharti's June quarter numbers are not strictly comparable to its performance in the previous quarters. This is because first, it has started consolidating operations of its overseas subsidiaries and second, it has adopted the accounting principles laid down by International Financial Reporting Standards (IFRS).

   While these factors make a direct comparison of Bharti's performance across quarters difficult, relevant observations can be culled from such an analysis, nevertheless. For instance, over the past five quarters — for which Bharti has provided IFRS-adjusted numbers — its business growth and margins have deteriorated on account of falling profitability of its mobile business.

   This largely confirms the industry trend on account of intense competition from existing as well as several new operators. But what could be a cause for concern for investors is unlike the Street's expectations, Bharti's other business segments, including telemedia and enterprise services, have not cushioned the falling profitability of its mobile business.

   Take, for instance, the share of each of Bharti's segments in revenue and operating earnings before depreciation (EBITDA). The share of revenue from mobile operations has dropped from 81% in the June 2009 quarter to 78% — excluding revenue from Zain. The other two mentioned divisions have also seen shrinking shares. What has grown in share is Bharti's tower infrastructure business. It now forms 18% of total revenue, higher than 15% five quarters ago.

   Telemedia and enterprise services have also not been able to fully compensate the falling share of mobile operations in EBITDA. In the past five quarters, the share of EBITDA of mobile services has shrunk from 79.4% to 74.6%. The share has marginally improved by 100 basis points (bps) to 9% for telemedia while it has shrunk 90 bps for enterprise services. Here again, the passive infrastructure division has witnessed a healthy 490-bps improvement in its profit share, thereby providing some cushion to profits.

   Given the continued pressure on its domestic mobile business, future growth largely depends on how well Bharti expands its other divisions on the domestic front. These are not exposed to the cut-throat competition and hence, are not impacted by tariff wars.

   The second factor is how well Bharti turns around its overseas ventures and acquisitions.