Stock Review: BHARTI AIRTEL

 

Bharti Airtel's stock fell by over 3% after it reported lower-than-expected growth in its bottom line in the March quarter. As anticipated by this column earlier, telecom operators have started reporting interest expense on 3G-related loans now that these services are rolled out. This finance charge restricted Bharti's sequential net profit growth to 7.5% during the fourth quarter even though its operating profit grew 9%, the fastest rate in at least 10 quarters. While its bottomline will be under pressure until the 3G segment starts adding to profits, what could offer some relief is the streamlining of its African operations.

Bharti Airtel operates in 16 African nations after acquiring Zain's telecom business in the continent last fiscal. The operating profitability (before accounting for depreciation) of the African business reached the three quarter high of 26.4% in the three months ended March 2011, much to the surprise of analysts.

The 560-basis points sequential improvement in the margin was due to lower operating costs relative to sales. Bharti's management has indicated that even though the telecom cost structure is steeper in Africa compared to India, per minute costs have begun to drop. It expects African operations to become more affordable in the next six quarters.

With a trimmed cost structure, the African operations should be able to not only drive Bharti's topline growth but also support its overall profitability in the coming quarters. To further increase its presence in the continent, the company has earmarked a capex of over $1.2 billion for FY12.

Bharti's domestic business is yet to report a remarkable shift from the sluggish trend that has been prevailing for the past six quarters. Bharti's per minute revenue fell by another 2.5% sequentially in the March quarter, while minutes of usage per head stagnated at 449 minutes for the second straight quarter. What could provide comfort, however, is the fact that total minutes on its network have started growing again in tandem with subscriber growth.

To maintain its domestic profitability, Bharti will have to aggressively roll out its 3G services in the near term. .