Bharti Airtel: Lacklustre numbers, how vulnerable is the stock?

MUMBAI: Bharti Airtel's stock fell by over 2% in the afternoon trade on Friday after the company reported flat topline and a sharp 60.7% sequential fall in net profit for the December 2012 quarter as a result of higher finance cost, and increased depreciation. Analysts on average had estimated net profit of Rs 774 crore.

While overall performance of the nation's largest telecom service provider was lacklustre, a moderate improvement in minutes on its network, a near stable revenue per minute, sustained traction in data usage, expanding number of data using subscribers and momentum in African business are some of the major positive factors.

But, are these factors sufficient for investors to retain their positions in Bharti's counter? While these are important for the long term profitability of the telecom player, near-term pain still persists.

The company's profitability as measured by margin at the operating profit before depreciation (EBITDA margin) and return to shareholders (RoE) are under pressure for quite some time according to its latest quarterly report. From over 40% in FY10, EBITDA margin has shrunk to over 30% as of December 2012. RoE has fallen from 24.5% to 5.6% by similar comparison.

This broadly shows the state of the domestic telecom sector, which has been reeling under competitive pressure. While, in recent months the number smaller competitors has reduced, the performance of large companies such as Bharti, Idea Cellular, and Reliance Communications is yet to reflect the benefits.

In case of Bahrti, which is the only bigger telecom operator to expanded business overseas, African operations also play a crucial role contributing nearly one-third of the total topline. In the December quarter, it reported 50 basis points drop in EBITDA margin at 26.6% sequentially.

On the positive side, the proportion of subscribers using data service rose from nearly 20% in the March 2012 quarter to 23% in the December 2012 quarter. In addition, data traffic nearly doubled in the said period. While data comprises of just 5.7% of mobile revenue as of now, the growth trend is healthy given its higher revenue realisation compared with voice services. However, investors will have to wait for a little longer to see the positive effect of these factors.