Africa Pays the Bills While India Bleeds
Bharti Airtel is India's largest mobile operator by subscribers, but it's really a portfolio of businesses stitched onto one balance sheet: the India mobile network that built the brand, a fast-growing enterprise arm (Airtel Business), a majority-owned tower infrastructure company, a home broadband/DTH» bundle, and - the part most Indian investors underweight - a large African mobile footprint spanning over a dozen countries. The bet behind owning all of this together is diversification: a price war hitting the India mobile business shouldn't sink the whole company if Africa, towers, and enterprise are pulling their own weight.
This quarter is the first real stress test of that bet. Reliance Jio's aggressive free-data, rock-bottom-tariff entry into Indian mobile (launched September 2016) had already been reshaping the market for a year and a half by the time this quarter ended March 31, 2018, and this is the quarter where the pressure finally shows up as an outright loss in Bharti's home market segment - not just slower growth, an actual loss. What kept the consolidated numbers from looking worse is everything that isn't India mobile: Africa, towers, and enterprise all grew profit this quarter. This is Bharti Airtel's first quarter covered on this site, so there's no prior post to compare it against - what follows is what the audited financial results for the quarter and year ended March 31, 2018 (filed April 24, 2018) actually show.
The Prescription
Bharti's real edge right now isn't its mobile network - it's the parts of the business Jio can't touch: Airtel Business (enterprise connectivity, +28% segment profit growth this quarter, ~30% margins) and Tower Infrastructure Services (~50% margins, annuity-like cash flows independent of subscriber pricing wars). The company should keep shifting capital and management attention toward these two segments and toward the African mobile business, where margins more than doubled YoY this quarter (7.8% to 21.2%) precisely because there's no Jio-equivalent price war there yet. A business this diversified should be leaning harder into the segments that are actually working, not treating India mobile as the flagship that gets first call on resources by default.
What it should stop doing: continuing to fight Jio dollar-for-dollar on India mobile pricing. This quarter's India mobile segment didn't just grow slower - it posted an outright operating loss (see below), and the standalone entity's own pre-exceptional pre-tax result flipped from a Rs1,910 crore profit a year earlier to a Rs940 crore loss this quarter. That's not a business Bharti can price its way back into against a competitor with deeper pockets and a stated strategy of chasing volume over margin. Matching Jio on price is a fight Bharti's own numbers say it's losing - the more defensible path is protecting ARPU and network quality for the subscriber base willing to pay for it, not chasing back subscribers Jio is effectively subsidizing to acquire.
Key Financial Metrics
Q4 FY18 (quarter ended Mar 31, 2018) vs. Q4 FY17, consolidated
FX: INR 65.04 = USD 1 (RBI reference rate, March 28, 2018 - the last trading day before the March 31 quarter-end, since the NSE was closed for holidays through the 31st itself).
| Metric | Q4 FY18 (INR) | Q4 FY18 (USD) | Q4 FY17 (INR) | YoY |
|---|---|---|---|---|
| Revenue | Rs19,634.3 crore | ~$3.02B | Rs21,934.6 crore | ⚠️ -10.5% |
| Adjusted EBITDA» (profit before D&A and exceptional items, as reported) | Rs7,005.2 crore | ~$1.08B | Rs7,906 crore | ⚠️ -11.4% |
| Operating Income» (EBIT, derived: Adjusted EBITDA minus D&A) | Rs2,106.1 crore | ~$324M | Rs2,964.2 crore | ⚠️ -28.9% |
| Profit before tax | Rs116.9 crore | ~$18M | Rs645.9 crore | ⚠️ -81.9% |
| Net Income (total profit for the period) | Rs419 crore | ~$64M | Rs470.6 crore | ⚠️ -11.0% |
| ...of which, attributable to Bharti Airtel's own shareholders | Rs82.9 crore | ~$12.7M | Rs373.4 crore | ⚠️ -77.8% |
| ...of which, attributable to non-controlling interests» | Rs336.1 crore | ~$51.7M | Rs97.2 crore | ⚠️ +245.8% |
| Basic EPS | Rs0.21 | ~$0.0032 | Rs0.93 | ⚠️ -77.4% |
| Total Cash (cash and cash equivalents) | Rs4,788.6 crore | ~$736M | Rs1,281.7 crore | ✅ +273.6% |
| Balance sheet metric | Mar 2018 (INR) | Mar 2018 (USD) | Mar 2017 (INR) | YoY |
|---|---|---|---|---|
| Total Assets | Rs250,581.6 crore | ~$38.5B | Rs233,265.2 crore | ✅ +7.4% |
| Total Borrowings (gross, non-current + current + current maturities) | Rs111,333.5 crore | ~$17.1B | Rs107,287.7 crore | ➖ +3.8% |
| Total Equity (including non-controlling interests) | Rs78,348.3 crore | ~$12.0B | Rs74,331.3 crore | ✅ +5.4% |
| Debt/Equity (gross borrowings ÷ total equity incl. NCI) | 1.42x | 1.44x | ➖ roughly flat |
Free cash flow isn't calculable this quarter - the filed document is the audited results statement plus balance sheet and segment note, and doesn't include a cash flow statement.
The headline net income number (-11.0% YoY) looks like a business absorbing pressure reasonably well. It isn't. Profit before tax fell 81.9% YoY, to just Rs116.9 crore - the net income figure only looks closer to flat because a Rs302.1 crore net tax credit this quarter (a Rs464.3 crore deferred tax credit, only partly offset by a Rs162.2 crore current tax charge) did most of the work of getting from a thin pre-tax result to the reported net profit (see Beyond the Usual). And of the Rs419 crore that did get reported as profit, more than three-quarters went to non-controlling interests, not to Bharti Airtel's own shareholders - a complete reversal from a year earlier, when owners kept three-quarters of the total. Total cash more than tripled YoY, but that's a financing event (see the NCD issuance below), not operating cash generation.
Three numbers moving in three different directions inside one "net income" line - a thin pre-tax result, a tax credit doing the heavy lifting, and most of what's left going to minority shareholders - is not a quarter where the headline profit figure tells you much on its own.
Key Operational Metrics
No presentation deck or investor call materials were located for this quarter - only the audited financial results filing - so subscriber count, ARPU», minutes of usage, and data-usage-per-subscriber, the metrics a telecom deck would normally lead with, are not available for this specific post.
What the filing does disclose, as part of Bharti's SEBI-mandated non-convertible debenture ('NCD') disclosures for the standalone entity:
- Debt Service Coverage Ratio (DSCR): 1.57x
- Interest Service Coverage Ratio (ISCR): 3.81x
- Debt-to-Equity Ratio» (standalone, net of cash and term deposits): 0.63x
- Net worth (standalone, per Companies Act Section 2(57)): Rs97,270.9 crore
These are standalone-entity, net-of-cash figures - see Beyond the Usual for why they read very differently from the consolidated group's actual leverage.
Segment Comparison
Bharti Airtel reports eight consolidated segments: Mobile Services India, Mobile Services Africa, Mobile Services South Asia, Airtel Business (enterprise), Tower Infrastructure Services, Homes Services, Digital TV Services, and Others.
| Segment | Revenue (Q4 FY18) | Revenue (Q4 FY17) | YoY | Segment Result (Q4 FY18) | Margin (Q4 FY18) | Margin (Q4 FY17) |
|---|---|---|---|---|---|---|
| Mobile Services India | Rs10,353.2 crore | Rs12,971.9 crore | ⚠️ -20.2% | -Rs482.2 crore | ⚠️ -4.7% | 11.1% |
| Mobile Services Africa | Rs4,971.2 crore | Rs5,047.6 crore | ➖ -1.5% | Rs1,055 crore | ✅ 21.2% | 7.8% |
| Airtel Business | Rs2,819.5 crore | Rs2,576.9 crore | ✅ +9.4% | Rs840.1 crore | ✅ 29.8% | 25.4% |
| Tower Infrastructure Services | Rs1,673.9 crore | Rs1,601.7 crore | ✅ +4.5% | Rs843.5 crore | 50.4% | 51.1% |
| Digital TV Services | Rs958.5 crore | Rs865.7 crore | ✅ +10.7% | Rs153.8 crore | ✅ 16.0% | 11.3% |
| Homes Services | Rs604.2 crore | Rs678.5 crore | ⚠️ -11.0% | Rs114.9 crore | ⚠️ 19.0% | 24.7% |
| Mobile Services South Asia | Rs103.3 crore | Rs97.7 crore | +5.7% | -Rs61.1 crore | -59.1% | -91.0% |
| Others | Rs100.4 crore | Rs93.7 crore | +7.1% | -Rs67.2 crore | -66.9% | -160.1% |
| Total segment | Rs21,584.2 crore | Rs23,933.7 crore | ⚠️ -9.8% | Rs2,396.8 crore | 11.1% | 13.9% |
Ranked by what's actually carrying the business this quarter: Tower Infrastructure Services has the highest margin by far (50.4%) but grew only 4.5%; Airtel Business grew fastest of the profitable segments (+9.4% revenue, +28.4% profit) while also expanding margin; Mobile Services Africa's margin nearly tripled YoY even with revenue essentially flat. Mobile Services India - still the single largest segment at Rs10,350 crore of revenue, nearly half of total segment revenue - is the only one of the six material segments that swung from a profit to a loss. Mobile Services South Asia and Others are both small enough (under Rs110 crore revenue each) that their losses barely move the consolidated total, though both losses did narrow YoY.
Mobile Services India
Bharti's largest and historically most important segment posted a Rs482.2 crore operating loss this quarter, against a Rs1,439.4 crore profit a year earlier - a segment margin swing from +11.1% to -4.7%. Revenue fell 20.2% YoY, the steepest decline of any material segment, consistent with the tariff pressure the whole Indian mobile industry was absorbing through this period. This is the segment the rest of the prescription above is about.
Mobile Services Africa
Africa did the opposite of India this quarter: revenue was essentially flat (-1.5% YoY) but segment profit grew 168.4% and margin nearly tripled (7.8% to 21.2%). Africa isn't a bigger business than India mobile by revenue (Rs4,970 crore vs Rs10,350 crore), but it's now a meaningfully more profitable one on a percentage basis, and it's the single largest offset to India's collapse this quarter.
Airtel Business
The enterprise connectivity arm grew revenue 9.4% and segment profit 28.4% YoY, expanding margin from 25.4% to 29.8% - the only segment this quarter that grew and got more profitable at the same time, at a scale that actually moves the consolidated numbers (Rs2,820 crore revenue, the third-largest segment).
Tower Infrastructure Services
The infrastructure-leasing business (largely Bharti Infratel, majority-owned with a substantial minority stake held by outside shareholders) is Bharti's highest-margin segment by a wide margin - 50.4% this quarter, essentially flat YoY (51.1%). It grew revenue a modest 4.5%. This is the segment whose profit split matters most for the non-controlling-interest story below (see Beyond the Usual).
Digital TV Services and Homes Services
Digital TV (DTH») grew revenue 10.7% and profit 57.7%, expanding margin from 11.3% to 16.0% - a small but genuinely improving segment. Homes Services (fixed broadband) moved the other way: revenue fell 11.0% and profit fell 31.4%, margin compressing from 24.7% to 19.0% - the one non-mobile segment that also weakened this quarter, though at Rs600 crore revenue it's a minor share of the total.
Beyond the Usual
This quarter's profit was mostly a tax credit, not the business
Consolidated profit before tax was only Rs116.9 crore this quarter - down 81.9% YoY. The reported net profit of Rs419 crore only got there because of a Rs302.1 crore net tax credit (a Rs464.3 crore deferred tax credit, several times the size of the pre-tax profit itself, only partly offset by a Rs162.2 crore current tax charge) - meaning most of this quarter's final profit figure came from tax accounting, not operations. A year earlier, the equivalent swing ran the other way (a net tax expense of Rs175.3 crore reduced a much healthier Rs645.9 crore pre-tax profit down to Rs470.6 crore net). Anyone reading only the "net income -11.0% YoY" headline would miss that the underlying, pre-tax business result actually fell off a cliff this quarter.
Most of this quarter's profit belongs to someone else
Of the Rs419 crore total profit for the quarter, Rs336.1 crore (80.2%) went to non-controlling interests» - outside shareholders in Bharti's less-than-wholly-owned subsidiaries - and only Rs82.9 crore (19.8%) belonged to Bharti Airtel's own shareholders. A year earlier the split ran almost exactly the opposite way (79.3% to owners, 20.7% to non-controlling interests). The mechanical explanation is straightforward once the segment data above is read alongside it: Mobile Services India, which is almost wholly owned and posted a loss this quarter, carries no offsetting non-controlling interest to share that loss with, while Tower Infrastructure Services and the African operations - both profitable, both carrying substantial outside minority stakes - get their profit split with those outside shareholders regardless. The practical effect: Bharti's own shareholders absorb essentially all of the India mobile loss but only a fifth of the profit generated elsewhere in the group. Basic EPS falling 77.4% YoY, far more than the 11.0% net income decline, is the same story stated per-share.
A five-year-old, half-billion-dollar spectrum dispute still not provided for
The Department of Telecommunications ("DoT") issued a demand on the Company and one of its subsidiaries back in January 2013 for Rs5,201.3 crore (consolidated) / Rs5,135.3 crore (standalone) toward a one-time spectrum charge. The Bombay High Court directed DoT in January 2013 not to take coercive action pending further hearing, and as of this filing - over five years later - Bharti has still not given effect to the demand in its accounts, based on independent legal opinion. At today's FX rate this is roughly $800 million sitting outside the reported liabilities, fully disclosed (including a specific emphasis-of-matter paragraph in the auditor's report) but unresolved for half a decade with no visible progress toward resolution.
Two very different debt-to-equity ratios, both technically accurate
The company's own SEBI-mandated disclosure states a standalone debt-to-equity ratio of 0.63x - but that figure is specific to the standalone (India-only) legal entity and nets borrowings against cash and term deposits. The full consolidated group's gross borrowings (Rs111,333.5 crore) against total equity including non-controlling interests (Rs78,348.3 crore) works out to roughly 1.42x - more than double, on a different basis (gross, consolidated, including higher-levered African and infrastructure subsidiaries). Neither number is wrong, but a reader who takes the disclosed 0.63x as representative of the whole group's leverage would be significantly underestimating it.
"Exceptional" items have shown up in every single quarter
Consolidated exceptional items were a net Rs324.7 crore charge this quarter, following Rs239.5 crore in the December 2017 quarter and Rs605.5 crore in the year-ago March 2017 quarter - full-year exceptional items totaled Rs793.1 crore for FY18 and Rs1,169.7 crore for FY17. This quarter's items alone were a grab-bag: a forex-translation charge tied to Nigeria's exchange-rate regime uncertainty (Rs142 crore), network re-farming and upgrade costs (Rs113.8 crore), a litigation and internal-restructuring-related charge (Rs353.5 crore), a benefit mainly from an earlier divestment (Rs394 crore), and a provision against one delinquent receivable (Rs109.4 crore). Individually each item is plausible as a one-off; the fact that some combination of one-offs has appeared in every quarter shown here is worth remembering the next time "exceptional items" gets used to explain away a weak quarter.
A related-entity restructuring that skipped the P&L entirely
During the quarter, Bharti completed an internal restructuring of certain international and domestic entities. The excess of proceeds over the cost of the investments involved - Rs2,849.8 crore, roughly $438 million - was recognized directly in equity rather than flowing through the income statement, the standard (and legitimate) accounting treatment for a common-control transaction under Ind AS. It's a real, disclosed number that materially moved standalone equity this quarter without appearing anywhere in the P&L above.
Financed the quarter with rated debt, not equity
Bharti issued Rs3,000 crore of listed, unsecured, rated, redeemable non-convertible debentures ("NCDs") this quarter, split into two series (8.25% and 8.35%, rated CRISIL AA+ Stable) - the main driver of the +273.6% YoY jump in reported cash, which is a financing inflow, not operating cash generation.
One more African subsidiary added to the map
Bharti completed the acquisition of a 100% stake in Tigo Rwanda Limited during the quarter, continuing the pattern of adding wholly- or majority-owned African mobile operators to the group - directly relevant to why Africa's segment results carry the weight they do in this quarter's numbers.
No other governance or disclosure issues turned up in this filing: no promoter pledge activity disclosed, no management churn, and nothing indicating fraud or scandal specific to this quarter.
Target Valuation Range
Enterprise value ~Rs250,183.5 crore, implying ~8.25x EV/EBITDA - the only multiple worth trusting this quarter, landing at "fully priced, not obviously cheap." P/E is a mirage this quarter, distorted by a tax credit and minority-interest effects; EV/EBITDA and P/B are the more reliable reads.
Bharti Airtel's shares closed at approximately Rs359.33 on March 28, 2018 (the last NSE trading session before the March 31 quarter-end). The company has not split its stock since a 1-for-2 split in July 2009, so this price needs no adjustment for a later corporate action.
| Market cap → enterprise value | FY18 |
|---|---|
| Share price (period-end) | Rs359.33 |
| Shares outstanding | ~3,997.4 million (Rs1,998.7 crore paid-up capital ÷ Rs5 face value) |
| Market capitalization | Rs143,638.6 crore (~$22.1 billion) |
| Total gross borrowings | Rs111,333.5 crore |
| Less: cash and equivalents | Rs4,788.6 crore |
| Enterprise value | Rs250,183.5 crore |
| Peer-multiple sanity check | FY18 |
|---|---|
| Basic EPS | Rs2.75 |
| Trailing P/E | ~130.7x - close to meaningless this quarter; FY18 net income attributable to owners (Rs1,099 crore) fell 71.1% YoY from FY17's Rs3,799.8 crore on a thin pre-tax result, a tax credit doing much of the work, and most of the residual profit going to non-controlling interests rather than owners |
| Book value/share | ~Rs173.94 (Rs69,534.4 crore equity attributable to owners ÷ 3,997.4 million shares) |
| P/B | ~2.07x |
| Adjusted EBITDA | Rs30,327.9 crore |
| EV/EBITDA | ~8.25x - within the range mature telecom operators have historically traded globally (roughly mid-single-digits to high-single-digits) |
This is the first quarter of Bharti Airtel's backfill on this site, so there's no prior-quarter comparison yet. Share price moved a modest +13.7% over the trailing two years, from Rs316.16 (March 2016) to Rs359.33 (March 2018) - but that headline number hides a sharper recent move: shares peaked at Rs477.35 in December 2017, then fell 24.7% to this quarter's close by March 2018, tracking the same deterioration the India mobile segment shows in the numbers above. A full DCF isn't included here - a responsible multi-year free cash flow projection needs more history than a single quarter provides. The peer-multiple read above (mainly EV/EBITDA) is the more trustworthy lens until more quarters are in place.
Bharti Airtel Limited's audited standalone and consolidated financial results for the quarter and year ended March 31, 2018 (filed with the stock exchanges April 24, 2018, with the Independent Auditor's Report of Deloitte Haskins & Sells LLP).