Why analysts are backing Bharti despite its weak results

Bharti Airtel on Wednesday gained 2.1 percent despite reporting its ninth straight quarterly profit decline, as investors chose to focus on improving EBITDA margins.

Regulatory costs, tax expenses and forex losses were what led the company to post weaker-than-expected profit numbers. The company's consolidated net profit fell to Rs 1,006 crore from Rs 1,400 crore a year earlier. Rating agency Fitch had affirmed Bharti Airtel's long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' and predicted a negative outlook for the telco last week before the company's fourth quarter announcements.

Regulatory risks such assuch as an one-time charge for excess spectrum, spectrum re-farming and imposition of high spectrum renewal fees are high for the Indian telecom industry compared with other markets in Asia Pacific, Fitch Ratings had observed.

However, Sanjay Chawla, senior telecom analyst at JM Financial, feels the regulatory hurdles will impact Idea more than Bharti if the government accepts Trai's proposals over spectrum pricing and refarming, which is why he as picked Bharti Airtel as his preferred stock in the near term.

Ramakrishna Maruvada of Daiwa Capital Markets, in an interview with CNBC-TV18, said even though margins have grown by 1 percentage points quarter-on-quarter, the tax expenses are responsible for the company's below Street expectations performance. Tax expenses rose to Rs 697.6 crore against Rs 499.6 crore year-on-year, which means the company paid taxes at 40.8 percent on an annual basis. Since Bharti Airtel paid the highest amount of Rs 12,295 crore for 3G spectrum, it also paid Rs 106 crore towards 3G licence fee amortisation (the deduction of capital expenses for intangible assets, like spectrum, over a specific period of time.)

Despite the burden of high costs, the company's total revenue was up 15 percentat Rs 18,729 crore for Q4FY12 compared to Rs 1,293 crore in the year-ago period. Reuters

However, Goldman Sachs said despite the earnings miss, Bharti Airtel's overall EBITDA margins improved 115 basis points quarter-on-quarter led by improvements in its mobile and Africa businesses. The brokerage added that benefits of outsourcing and lower investment capex could have been reasons for the margin improvements.

Even though the company suffered a forex loss of around Rs 132 crore, brokerage Microsec Capital said that the company's African operations are on track and the region's cash generation capabilities may further cushion it against exchange rates while fulfilling its dollar-denominated loan obligations.

Despite the burden of high costs, the company's total revenue was up 15 percentat Rs 18,729 crore for Q4FY12 compared to Rs 1,293 crore in the year-ago period. The company's average revenue per user ( ARPU) improved marginally to Rs 189 in the March quarter as compared to Rs 187 in the December quarter.

Bharti's 5.6 million new subscribers in the March quarter is the steepest addition in its subscriber base in the last three quarters. After losing market share last year, Bharti Airtel seems to have woken up to the realities of intense competition and has decided to become flexible with its pricing, a Mint article pointed out. In fact, the telecom firm's Managing Director Akhil Gupta said the company has taken corrective measures on the tariff front in circles where the company was charging a premium.

"The shift in Bharti's pricing stance is reflected in the 1.9 percent sequential decline in the voice revenue per minute in the March quarter. This comes on the back of a 3.5 percent increase in the December quarter and a 1 percent increase in the September quarter," the report said.

"With the traffic growth of 5.1 percent quarter on quarter, Bharti more than made up for the RPM (revenue per minute) decline of 1.9 percent q-o-q. Bharti's strategy on customer acquisition has started to play in its favour, as the increase in traffic minutes of 11.2 billion over the December quarter surpassed the 10.3billion minutes increment reported by Idea," investment bank Barclays said in a note after the company announced its results.