Positive Signs

Financial results of companies present a mixed picture

Is activity in the infrastructure sector picking up? There are some positive signs. Cement despatches and power generation are up, for example. But we would ideally want good results from companies across a wide spectrum to confirm increased infra-related activity. We can look at a sample of the January-March 2016 quarterly results that have come in (by May 15, 2016).

Indian Infrastructure examines a sample of eight major listed businesses. Of these, three are from the telecom sector, two are from the energy sector, one is a construction major, one is in port services, and one makes capital goods. Seven of these companies are in the National Stock Exchange Infrastructure Index.

This is a “thin sample” but wide. All eight companies have registered revenue increases year on year in the January-March 2016 quarter and seven have registered revenue increases for the full year 2015-16. All eight have also registered appreciable increases in operating profits (profits before depreciation, interest and taxes [PBDIT]) for the quarter, and seven have registered increased PBDIT for the whole year. Five of the companies have registered increased net profits (profit after tax [PAT]) for the quarter while six have registered increased PAT for the year.

Operating margins – the percentage ratio of PBDIT to revenue – is a useful measure of efficiency. Operating margins have improved, since all eight companies registered better operating margins for the full year. Financing costs present a more mixed picture. Interest costs have climbed for most companies and the ratio of interest as a percentage of revenues has also climbed for five companies.

A brief look at the financial results of these companies…

Adani Ports and Special Economic Zone Limited (APSEZL)

The port services major registered a commendable performance in a bleak year for trade. Revenues are up 18 per cent for the year and 16 per cent for the quarter. Operating profits are up 19 per cent for the year and net profits are up 24 per cent. Financing costs have been pared down. The operating margin has increased slightly.

APSEZL outperformed the major ports in terms of traffic. Cargo traffic is up 5 per cent to 151.5 million metric tonnes (mmt) versus 144.25 mmt in 2014-15 whereas major ports have seen a cargo traffic increase of 4 per cent. APSEZL’s container volumes rose 17 per cent year on year to 3.3 million twenty-foot equivalent units (TEUs) in fiscal year 2015-16 from 2.9 million TEUs handled in 2014-15.

Business expansion for APSEZL will be driven by the under-construction container terminal, (CT4) at Mundra, which is a joint venture (JV) with France-based CMA CGM Group through its dedicated subsidiary CMA Terminals. Once operational, it will turn Mundra into India’s largest container port. The port operator also acquired Kattupalli port in late 2015. Volumes there rose from 7,900 TEUs per month (November 2015) to over 11,500 TEUs per month (March 2016).

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Adani Power Limited (APL)

Adani Power Limited has seen a turnaround, moving from consolidated losses to net profits. APL registered 57 per cent growth in quarter four (January-March 2016) revenues, accompanied by an 111 per cent growth in PBDIT and a 64 per cent rise in net profits. In terms of the full year, revenues rose 29 per cent while PBDIT rose 64 per cent. At the net level, APL went from losses of Rs 8.16 billion in 2014-15 to PAT of Rs 4.88 billion. The operating margins jumped by 5.3 per cent to 24.6 per cent from 19.3 per cent.

There was a sharp reduction in financing costs and the interest margin fell by 3.8 per cent. The company has recently raised Rs 3.3 billion in non-convertible debentures and intends to tap the bond market for another Rs 6.7 billion. This should further reduce financing costs.

At the operational level, the plant load factor (PLF) rose to 79.46 per cent versus a PLF of 77.1 per cent in October-December 2015. APL generated 18,185 million units (MUs) in the fourth quarter of 2015-16 versus 13,007 MUs in the fourth quarter of 2014-015, an increase of 40 per cent.

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Bharti Airtel

For Bharti Airtel, net sales rose by 4.9 per cent year on year for the full year and by 8.4 per cent for the fourth quarter of 2015-16. PBDIT was up by 5.9 per cent for the full year and by 10.9 per cent for the fourth quarter. Net profits were up 3.3 per cent for the full year and 2.8 per cent for the fourth quarter.

Operating margins rose to 36.8 per cent. In Africa, net losses reduced to Rs 3.8 billion from Rs 11.4 billion a year ago. The India operating margin was at 41 per cent, up from 39 per cent. Capital expenditure was up Rs 205.9 billion ($3.1 billion), an increase of 10.3 per cent year on year. Net finance costs at Rs 68.8 billion were higher by Rs 20.4 billion.

In India, voice traffic grew by 11 per cent, while data traffic rose by 69 per cent. Revenue realisations were lower than volume growth in both voice and data. Non-voice revenues contributed 36.7 per cent of total revenues, up from 32.3 per cent a year ago. About 7.9 million customers were added in the fourth quarter, and 25 million during the year. India’s largest operator now has 357.4 million customers across 20 countries, up 10 per cent year on year with a net addition of 33.1 million.

The average revenue per user (ARPU) fell slightly year on year to Rs 194 against Rs 198 in the fourth quarter in 2015, but rose in the fourth quarter over the third quarter (October-December 2015), when it stood at Rs 192. Data contributed 23.3 per cent of mobile revenues, up from 17.6 per cent a year ago. Mobile broadband customers rose to 35 million from 19 million a year ago.

Airtel has committed Rs 14.34 billion for a buy-back of up to 35.8 million shares at an average price of about Rs 400 each. This amounts to about 0.9 per cent of the equity. This is a result of a buy-back offered by group company Bharti Infratel. Airtel holds a 71.7 per cent stake in Infratel and the latter is offering a buy-back of

Rs 20 billion. Since Airtel’s stake in Infratel amounts to Rs 14.34 billion, it is utilising the funds from the Infratel buy-back to buy back Airtel shares.

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Idea Cellular

Idea Cellular, which is India’s number 3 operator in terms of subscriber base, registered a 39 per cent drop in net profit in the fourth quarter. However, revenues increased by 12.6 per cent year on year and operating profits also increased 12.5 per cent. Revenues increased by 14 per cent in the full year over 2014-15 while operating profits increased by 17.4 per cent. Net profits fell 3.5 per cent for the full year.

Idea now has 175 million subscribers, up about 3.2 million in the fourth quarter and up about 17 million for the year. It has rolled out 4G networks across 11 circles in the previous fiscal year and it offers 3G coverage in 22 circles. It is a leading player in eight circles. It is also a leading player in terms of mobile number portability gains. Voice traffic grew 9 per cent and data traffic grew 51 per cent year on year. Data provides about 20 per cent of service revenues.

Idea doubled its average capex spend in 2015-16 and there are estimates that it will spend at least another Rs 135 billion on roll-outs and spectrum. The balance sheet is stretched. Long-term debt has risen to Rs 365.7 billion from Rs 166 billion in 2014-15, while short-term debt is up to Rs 16 billion from Rs 2 billion.

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Bharti Infratel

The telecom tower firm reported an 18.7 per cent year-on-year jump in net profit for the fourth quarter of 2015-16. This was mainly due to growth in network roll-outs. Revenues increased 7.3 per cent in the fourth quarter, while operating profits were up 6.5 per cent. For the full year, revenue was up 5.5 per cent while operating profit was up 10.6 per cent and net profit rose by 19.5 per cent.

The operating margin improved sharply, from 43.6 per cent to 45.7 per cent, during the quarter. The interest margin reduced slightly. Infratel is offering a share buy-back of Rs 20 billion and, as mentioned above, Bharti Airtel will utilise the proceeds to offer a buy-back as well.

On a consolidated basis, Infratel’s results are computed including its 42 per cent stake in Indus Towers. Taken together, the two companies are present across all 22 circles. (Vodafone and Aditya Birla Telecom own 42 per cent and 16 per cent respectively in Indus.)

Including the interest in Indus, Infratel added about 3,000 towers during the year, taking its holdings to 88,808 towers. Consolidated co-locations stand at 195,035. Capital expenditure amounted to Rs 22 billion for the year. Net debt actually reduced to Rs 138.6 billion for 2015-16 from Rs 142.9 billion in 2014-15.

Hindustan Construction Company (HCC)

Construction major HCC saw increasing losses. Consolidated full-year revenues fell by 15 per cent and operating profits fell by 5 per cent. Net losses increased at the consolidated level. Interest costs spiralled up, more than doubling despite the falling revenues. Although the operating margin improved somewhat to 10 per cent in 2015-16 from 9 per cent in 2014-15, interest as a percentage of revenue was also about 9.2 per cent, leading to larger losses.

HCC has been hit by slow progress on projects and it has over Rs 30 billion in receivables, which is huge, given that it did Rs 88 billion worth of business in 2015-16. It has also not been able to raise funding for its subsidiary, Lavasa Corporation, postponing plans for an initial public offering several times. Although HCC received new orders worth Rs 57 billion in 2015-16, the massive backlog is affecting its financial health. The best hope is to see some of the receivables come in.

JSW Energy

JSW Energy has a current operational capacity of 4,531 MW and is planning to acquire a plant in Chhattisgarh for a consideration of Rs 65 billion from Jindal Steel and Power Limited. This would add 1,000 MW of capacity. The deal follows a consistent pattern of acquisition, since JSW Energy has already acquired hydropower assets from the Jaiprakash Group.

Net generation increased to 5,894 MUs from 4,698 MUs in 2014-15 while revenue rose by 22 per cent. The dependence on imported coal has been reduced as the group has diversified into hydropower. However, both long-term and short-term debt has risen considerably. The debt-equity ratio climbed from 1.01 in 2014-15 to 1.77 in fiscal year 2015-16.

Siemens

Adjusting for one-time charges, Siemens has seen an improved performance in the January-March 2016 quarter. The performance improved on all parameters with a relatively small rise in revenues versus stronger gains in operating profits and net profits. Operating margins were low. But debt was negligible. A pickup in revenues will probably be dependent on a rise in private investment.

Conclusion

The results offer a mixed picture. While there has been some improvement in financials, there are also worries on the debt front. Activity does seem to be picking up but in a selective sort of way. It will be easier to gauge the situation as more results are declared.

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