Jio-led price wars halve Bharti Airtel Q3 profit to Rs 504 crore

Net down 55% y-o-y, the biggest decline in 16 quarters; revenue down 3%

Bogged by competitive pressures brought on by low tariffs of Reliance Jio (RJio) and disruption due to demonetisation, Bharti Airtel’s December quarter (Q3) numbers were below Street estimates. Pricing pressure in India coupled with Nigerian currency devaluation saw consolidated revenues fall three per cent year-on-year (y-o-y) to Rs 23,336 crore, compared to Bloomberg consensus estimates of Rs 23,897 crore.

Adjusted for divested Africa units, the sale of tower assets and Bangladesh merger, revenue performance was flat. According to Bloomberg, this was the worst-ever revenue growth performance for the company. Operating profit at Rs 8,570 crore was up just 1.1 per cent though lower than estimates of Rs 8,760 crore due to subdued performance. 

Net profit, too, fell by more than half to Rs 504 crore and came in lower than consensus estimates of Rs 1,023 crore, on account of a 33 per cent increase in net interest costs (higher debt due to spectrum purchase) as well as higher spectrum amortisation and depreciation cost, which were up 11 per cent over the year-ago period. The company’s consolidated debt after the October 2016 spectrum auction, when it acquired rights to airwaves worth Rs 14,281 crore, has increased to $14.3 billion (Rs 97,500 crore), from $12.2 billion in the September quarter. 

Acknowledging the pricing pressures, Gopal Vittal, managing director and chief executive officer, India & South Asia, Bharti Airtel, said the quarter has seen turbulence due to the continued predatory pricing by a new operator. “The present termination costs at 14 paise, which are well below cost, have resulted in a tsunami of minutes terminating into our network. This has led to an unprecedented y-o-y revenue decline for the industry, pressure on margins and a serious impact on the financial health of the sector.” 

Realisations, both at the voice and data segments, which were trending down, fell further in the December quarter, as customers used more of the free services on offer. This coupled with competitive tariffs launched by Bharti and other players, too, is expected to have made a dent in the Indian wireless revenues. Voice realisations were down 13 per cent to 29.42 paise per minute on a y-o-y basis and 9.2 per cent over the September 2016 quarter. What has led to this is the higher contribution of calls from RJio network (incoming minutes), which only earns it the interconnect usage charge of 14 paise per minute which is less than half the average voice realisations. This is what is reflected in the Indian mobile revenues (60 per cent of consolidated revenues), which fell six per cent on a sequential basis. Average voice revenue per user also fell six per cent. What helped were voice volumes, which were up 3.4 per cent both on a sequential and YoY basis.

But, the deepest cuts are in the faster-growing data segment. Not only was the realisation down over 11 per cent sequentially, volumes, too, fell 3.5 per cent over the September quarter. Analysts at IDFC Securities had highlighted the negative impact of demonetisation on prepaid recharges, specifically data volume growth. Data, as a percentage of mobile service revenues, which have been on an uptrend since 3G services took off, fell 200 basis points sequentially to 22.8 per cent.

The positive aspects from the results are the Africa operations, where revenues grew six per cent YoY, the highest in the past nine quarters. Data revenues at $153 million were up 24 per cent over the year-ago quarter, led by increase in data customer base of 21.3 per cent, while data volumes were higher by 91 per cent. Africa contributes 23 per cent to consolidated revenues. 

Going ahead, in addition to the RJio impact, the Street will keep an eye out for deals such as the acquisition of five circles of Telenor by Bharti Airtel. Telenor operates in seven circles, including Maharashtra and Gujarat, and the circles contribute around 37 per cent to Bharti’s revenues.