Bharti Airtel and Reliance Communications could emerge stronger than other players in the fight to grab and retain customers
The increased competitive intensity between wireless telephony service providers has not only had a dampening effect on the stock prices but is also reflecting in their September 2009 quarter results. India’s largest wireless telecom companies by subscribers—Bharti Airtel (Bharti) and Reliance Communications (Rcom)---have seen their revenues and net profits register a drop in growth for the first time in the last three quarters.
Despite the recent recovery in prices, Bharti’s stock price is down by a tenth over the month while Rcom’s scrip is down a third over the same period. Though Bharti and Rcom are best placed due to their scale to tackle the situation, analysts believe that the pricing pressure will continue for at least the next two-three quarters before the dust settles down.
Eating into the subscriber pie
While the subscriber base continues to grow for both players with Bharti adding an average of 27 lakh users a month and Rcom adding 22 lakh users, the growth in new subscriber additions and the market shares have slowed down. For the September 2009 quarter, Bharti’s net subscriber additions and market share are down 4 per cent to 81 lakh and 50 bps to 23.5 per cent, respectively as compared to June quarter---even on a year-on-year (y-o-y) basis, they are flat. Rcom net additions are down 6.5 per cent to 65 lakh and market share is down 40 bps to 18.5 per cent on a sequential basis for the September quarter.
The national launch of GSM based services at the start of the current calendar year saw Rcom grow its net subscriber additions y-o-y by 25 per cent for September quarter. Going ahead, expect the market share of both companies to drop as new entrants grab users on price and with innovative offers. Both players have responded by introducing per second billing to arrest the fall and are playing the waiting game.
On the per second bandwagon
Reliance was first off the block by responding to the price war initiated by Tata Docomo with it’s per second plan. Rcom introduced the ‘Simply Reliance’ plan in first week of October, which was made available to its 86 million subscribers at 50 paise per minute as well as 1 paisa per second. In addition to this, the company is now planning to consolidate its leadership position in the CDMA platform by expanding its presence in the fixed wireless and the PCO segment.
The usage in the CDMA segment is also being driven by the hi-speed data service of the company. The lucrative data service which unlike the voice business commands average revenue per line or user per month at around Rs 1,000 is dominated by the two pan-India players in the CDMA segment—Rcom and Tata Teleservices.
| ONE SECOND DISRUPTION | ||
| Q2, FY10 | BhartiAirtel | Reliance Comm |
| Customers (mn) | 113.0 | 86.1 |
| % change | 7.6 | 8.8 |
| Market share (%) | 23.5 | 18.5 |
| % change (bps) | -50.0 | -40.0 |
| ARPU (Rs) | 252.0 | 161.0 |
| % change | -9.0 | -23.3 |
| MoU (minutes/month) | 450.0 | 340.0 |
| % change | -6.0 | -7.0 |
| ARPM (Rs) | 0.6 | 0.5 |
| % change | -4.0 | -19.0 |
Though Bharti, on its part has also launched its per second plan towards the end of October, as a strategy the management believes that it is not necessary that the company will match the lowest fares in the market every time. The focus for the company is to maximise its revenue market share (32.7 per cent for the September quarter, up 90 bps q-o-q, while subscriber share is down 50 bps to 23.5 per cent) on the back of its passive infrastructure advantage (1 lakh tower sites), fibre optic coverage and presence across circles. The company is also focussing on improving revenues from its managed services business, which offers network-based solutions to corporates.
Both Bharti and Rcom are countering the dip in the fiercely competitive voice business by citing that they are superior to new players on scale, distribution reach, brand and cash flows. In addition, the integrated and diversified nature of their business has meant that these players are able to withstand competitive pressures better than other voice only players. While Bharti gets 35 per cent of its revenues from non-mobile business, Reliance’s share of the non-wireless business is 45 per cent.
Not up to scratch
For both Bharti and Rcom, the September quarter was a challenging one on a wide variety of parameters. The first, revenues per minute were down 4 per cent for Bharti while it fell 19 per cent for Rcom compared to June quarter. Average revenues per user, too, showed a similar trend. While both Bharti and Rcom were affected due to competitive pricing, Rcom additionally was affected by exclusion of CDMA handset sales from revenues, lower value added services revenues and bundling of free minutes.
The minutes of usage (MoU) per customer for both companies were down by 6-7 per cent due to weaker rural revenues on delayed monsoon and rising food prices. On the urban customer front, both firms suffered from the new phenomenon of dual SIM phones and multiple SIM consumption, which reduces the number of minutes of individual players.
| NOT SO PROMISING | ||||||
| Bharti Airtel | Reliance Communications | |||||
| in Rs crore | Q2, FY10 | FY09 | FY10E | Q2, FY10 | FY09 | FY10E |
| Total Revenues | 9,845 | 36,961 | 39,350 | 5,702 | 22,941 | 23,766 |
| % change | -1.0 | 36.8 | 6.5 | -7.2 | 20.3 | 3.6 |
| OPM (%) | 42.1 | 41.0 | 41.8 | 35.4 | 40.4 | 36.0 |
| change in bps | 30.0 | -7.7 | 79.0 | 450.0 | 259.0 | -440.0 |
| Net profit | 2321.0 | 8469.0 | 9192.0 | 740.0 | 5907.0 | 3945.0 |
| % change | -7.7 | 26.4 | 8.5 | -54.7 | 9.4 | -33.2 |
| P/E (x) | ----- | ------- | 13.2 | ----- | ------- | 9.7 |
The road ahead
While both companies saw their top line and bottom line drop sequentially for the September quarter, Bharti has come off better than Rcom. While Bharti’s net profit is down 7 per cent, Rcom’s down by half. While cash flows are strong, they will come under strain in the short to medium term not just due to the competitive intensity but also due to the upcoming 3G auction. Both players have given a capex of around Rs 10,000 crore for 2009-10, which includes the licence fee for 3G.
While Rcom has been able to bring down its debt over the last two quarters, its net debt is still at a high Rs 21,079 crore as of September 30, 2009 while that for Bharti is a fifth of this at Rs 4,210 crore. This gives the latter leeway both on potential acquisition front and in the upcoming bidding process. Despite the recent gains, both stocks trade at attractive levels with Bharti justifiably trading at a premium. Invest with a two-three year horizon.