Improving signals

Despite muted June quarter numbers, outlook is positive after the recent rate increases and better show in Africa business.

Bharti Airtel’s financials for the June quarter were below expectations. The company reported a 13 per cent fall in net profit to Rs 1,215 crore on the back of a 27 per cent sequential increase in interest costs, as well as higher depreciation and tax expenses. Revenues, up just four per cent, were a bit below analyst expectations. The key disappointment was the decline in average revenue per minute (ARPM), given that competitors such as Idea Cellular had reported improvement.

The Street was not impressed and pushed the stock down 1.4 per cent to Rs 426 on Wednesday, when the Sensex fell 0.9 per cent. While the results were muted, the rise in rates by Bharti in select Indian markets is considered a positive and likely to reflect on its numbers over the next year. Estimating the operational matrix would improve on this count (competitors had raised rates, too), analysts had revised their price targets upwards to Rs 510-528 (after the rate rises).
 

BELOW EXPECTATIONS
In Rs crore	Q1' FY12
Total revenues	16,975
QoQ chg (%)	4.2
Ebitda	5,706
QoQ chg (%)	4.1
Ebitda (%)	33.6
QoQ chg (bps)	-10.0
Net profit	1,215
QoQ chg (%)	-13.0
P/E (x) FY12E	19.6
Consolidated numbers E: Estimates Source: Company, analyst reports

Bharti’s stock, which has outperformed the broader markets (19 per cent compared to the Sensex’s 12.5 per cent decline) since the start of 2011, is likely to give upwards of 20 per cent from these levels.

PRESSURE STILL
The key disappointment in the June quarter was the decline of ARPM by one per cent to 42.8 paise. Idea, on the other hand, managed to increase ARPM by nearly one per cent to 41p in the quarter. In addition to the continuing competitive pressures across most circles, another reason for the poor ARPM performance is the drop in non-voice revenues. As a percentage of mobile revenues, these fell 40 basis points to 14.6 per cent, despite the company launching its 3G services. The company management has blamed this on seasonality and is hopeful of a rebound. Says Sanjay Kapoor, Bharti Airtel’s CEO of the India and South Asia business, “While 3G has not taken off, given the rise in 3G-enabled handsets, it is a matter of time before the segment will witness growth.” Idea, on the other hand, has done better than Bharti and reported flattish numbers for the non-voice segment.

PRICE RISE HELPFUL
The company also saw average revenues per user (ARPU) fall nearly two per cent in the domestic business, to Rs 190 in the June quarter. However, analysts believe the price rises will gradually reflect on both, ARPMs and ARPUs. The six circles where there has been a 20 per cent rise in rates for calls within the network would impact about a third of domestic mobile revenues. So, there might be some upside in the near term, feel analysts.

The company took the price rises in their stronger markets, as price competitiveness in the tier-2 and tier-3 areas is severe. Analysts say Bharti may have been forced to increase its rates since it had failed to arrest the decline in ARPMs. Kapoor says it was no longer sustainable to run the operations, given the increase in costs/inflation.

AFRICA BIZ BETTER
The Africa business did better than expected, and helped offset the pressure witnessed in India. While revenues were up six per cent, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins were up 30 basis points to 26.7 per cent on a sequential basis. The company managed to increase its minutes of usage, ARPUs and subscriber growth at five per cent, sequentially, which is encouraging. Angel Broking’s telecom analyst, Srishti Anand, says there is headroom for growth, given that MTN Africa’s Ebitda margins are at 40 per cent and the company operates in the same markets as Bharti Airtel. Compared to other domestic operators, Bharti is in an advantageous position as it is able to diversify its revenue risk across South Asia and Africa, she adds.