Bharti Airtel: Low margins

Margins decline due to higher network costs, low spectrum

Putting out a reasonably good set of numbers for the December quarter (Q3FY08), Bharti Airtel, India's largest telecom company in terms of market capitalisation, posted revenues of Rs 6,964 crore, an increase of 9.8 per cent quarter-on-quarter. With this, the GSM operator should end FY08 with revenues of about Rs 26,750 crore and a net profit of Rs 6,750 crore.

During the quarter, operating margins fell by 30 basis points to 42.5 per cent, largely a consequence of higher network operating costs resulting from a shortage of spectrum. Thus, the operating profit showed a rise of 9.3 per cent at Rs 2,963 crore.

Margins for mobile services were down about 20 basis points with the average revenue per user (ARPU) coming off only by 2.25 per cent to Rs 350. During the September quarter (Q2FY08), the fall in ARPU had been sharper at 6 per cent q-o-q.

The minutes of usage (MoU) saw a rebound in Q3FY08 and were up 1.1 per cent at 474; in Q2FY08 it had fallen to 469.

However, the revenue per minute declined 3.2 per cent q-o-q. The introduction of the pricing of Re 1 a minute for lifetime subscribers may have impacted the margins somewhat. Lifetime subscribers account for 34 per cent of the total subscribers.

Enterprise revenues dropped 4 per cent q-o-q, unlike the September quarter, which saw a smart rise of over 25 per cent q-o-q though the operating profit was stable.

Bharti has spectrum in five circles and is likely to get allotment for five more.

It should help ease network operating costs, which would in turn boost margins.

At the current price of Rs 852, the stock trades at just under 19 times estimated FY09 earnings and should remain an outperformer.

The launch of IpTV and DTH services in the first quarter of FY09 should help the company to consolidate its market share (23.6 per cent) further.