The Bharti Airtel stock, which has been lagging broader markets since last September due to issues surrounding the sector and a fall in revenue market share (RMS), has shed 6.5 per cent since the start of the month on the December quarter results that were below expectations and damages claimed by telecom services provider Econet.
The company reported a drop in third-quarter net profit due to higher interest charges and steep 3G network rollout costs. Its strategy to stick to a price discipline led to lower volume growth vis-à-vis competitors, such as Idea and Vodafone in the December quarter.
However, the company says it’ll continue to remain competitive in the market and take steps to regain lost RMS. The Street will also keenly watch whether the company can repeat its January performance in terms of subscriber additions and stabilise its operations in Africa. Most analysts believe things will improve from here on. They are also bullish on Bharti’s prospects, with target prices ranging from Rs 385 to Rs 470 for its stock. At Rs 345, the stock is trading at 19.7 times its 2012-13 estimates.
Falling RMS share
For the second quarter in a row, Bharti Airtel’s RMS dipped below 31 per cent (see chart), while its competitors registered gains. While the industry’s revenues (adjusted gross revenues) grew by 15 per cent, Bharti’s revenues rose 9.9 per cent.
| UNDERPERFORMING PEERS | |||
| December 2011 quarter | Bharti | Idea | Vodafone |
| India wireless revenues (Rs cr) | 9,773 | 5,030 | 7,605 |
| % chg q-o-q | 4.0 | 9.0 | 5.0 |
| Total minutes (mn) | 219,152 | 113,964 | 133,220 |
| % chg q-o-q | 1.0 | 7.0 | 4.0 |
| ARPU (Rs) | 187 | 159 | 173 |
| % chg q-o-q | 2.0 | 3.0 | 3.0 |
| ARPM (Rs) | 0.45 | 0.43 | 0.57 |
| % chg q-o-q | 3.0 | 1.2 | 1.0 |
| Revenue market share (%) | 30.5 | 14.3 | 21.4 |
| % chg q-o-q (bps) | -40.0 | 30.0 | 30.0 |
| Source: Companies, Nomura, ICICI Securities | |||
| REVENUES: MEETING EXPECTATIONS | |||
| In Rs crore | Q3FY12 | FY12E | FY13E |
| Net sales | 18,507 | 71,517 | 78,930 |
| % chg ** | 7.1 | 20.3 | 10.4 |
| Ebitda | 5,958 | 23,791 | 25,573 |
| Ebitda (%) | 32.2 | 33.3 | 32.4 |
| Net profit | 1,011 | 4,442 | 6,630 |
| % chg ** | -1.5 | -25.3 | 49.3 |
| EPS (Rs) | – | 11.6 | 17.5 |
| P/E (x) | – | 29.4 | 19.5 |
| ** % change for Q3' FY12 is on q-o-q basis, while for FY12 & FY12 is y-o-y Consolidated numbers E: Estimates, revenue growth y-o-y Source: HDFC Securities | |||
Analysts at ICICI Securities, led by Vikash Mantri, said in a recent note that Bharti Airtel’s strategy to focus on establishing rates seem to have benefited its peers. They said they saw a possibility of the company reverting to lower rates to capture lost revenue share. Another reason, according to IIFL analysts, was the premium/at par pricing even in circles where Bharti was not the leader.
Bharti’s revenue per minute gain on a quarter-on-quarter basis was the highest among its peers. This was largely because of the 20 per cent price increase across its 22 circles on calls within the network from prepaid customers. However, the revenue growth was lower (compared to Idea and Vodafone) due to a decline in traffic growth in a seasonally strong quarter (see table), in a way indicating the consumer’s sensitivity to prices.
So, will Bharti continue to focus on higher rates at the cost of revenue share? Sanjay Kapoor, chief executive for India and South Asia at Bharti Airtel, said in a recent investor concall the company continued to focus on RMS and would take steps to regain share and stay competitive in the market. The Bharti management says even if it means taking a short-term hit, the company wants to make sure it’s more viable and sustainable in the long term, based on its strategic moves (such as raising prices). While it has fallen behind in the revenue metric, high month-on-month net subscriber additions for January came across as a major positive for the market leader.
Positive user additions
After averaging net subscriber additions below the million mark over the September-December period, Bharti’s net addition in January jumped by 35 per cent on the back of promotional campaigns. In addition, analysts at Barclays Capital say the performance could reflect a recalibration of the management strategy, as Bharti refocuses on usage and subscriber additions, following a strong increase in revenue per minute in the December quarter. While Bharti’s new subscriber additions were strong, it needs to do more to capture lost ground. That’s because even after the strong growth in January, its subscriber market share dipped marginally (20 bps) to 27.3 per cent, as new operators (such as Uninor) and established ones (such as Idea) continue to gain on attractive pricing.
Outlook
Though recent data points to a mixed picture, analysts are bullish on the company.
An Enam Securities report said the telecom operator was best placed in an improving competitive (price hikes) and regulatory (licence cancellations and policy clarity) environment.
In its Africa business, it should do well too. For the December quarter, the company posted robust revenue gains (14 per cent quarter-on-quarter) driven by three per cent growth in volumes. While the company has been aggressive in rate cuts in its Africa business, the management has indicated rates will be stable in the coming days. Bharti continues to stick to its guidance of achieving $5 billion in revenues and $2 billion in earnings before interest, taxes, depreciation and amortisation (Ebitda) by 2012-13 for its Africa operations. In the four quarters to December 2011, it posted $3.8 billion in revenues and $915 million in Ebitda. Though the company will have to contend with steep rollout costs, volume growth and scale efficiencies will drive Ebitda growth in Africa, feel Enam Securities analysts.
