Minutes of usage up 5%, but steep fall in tariffs continues to impact margins of the telecom major.
While the ongoing price war continues to pull down the margins of Bharti Airtel, growth in traffic volumes and the performance of its Infratel subsidiary have stood it in good stead in the March quarter. The company reported a 13 per cent growth in network traffic versus five per cent growth in the December 2009 quarter, as the company’s move to introduce per-second billing in the previous quarter induced customers to talk more and restore some of the traffic it lost to competition.
The improvement in the numbers was led by a five per cent increase in the minutes of usage over the preceding quarter. The fall in rates, however, continues to impact the company’s margins.
Margins continue to slide
The intensifying rate war continues to play truant with Bharti’s average revenue per user (ARPU) and revenue per minute statistics. While revenues per user are down 4.3 per cent over the previous quarter and 28 per cent over the previous year to Rs 220, revenues per minute, too, fell nearly nine per cent over the previous quarter and about 29 per cent over the year-ago quarter, to 47 paise.
Thus, despite growth in network traffic (13 per cent) and overall revenues by 6.45 per cent, quarter-on-quarter (q-o-q), that helped the company cross the Rs 10,000-crore revenue mark for a quarter for the first time, Ebitda (earnings before interest, taxes, depreciation and amortisation) margins fell by 100 basis points to 39 per cent.
While net profits fell seven per cent q-o-q, the fall was checked as the company reported a gain in net interest income/forex gains to the tune of Rs 180 crore. While the market will take heart from the operational improvement in terms of network minutes and keep an eye out for a further squeeze on margins, the more important triggers would be the handling of the $10.7-billion acquisition of Zain and the listing of its tower subsidiary, Bharti Infratel.
Zain and Bharti Infratel
Analysts estimate the company will need to invest about $1 billion in 2010-11 in its African operations to maintain and grow its share of the newly acquired business. Given the scale of investment and the need to integrate the African business in line with its own business model, analysts believe the acquisition will take time to turnaround and could add to Bharti’s earnings only in 2012-13.
The listing of Bharti Infratel, likely over the next two quarters, would be crucial, as it would free up cash for use in other operations. The tower business is the second-largest capex for Bharti Airtel after the wireless business, accounting for almost a fifth of its capex for the quarter. Bharti’s own tower business did well in the quarter, with revenues up 3.1 per cent to Rs 960 crore and Ebitda up 5.6 per cent to Rs 460 crore.
This comes on the back of improvement in tenancy from 1.57 times in the December quarter to 1.62 times in this quarter on its portfolio of 30,600 towers. The company also has a 42 per cent stake in Indus, which has a tower portfolio of 1,03,000 towers.
Conclusion
While investments in 3G as well as in operations in India, Africa, Sri Lanka and Bangladesh will mean that Bharti’s capex will keep rising over the next two years, Bharti’s key advantage over competition is the free cash flow it manages to generate each passing quarter. HSBC estimates the company generated about Rs 3,200 crore of free cash flow in the March quarter and about Rs 8,000 crore in 2009-10, which will come handy due to the big-ticket investments planned.
On valuations, the Bharti stock is trading at 12 times its 2010-11 earnings per share of Rs 25 and can be considered at dips.
