Bharti Airtel’s scale gives it an edge over peers but the business will lose pace and could become less profitable.
It’s one of the best moves Bharti Airtel ever made. When peer Reliance Communications (RCom) rolled out its GSM network in January this year, it was dishing out free minutes to anyone who bought a connection. One might have expected Bharti to retaliate. But it refused to join the price war and didn’t even tweak its tariffs, let alone offer free minutes.
In fact, Bharti hasn’t touched its key rates for quite a while now, almost 18 months. That’s despite the fact that both Vodafone and Idea Cellular have been rolling out networks in new circles. Subscribers seem to be willing to pay up—the telco commands a revenue market share of an enviable 32 per cent. And the high base doesn’t seem to be coming in the way of growth.
In 2008-09, the Rs 36,962 crore firm added nearly 32 million subscribers, close to a fifth of the net additions during that period, so that its subscriber base is now nudging 94 million.
MOUs trend down
Indeed not tinkering with call tariffs seems to be paying off: in the March 2009 quarter, Bharti’s average revenue per user (arpu) fell by a less than expected 6 per cent sequentially.
Also, while the minutes of usage (mou) per subscriber dropped by 20 minutes (or 4 per cent) sequentially to Rs 485, eleven minutes were lost because of the fewer number of days in the quarter. Of the rest, some minutes were yielded to the competition and some lost because more connections are being sold in rural markets.
However, it’s evident that elasticity trends aren’t showing an uptick—people don’t seem to be talking more just because it costs less to do so. In fact, the drop in mou for RCom during the quarter was a sharper 9 per cent.
Also, since Bharti will continue to expand in the rural areas—currently over 50 per cent of new subscribers are from the hinterland— the growth in traffic can’t but slow down. It’s happening already: Bharti’s total wireless minutes grew by just 5.7 per cent sequentially in the March 2009 quarter lagging the 9.7 per cent growth in subscribers—the trend was similar in the December 2008 quarter.
Calling rural India
The rural spread could hurt arpus too. But that’s the only way forward for the telco, which now reaches 81 per cent of the population compared with 71 per cent at the end of 2007-08.
Given that roughly 70 per cent of India’s population is rural and urban-teledensity has already hit a high 75 per cent—90 per cent plus in the metros—it’s rural subscribers who will come into the fold and drive the industry for the next few years. Industry watchers say there’s an opportunity here for Bharti which it is well-positioned to exploit; that’s because it has 900MHz of spectrum in 13 service areas.
But a rural franchise can also mean lower arpus. So far though, the revenue per minute (rpm) has held up pretty well, coming off by just 2 per cent sequentially in the March 2009 quarter, a factor that helped the support margins for the wireless business at 31.5 per cent. As analysts point out, the ebitda (earnings before interest depreciation and tax) per minute at 20 paise has stayed more or less flat now for four quarters.
However, although the management has indicated that most of the capital expenditure is behind it and that some channel costs are lower in rural areas, that may not be enough to cushion a fall in the margins which could result from lower growth in revenues.
Top line to taper off
Indeed, the days of an annual 35-40 per cent growth in revenues are over. The sequential revenue growth in the March 2009 quarter was a rather disappointing 2 per cent betraying the severity of the competition.
Typically, revenues have grown at around 5-6 per cent and on occasions, even faster. So it’s not surprising that even for the current year, analysts are pencilling in a sales growth of just 16-17 per cent: compare that with the 37 per cent rise in revenues in 2008-09 to Rs 36,962 crore.
The growth for 2010-11 is a far more subdued sub-15 per cent. Even if the RCom threat has subsided after it withdrew the free minutes scheme, the competition from both incumbents and new entrants—who are also expanding their network—will continue to hurt.
Vodafone, for instance, is already netting 2 million subscribers a month and by the end of the year will have a pan-India footprint. The multinational has been gaining market share in many of the new circles where it has launched.
Idea Cellular too has become a stronger player after the acquisition of Spice and although it operates only in 16 circles now will have a pan-India presence by end 2009.
In January this year, despite RCom’s GSM launch, Idea trebled its share in the Mumbai market, albeit on a low base. Also, while churn for Bharti, both in the pre-paid and post-paid segments, had fallen to an all-time low in the December 2008 quarter, it went up again in the March 2009 quarter.
| THE TONE GETS LOUDER | ||||
| (in Rs crore) | 2007 | 2008 | 2009 | 2010E |
| Revenues | 18,519 | 27,025 | 36,961 | 42,781 |
| Net profit | 4,257 | 6,700 | 8,469 | 9,463 |
| EPS (Rs) | 22.5 | 35.3 | 44.6 | 49.8 |
| EPS (% YoY) |
- | |||
The arrival of Mobile Number Portability (MNP) too could result in some churn though it’s unlikely Bharti will lose too many customers given its strong brand equity, reach and value-added services.
The 3G kicker
Where Bharti scores over its rivals is in the scale that it has built—the telco is in a far better position than its rivals to absorb costs. Moreover, its strong balance sheet will allow it to bid for and offer 3G services without taking on too much debt. That’s why the sooner 3G spectrum auctions are held, the better for Bharti.
Analysts point out that since the lack of 2G spectrum remains an issue, 3G will probably be used mainly for voice services initially, but add that Bharti can always offer value-added services at higher charges which could offset some of the fall in the 2G arpus.
The company has said it would spend $2-2.2 billion on capex this year and finance this from internal accruals since it now generates free cash flows on a stand-alone basis; also it needs to make much smaller investments from here on since it already has a huge reach.
Peer RCom, on the other hand, has decided on a smaller outlay of Rs 10,000 crore for expanding its network in the current year, possibly because it is far more leveraged. That’s surprising given that RCom needs to expand its GSM network. Bharti’s other initiatives such as mobile commerce and mobile banking revenues will start paying off though how soon they will contribute meaningfully to the bottom line is hard to tell.
The top line for non-mobile segments, in the March 2009 quarter, was nothing to call home about—the wholesale carrier business, in fact, saw a sequential fall in revenues.
Industry watchers believe that with Idea Cellular and Vodafone putting up their own fibre networks, Bharti’s revenues in the carrier segment will be driven largely by captive usage, which in turn will be a function of how well the the wireless business does. Bharti holds a 42 per cent stake in Indus Towers and while the investment is currently a drag on profits, analysts believe the venture should make money this year.
The best bet in telecom
Of course, earnings growth for Bharti will taper off in the next couple of years –analysts are estimating a compounded 16 per cent growth in net profits between 2009-2011. In 2008-09, net profits grew 26 per cent to Rs 8,470 crore.
Concerns on over-ownership by foreign investors, RCom’s GSM rollout, company executives selling shares and the cut in termination fees have left the stock subdued in recent months. The stock is currently valued at just around 7.8 times 2009-10 EV/ebitda (enterprise value to ebitda).
Surprisingly, RCom trades at just a 14 per cent discount to Bharti--an EV/ebitda of 6.7 times, which is much too small given that Bharti has a much stronger balance sheet with a net debt to equity ratio of just 0.23 times whereas RCom’s net debt to estimated ebitda for 2009-10 is expected to be just under three times.
What’s even harder to understand is why Idea Cellular trades at an even smaller discount. Although Idea has a strong balance sheet with close to Rs 5,000 crore of cash, it has neither the reach nor the scale that Bharti has and makes losses in several circles. So it’s Bharti for those who want to play telecom in India.
