Right ring

Operating leverage powers Bharti Tele bottomline

Bharti Tele-Ventures had a phenomenal December quarter, with overall revenues growing 11 per cent sequentially, and thanks to the high operating leverage, net profit jumped 72.9 per cent to Rs 161.3 crore.

Consensus estimates (Rs 125 crore) were nowhere close, and as a result the Bharti stock jumped 5.2 per cent on Tuesday even though profit-booking in other heavyweight stocks pulled the Nifty down 2.2 per cent.

What's important is that each of the company's divisions saw an increase in revenues and margins, but what really drove the overall performance was the good show in the mobile business, which saw a 13.4 per cent sequential increase in revenues and a 61.5 per cent jump in EBIT (earnings before interest and tax).

Customer addition continued at a rapid pace "" last quarter, the company's mobile customers increased 19.2 per cent to 5.5 million subscribers. Revenue growth was lower as the average monthly revenue per user (ARPU) fell by around 5 per cent last quarter.

Importantly, 26 per cent of the customers added last quarter took post-paid connections, compared to 7 per cent in the September quarter. The churn among post-paid clients is lower and more importantly, their ARPU is almost four times that of pre-paid users.

Overall margins jumped over 400 basis points to 37.3 per cent, thanks to the high operating leverage the company enjoys "" network operating expenses fell 170 basis points as a percentage of sales, staff costs fell 60 basis points, and other expenditure fell 140 basis points. Besides, thanks to the new favourable regulations, access and inter-connect charges fell 180 basis points.

License fees increased 90 basis points as a percentage of sales, but soon this could see a decreasing trend""effective April 1, 2004, the license fee has been reduced by two percentage points across the board for all service providers and an additional benefit of 2 percentage points reduction in revenue share has been granted to first and second circle (and not metro) cellular licensees for a period of four years.

The only setback in the otherwise splendid quarter was that the company's share in the new mobile connections added last quarter fell to 23.9 per cent, compared to 27.5 per cent in the September quarter. But this is not of much concern as the growth potential in the Indian cellular phone industry continues to be huge.

Thanks to the fact that starter packs are available for as low as Rs 99, and also since phone prices have reduced after duty cuts, growth is expected to continue at a fast pace. However, Reliance Infocomm's plans to offer pre-paid connections should heat up competition in the sector.

The Bharti stock has had a great run in the past six months, but still trades at around 21 times estimated FY05 earnings, which means there could be more upside if the company continues to surprise with similar results.