Trai-ing times

BS Compass

The telecom regulator's proposal increases the uncertainty for Bharti

The Trai proposal to migrate to a unified licence only formalises what was earlier rampant amongst WLL players, which is providing roaming services.

Reliance can now aggressively target new customers by simply paying a fine and the difference in licence fees.

Although some analysts point to the extra amounts that Reliance will now have to cough up, that should not be much of a concern for Reliance given the strong cash balances unlike the cellular players.

The new regime also gives Reliance a plank to offer its services at much cheaper rates to calls between two Reliance phones. Importantly, it makes Reliance the biggest player in the cellular segment.

Also, while Reliance has been penalised, players like Bharti, which arguably were affected by Reliance's operations, have not been compensated for the loss in business.

However, with the cellular industry having appealed in court, the situation remains fluid.

While the impact will become apparent in the second half of the fiscal, Bharti has done quite well in the first half.

It has outperformed bottomline expectations for the September 2003 quarter reporting a 200 per cent jump compared to the June 2003 quarter.

It needs to be remembered however, that Bharti's performance for the June quarter was impacted due to delay in implementation of the calling party pays principle""-simply put, free incoming calls for mobile customers.

Against an expected launch date of April 1, 2003, the regime was launched one month later. Against that, Bharti had already commenced offerings of free incoming calls, which resulted in loss of profitability for the month of April.

Nevertheless, even if we discount that factor, the growth in profitability is commendable. The improvement in profitability can be attributed to several reasons.

First, all of its mobile circles have broken even and have started contributing to profits.

Bharti's EBIDTA margins on its oldest circles average close to 40 per cent compared to overall margins of 32 per cent for the division.

Secondly, Bharti's mobile customer growth has been better at 23 per cent compared to industry growth of 21 per cent.

Finally, efficiencies have been improved considerably. Against a net revenue growth of 18 per cent, its operating expenses have gone up only 8 per cent.

One concern is the increasing proportion of prepaid customers. While prepaid customers constituted 81 per cent of total customers in the June quarter, that proportion increased to 83 per cent in the September quarter.

Monthly revenue per prepaid user is around a fourth of that for a postpaid user. Even though the minutes being talked for prepaid customers improved 13 per cent, the revenue per minute talked has been falling.

A sustained decline in this respect is not a welcome trend and will eventually impact profitability. The threat of competition from Reliance Infocomm only becomes more potent going forward if the regime is implemented.

Reliance Infocomm also intends to get into the prepaid segment and as the past has shown, it has tread the value for money path (Hungama scheme).

Therefore, it can reasonably be expected that Reliance Infocomm will use the same formula for garnering customers.

If Bharti has to match Reliance's offerings, it can result in a significant downside to profitability. Surprisingly, in spite of the future downsides, Bharti's stock was up 8.5 per cent.

With contributions by Sameer Ranade