Bharti Airtel Ltd’s results for the December quarter were a huge disappointment. Its shares fell by 7% after the results announcement. In contrast, Idea Cellular Ltd’s shares had jumped by 11% in just two trading sessions after its results announcement.

It became clear in the September quarter that Indian mobile customers are price-elastic. Volumes of both Bharti and Idea fell by 2% compared with the June quarter, a first in the history of the industry, due to the price hikes taken in May and June 2011. Idea woke up to this fact and became flexible with its pricing policy in the December quarter. Its voice revenue per minute remained flat at September quarter levels, which was surprising considering that it hadn’t rolled back the price hikes. Chief executive officer (CEO) Himanshu Kapania explained on a call with analysts: “Due to the competitive intensity in the market, the outgoing/incoming ratio adjusts to the lowest rate operator, making it difficult for other companies to improve voice rate realization, in spite of us having modified (read increased) our promotional base rates in May/June 2011.”

Sanjay Kapoor, CEO of Bharti’s India and South Asia operations, on the other hand, said at the post-earnings analysts’ call that what separated his company from others was that it didn’t raise tariffs selectively, but in all of its operating circles. He added that Bharti didn’t believe in toying with tariffs soon after they were raised, and that it was good to be patient and demonstrate in the marketplace that there is price stability in the market.

But a look at the numbers shows that the company’s patience has backfired, simply because competitors didn’t share the same view. According to an analyst with a domestic institutional brokerage, Idea and Vodafone have been much more hungry for growth. There also seems to be a lack of sound judgment on Bharti’s part. Idea’s Kapania said on the call that there was overcapacity in the industry, which isn’t allowing significant improvement in the voice revenue per minute. Bharti’s persistence with the tariff hikes suggests it believed that the marketplace was ready to absorb tariff hikes.

It’s important to note here that while Idea, too, hasn’t tinkered with its tariff card, it has been flexible on the customer acquisition side and on trade. Idea’s aggressiveness in the market led to a 7.3% rise in volume on the back of 6.2 million new customers. Bharti’s mobile customer additions, on the other hand, were much lower at 2.9 million, despite having a much larger base. And volume, as pointed out earlier, grew by just 0.8%. Bharti, at least from the numbers, appears to have been less active in customer acquisition. It can boast a high 3.5% increase in its voice revenue per minute, indicating that the price hikes taken last year are flowing in, but investors are far from impressed because the rise is coming at the cost of volume growth. The only solace is that Bharti now seems prepared to change its strategy, after having lost revenue market share in recent quarters.

Bharti’s mobile revenue grew 4% to Rs 10,176 crore and earnings before interest, tax, depreciation and amortization (Ebitda) grew at a decent pace of 4.6% to Rs 3,443 crore. Operating cash flow generation was also healthy at Rs 3,259 crore, up from an average of Rs 1,785 crore in the preceding four quarters. But again, it will be difficult to sustain this growth in the future, unless volume starts growing.

Additionally, the company’s margins in all of its non-mobile businesses fell, leading to a mere 2.5% sequential growth in Ebitda at the company-wide level. And with depreciation, interest and tax all rising in tandem, net profit fell by 1.5%. All this will lead to sharp cuts in the company’s earnings per share estimates, which is why the stock fell on Wednesday.

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Muted performance (PDF)

Quarterly performance (PDF)

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