Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday

Success starts weighing down Bharti Airtel

Success starts weighing down Bharti Airtel
Comment E-mail Print Share
First Published: Fri, Jul 24 2009. 01 04 AM IST

Updated: Fri, Jul 24 2009. 01 04 AM IST
New Delhi: Bharti Airtel Ltd’s profit for the quarter ended June exceeded expectations on the back of lower finance costs, but the company’s revenue growth is slowing as it expands into rural India—a statistic that underscores both the importance of a merger deal with South Africa’s MTN Group Ltd and the imperative of moving to a business model, as mentioned previously by a senior Bharti executive, which cuts costs and connects better with rural customers.
Click here to watch video
Bharti and MTN, top telcos in India and Africa, respectively, by revenues, are in merger talks, the exclusivity of which ends 31 July.
Announcing the results on Thursday, Bharti Airtel reported a 24% increase in net profit to Rs2,517 crore for the April-June quarter, the first for this fiscal year, from a year ago, beating analyst expectations in a Mint survey that set earnings expansion at an average of 16.92% (the median or mid-point of the estimates was at 17.65%)
Part of the increase in profits was driven by a fall in finance costs. In the June quarter, Bharti Airtel reported interest income of Rs260 crore on account of changes in currency rates, compared with an outgo of Rs213 crore in the year-ago period.
Operating profit margins (calculated as a percentage of revenues) stayed at a healthy 27.35% in the quarter, broadly in line with the results in the past six quarters.
Smaller rival Idea Cellular Ltd reported a 13% rise in consolidated quarterly net profit to Rs297.06 crore on revenues of Rs2,974.83 crore in the quarter.
The effects of falling average billings of its customers weighed down on Bharti’s revenues. Such monthly billings, commonly referred to as average revenue per user (Arpu), contracted 20.6% to Rs278 in the June quarter from a year ago.
Also See Mixed Showing (Graphics)
Strategy rethink: Bharti Airtel chief executive Manoj Kohli. Harikrishna Katragadda / Mint
Bharti Airtel reported revenues of Rs9,942 crore, according to US general accounting standards, in the April-June period, showing a 17% increase over the year-ago quarter. The expansion compared with the March quarter, also referred to as sequential growth, stood at just 1.19%—the lowest such increase in six quarters.
Part of the fall in Arpu—and, consequently, revenues— came from a reduction in what is called termination charges by one-third to 20 paise a minute effective 1 April, mandated by the country’s telecom regulator, the company said. Of the Rs27 fall from the Rs305 Arpu reported in the March quarter, Rs12, or 44%, was on account of this change, Manoj Kohli, chief executive officer, Bharti Airtel said in an earnings call with analysts.
Discounting for this change, the fall in Arpu was in line with the trend at most mobile phone service firms that are expanding the reach of their network beyond India’s cities, which are increasingly getting saturated. The number of phones in urban India stands at 89 per 100 people, while it is a low 15% in villages and small towns, according to end-March data from the Telecom Regulatory Authority of India.
Bharti Airtel also showed a drop in another key business metric: minutes of usage shrunk by 11% to 478 minutes. Its tax outgo in the June quarter nearly doubled to Rs682 crore from Rs305.3 crore a year ago, which Kohli attributed to the increase in the minimum tax—from 10% to 15%—that companies are required to pay in India from 1 April.
The Indian firm’s falling Arpu—analysts predicted a further fall in the quarters ahead as new phone service licensees start operations with aggressive pricing to woo high-paying and urban customers—is in contrast to those at MTN that runs 22 networks from South Africa to Iran. MTN’s operations in Syria, for instance, report an Arpu of $18 (about Rs900) a month.
This presents Bharti Airtel, which runs a lean business by outsourcing operations such as network and information technology management to vendors such as LM Ericsson Telefon AB, Nokia Oyj and International Business Machines Corp., an opportunity to mesh its operating business model with MTN’s, and dramatically increase profitability of the merged entity.
Put together, both the companies will service some 200 million customers, in cities ranging from Johannesburg to Jaipur. Akhil Gupta, a director at Bharti Airtel, said on Thursday his firm was still in talks with MTN, but declined further comment, citing confidentiality agreements.
On Thursday, still, Bharti Airtel shares ended trade at Rs813.90 each, down 1.09% on the Bombay Stock Exchange, whose benchmark index rose 2.61%.
One analyst tracking the stock said the sudden fall in Arpu may lead to a re-rating of Bharti Airtel shares. “We will look into whether to change the ratings of the company, given the fall in the Arpus,” Kevin Trindade, senior analyst with Kisan Ratilal Choksey Shares and Securities Pvt. Ltd said, adding the 8.88% fall in Arpu from the March quarter was much more than he had estimated.
The challenge in the quarters ahead for the company will be to maintain growth in a maturing market with new competition waiting on the sidelines, resulting in a pressure on Arpu, a Mumbai analyst said, asking he not be named as he is not authorized to speak to the media.
In an interview earlier this month, Sanjay Kapoor, deputy chief executive at Bharti Airtel, indicated the company was gearing up for “a bit of a change” in its business model, with focus on saving costs and improving quality of service as its expands to rural areas. “What it changes for us is our distribution strategy, it changes our marketing strategy, it changes how brand connects with rural India,” he said.
“Similarly, to service customers—rather than having calls come down to the contact centres and IVRs (interactive voice response systems), we went and invested into rural service centres and there are already 20,000 of these operational. In another few months’ time, this number will go up to 50,000,” he had added then,
The company also intends to expand contribution of its new businesses such as direct-to-home satellite television services and business data services. In the June quarter, mobile phone services contributed 82.7% of Bharti Airtel’s revenues, down from 83.6% in the previous quarter.
Reliance Communications Ltd, second behind Bharti by customers, is expected to report an 11.6% drop in quarterly net profit, as it spent about $2 billion in building a second mobile network on the popular GSM platform and gave away free talk minutes to attract users.
Graphics By Ahmed Raza Khan / Mint
Devidutta Tripathy of Reuters contributed to this story.
Comment E-mail Print Share
First Published: Fri, Jul 24 2009. 01 04 AM IST
More Topics: Bharti Airtel | Revenue | Overseas | MTN group | Telcos |