India’s largest mobile-phone operator Bharti Airtel Ltd sprang a positive surprise with its March quarter results, reporting a revenue growth of 12.3% over the same quarter last year, the highest in the past five quarters. The company’s shares jumped by 9.4% on the National Stock Exchange on Friday.
What stimulated the markets the most was that the average minutes of use by its mobile phone customers rose 7% compared with the same time a year ago, showing that there was a fair bit of elasticity between call rates and usage minutes.
The average rate realised by Bharti for every minute of use had fallen by as much as 11.7% between the previous financial year’s March quarter and last fiscal year’s December quarter. But average minutes of use was stuck at about 475 minutes for three successive quarters, giving the impression that adding low-income users, especially in rural areas, was impacting the company. Indeed, average revenue per user, or Arpu, had fallen by about 12% during the period.
But this changed last quarter—although average call rates fell by another 6.7%, usage jumped by more than 7%, enabling the company to maintain the Arpu.
The company increased its number of customers by more than 12% last quarter, resulting in a similar increase in revenues. It added customers by similar or better rates in the preceding three quarters, but successive drops in Arpu had led to lower revenue growth.
It’s not that the drop in average call rates hasn’t hurt the company. Although revenue growth was impressive, operating margin of its core mobile business fell by more than 200 basis points. The company says one of the reasons was lower rates, while the other was an aggressive spend in selling and marketing. Some analysts are worried that it may have to live with lower margins because of high costs of getting customers and lower call rates. But on the whole, the jump in average usage and the ensuing spike in revenues were a pleasant surprise.
The company has also said that the government has released air waves for some of its circles, which clears some of the worries about allotment. But regulatory risk continues to haunt the sector, with players concerned about the likely fees they may have to pay in the future for radio spectrum.
Thanks largely to such concerns, Bharti’s shares underperformed the broader market in the last financial year that ended on 31 March, the first time since the markets started their rally in April 2003. Even after Friday’s jump in share price, Bharti’s enterprise value represents 15.4 times its earnings before interest, tax, depreciation, and amortisation for the last fiscal year. This is a sharp decline from the multiple of as much as 22.5 times it enjoyed in fiscal 2007. Although valuations have cooled, they are by no means cheap given regulation risks and new competition later this year.
ABB: no sign of a slowdown
ABB Ltd’s March quarter numbers in India were supposed to answer concerns of a slowdown in the engineering space. Well, revenue growth was a bit muted at 17% compared with the 62% growth notched up during the March 2007 quarter. Earnings per share, however, rose 35%, about the same rate at which it increased in the preceding quarter.
Its operating profit was up 34.7%, slightly higher than the pace at which it increased in the December quarter. No sign of a slowdown there. Growth in orders at 35% was, however, a bit lower than the 42% rise in the December quarter. The order backlog has risen 22.8% in the past quarter to Rs6,175 crore and is around 0.75 times of expected revenues in fiscal 2008 that ended on 31 March.
Have the increase in input costs hurt margins?
Ebitda (earnings before interest, taxes, depreciation and amortization) margin was 11.3% in the March quarter, well below the 14.1% margin in the previous quarter. Profit margins before income tax have fallen sharply for the power technologies segment and in the automation products business.
ABB has substantial capital expenditure lined up and will also expand into new products, which should help it grow faster than the industry. But at its current price of Rs1,170, the stock trades at 34.5 times the company’s estimated 2008 earnings, which is why the upside is limited.
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