Bharti Airtel Ltd’s December-quarter earnings prove that the rise in its stock price in recent times has been over-optimistic. In August, telecom firms had slashed dealer commissions; and in the following month, they reduced discounts to customers. That, coupled with the poor response to the spectrum auction, pointed towards reduced competitive intensity in this industry, and led investors to believe that profitability will improve.
That has clearly not come to pass, at least in the December quarter. The main indicator of this was the decrease in voice realization per minute. Although the slip was relatively minuscule—35.2 paise in the December quarter for the India mobile business, compared with 35.4 paise in the three months ended September, the reduced discounts were expected to boost this metric. It didn’t even arrest the continuing fall in realizations per minute, which has been happening at least since the December 2011 quarter.
Secondly, all these proved inadequate to boost Bharti Airtel’s operating margins as well. Consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) margins declined 80 basis points (bps) from a quarter ago to 30.55%. That was, in turn, driven by a 73 bps decline in Ebitda margins of the Indian and South Asian operations, and a 57 bps fall in Bharti’s Africa business. One basis point is one-hundredth of a percentage point.
Brokerage Nirmal Bang attributes the fall in margins to higher network costs.
Network operating expenses for the company rose 4.6% from a quarter ago. Overall, operating expenses as a percentage of revenue increased to 46.6% in the December quarter, compared with 46% in the September quarter, squeezing margins.
On top of this decline in Ebitda, a key measure of profitability, Bharti faced other problems.
The rupee’s depreciation meant that Bharti had to pay more for overseas debt and, thus, interest costs (inclusive of forex fluctuations) increased 30.3% from a quarter ago. The effective tax rate came in at 70% as one deferred tax asset in Africa had to be written back. Thus, net profit declined 61% over a quarter ago. Nirmal Bang estimates that even adjusting for one-offs of the previous quarter, net profit would still have fallen 47.7% from the September quarter.
That is not to say that the outlook hasn’t improved. After all, voice usage per customer has increased 4% and network traffic in India has increased by 3%, indicating some degree of price inelasticity. The effects of the reduction in discounts may become visible in the next couple of quarters as well. Also, subscriber churn has come down to 5.9% in the three months ended December, the lowest in at least five quarters.
That said, the run-up in stock price is not justified in light of other challenges such as the continuing losses in the Africa business and pressure on margins as Friday’s 4.12% decline shows.