The June quarter results of Bharti Airtel Ltd are unexciting. While the company did well to maintain its high profit margins in the core wireless business, it disappointed on some other counts. Average minutes of use per user (AMOUs) fell by 1.5% sequentially and marked the fourth consecutive drop in usage by customers. AMOUs have now fallen by 10.6% in the past four quarters. Average revenue per minute (ARPM), or the average tariff collected from customers for every minute of traffic, fell by 3.4% in the last quarter, which follows the 2.14% decline in the March quarter. This is after adjusting for the loss of revenue on account of the withdrawal of the mobile termination charge (MTC) last quarter.
Average revenue per user (Arpu), which is the net result of the two factors above, fell by 4.9% last quarter, on the back of a 6% decline in the March quarter. Analysts have been factoring in a decline in Arpu owing to enhanced competition and the fact that an increasing proportion of the company’s new customers are from rural areas. But the extent of Arpu decline in the past few quarters has been a higher than expected.
Telecom players such as Reliance Communications Ltd and Aircel Cellular Ltd have increased reach in the GSM space, and have sought new customers by offering discounted tariff packages and even free minutes. While this would have caused some of the company’s customers to migrate, some customers retain their Airtel connection while at the same time availing the free minutes offered by competitors. This process, referred to as “minutes arbitrage”, has led to a drop in MOU. Further, the company pointed out to analysts in a post-results conference call that 54% of its net customer additions came from rural areas, and that it will be a while before usage by such customers catches up with that of urban consumers. With competition in urban areas set to increase further thanks to new entrants and with the proportion of rural consumers in the total pie increasing with every passing quarter, the pressure on Arpu may continue.
The extent of Arpu decline in the past few quarters has been a higher than expected. Ahmed Raza Khan / Mint
Notwithstanding the pressure on Arpu, the company has improved its operating margin in the wireless business by 50 basis points to 32% on a like-to-like basis (i.e., after adjusting for the loss of revenue on account of the withdrawal of MTC). The company’s ability to retain margins despite high competitive pressure is commendable. Needless to say, there are obvious limits on margin expansion and what is more important to sustain earnings growth is the firm’s ability to grow revenues.
The company’s tower infrastructure business performed much better than expected, with both the share of tenants’ usage as well as rentals increasing. For Bharti Infratel, which represents in-house towers (the remaining having been hived off to the consortium called Indus Towers), the average rentals increased by 8.4% last quarter. Coupled with an increase in the tenancy ratio, this resulted in a 22.5% jump in the division’s operating profit. While this is significantly higher than most analysts’ expectations, it must be noted that Bharti derives a relatively small portion of its revenues and profit from this division. The wireless division still contributes about 70% of revenues and profit, and the lack of positive surprises in that division means that excitement in the stock would be hard to come by in the near future—unless, of course, the firm is able to go ahead with the MTN deal, and that too at attractive valuations.
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