Bharti Airtel faces short-term uncertainty

Bharti Airtel faces short-term uncertainty
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First Published: Thu, Jan 22 2009. 10 05 PM IST

Updated: Thu, Jan 22 2009. 10 05 PM IST
Mobile telephony firmBharti Airtel Ltd has reported strong financial results in a competitive environment. Revenues of its wireless business grew by 9% sequentially, much higher than the 5.3% growth recorded in the September quarter.
What’s more, margins have improved and earnings before interest, tax, depreciation and amortization, or Ebitda, grew by as much as 13.4%. The other business segments such as fixed line, data and long-distance services reported a drop in profit growth, but the company’s profit growth was higher than the preceding quarter, thanks to wireless services.
Average revenue per user, or Arpu, in wireless fell by 1.9% on a quarter-on-quarter, or q-o-q, basis, again an improvement from the 5.4% drop reported in the September quarter.
Analysts say Arpu, revenues and profit could come under pressure in the next two quarters thanks to the price war initiated by Reliance Communications Ltd in the GSM segment. Reliance is offering substantial free minutes in its recently launched GSM service, short for global system for mobile communications technology platform.
This is expected to impact competitors such as Bharti, at least in the short term. Bharti is already seeing the impact of spreading its wings into rural India, as a result of which minutes of usage have been coming down. For instance, Bharti’s subscriber numbers have risen at an average rate of 11-12% on a q-o-q basis in the past four quarters. But the rate of growth in the number of minutes carried on the wireless network has been coming down, from 18-21% in the March and June quarters of 2008, to 10.1% in September and 6.7% in December.
Analysts believe this is a result of expanding into rural areas, where mobile use is low. Besides, much of the recent growth has come from the aggressive marketing of so-called lifetime plans, where usage is again relatively low.
To be sure, the company says the drop in traffic is due to a withdrawal of free minutes offered in some schemes. It points to the improvement in average revenue realized for every minute of traffic carried, which has improved by 2% q-o-q to Rs0.642. The company’s suggestion is that realizations improved in a competitive environment simply because the free minutes were taken away.
Analysts, however, are convinced that both usage and Arpu are under pressure and will remain so given the new competition. A report by HSBC Research on Bharti dated 21 January states: “We have cut our estimate of minutes of usage per subscriber by 4% for FY10 from our earlier estimate of yearly growth of 5%. The combination of excess capacity and a price war will hurt revenue and result in more free minutes.”
At the same time, Bharti shares have corrected by about 14% since Reliance’s GSM launch and reflect the market’s concern about the price war. Given valuations of about 14 times and considering that earnings are still growing at 35%, downside from current levels seems limited.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jan 22 2009. 10 05 PM IST