When Bharti Airtel Ltd announced a sharp increase in its average minutes of usage for the March quarter, and a resultant jump in wireless revenues, last Friday, most telecom stocks rallied on the assumption that demand elasticity continued to be strong. After all, even Idea Cellular Ltd had reported a similar increase. While Bharti’s shares jumped 9.4%, those of Reliance Communications Ltd rose 8.5%. But, when the latter announced results on Wednesday, it turned out that the trend is not true for the whole industry.
Reliance’s average minutes of usage fell by 4.2% last quarter compared with the December quarter. Compared with the year-ago quarter, usage has dropped by more than 20%. Contrast that with the increase of 6.8% in average usage by Bharti’s customers.
According to Reliance, the drop in usage is a result of a rebalancing in its tariff plans by reducing the number of free minutes that are offered under some plans. As a result, revenue per minute has risen by 5.8% on a year-on-year basis. Bharti, on the other hand, has seen revenue per minute fall by as much as 17.6% on the same basis due to tariff cuts. But, in the trade-off between average realizations and usage, Bharti seems to have come out trumps. Its average revenue per user (Arpu) fell by 12% year-on-year last quarter, while Reliance’s Arpu has dropped by 15.9%.
And, while Bharti managed strong sequential double-digit growth in its wireless business, both at the revenue and profit levels, Reliance managed a mere 5% growth in wireless revenues and a 6% growth in the segment’s profit last quarter. The non-wireless business grew both revenues and profit smartly by 25% and 22%, respectively. But, growth in the non-wireless business has been lacklustre in the preceding three quarters and it’s premature to take the jump last quarter as a trend.
Having given up all of its relative gains (see chart), future stock performance will depend on the roll-out of its nationwide GSM network and progress on signing tenants for its massive tower infrastructure business.
HDFC beats the housing downturn
Housing Development Finance Corp. Ltd’s (HDFC) outstanding loans amounted to Rs72,998 crore at the end of March, a 29% growth from the year-ago level. Housing loans to individuals, which is around two-thirds of all loans, grew at the same pace, far above the 12% growth in housing loans for the banking sector. It’s a clear indication that HDFC has been able to weather the deceleration in housing loans and is gaining market share.
What’s more, there are no signs of a deterioration in asset quality. Gross non-performing loans were 0.84% of the portfolio, lower than 1.12% at the end of December 2007, and 0.92% at the end of March 2007. Being conservative and not running after market share clearly have their merits.
For the March quarter, HDFC’s profit before tax and exceptional items is up 31.5%, powered by a 67% jump in net interest income, although other operating income (especially dividend income) fell, as did profit on sale of investments. HDFC’s cost-to-income ratio is a very low 9.2% (for FY08) and any improvement in net interest income directly flows through to the profit.
Net interest margin was at 2.32%, against 2.3% in the December quarter, in spite of a 25-basis point reduction in its lending rate during the March quarter.
Of course, profit before tax and exceptionals was up a huge 71% in the December quarter, but then fourth quarter of fiscal 2007 had high profits on account of gains from lending rate hikes and this base effect restricted year-on-year profit growth in the March quarter.
Loan approvals grew at 28% year-on-year, while disbursements grew at 26%. At the end of December, these growth rates were at 30% and 28%, respectively.
At around Rs2,800, the stock trades at 6.6 times book value and at 3.6 times book, if unrealized gains on investments are taken into account.
The stock has also gained sharply as concerns about its yen exposure have subsided. But its consistent ability to deliver above-average growth even during turbulent times is a comfort for which investors are willing to pay a premium.
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