Airtel, Idea end FY15 well; all eyes on pricing strategy
It remains to be seen if Idea Cellular will change its strategy of being aggressive on pricing in order to drive volume growth
Bharti Airtel Ltd and Idea Cellular Ltd continued to report strong profit growth in their India operations. Earnings before interest, taxes, depreciation and amortization (Ebitda) rose by 22.7% for Bharti Airtel’s India mobile operations and by 40.1% for Idea Cellular. Most analysts had factored in strong growth in profit, with incumbents in the sector reaping in the benefits of reduced competition.
The pertinent question, of course, is if profit growth will remain healthy in the future as well. After the recent expensive spectrum auctions, a number of analysts have said that telecom companies will compensate by raising tariffs, which in turn will aid profit growth. The experience of the past year suggests that things may not be as straightforward.
Despite reduced competition, Idea Cellular, in particular, has been willing to compromise on pricing in order to drive volume growth. In the past year, its average revenue per minute of voice traffic has fallen by 7.1% year-on-year (y-o-y) in the March quarter, while voice traffic has risen by as much as 17.8%. While some of this is driven by a cut in interconnection rates effective March 2015, the fact remains that Idea Cellular has preferred to stay nimble footed as far as pricing is concerned to gain market share.
Even in the case of Bharti Airtel, which has been content to grow volumes at a sedate pace while trying to hold on to tariffs, average price realization has fallen. Its revenue per minute of voice traffic fell by 2.5% y-o-y, while voice traffic rose by 4.9% in the March quarter. It’s important to note that this has happened in a relatively benign environment as far as competition goes. Things could get worse when competition increases after the entry of Reliance Jio Infocomm Ltd (RJio).
Besides, as analysts at JP Morgan Research point out, even if telcos try and raise tariffs, it’s not clear how consumers will respond.
“We stay sceptical that price increase, if at all, will achieve the desired effect... We do not think so as tariff increase playing out is not just a case of operator action, but also of consumer acceptance. We think consumers tend to dial back their minutes of usage in response to tariff hikes. Though data prices might remain stable in the near-term, we expect downside to data prices in the medium-term due to RJio’s (expected) disruptive strategy", they wrote in a note to clients last week.
Therefore, much depends on the stance Idea Cellular takes with respect to pricing in the aftermath of the spectrum auction. It remains to be seen if it will change its strategy of being aggressive on pricing in order to drive volume growth.
In the near future, profit will also begin to get marred by the increase in depreciation, amortization and interest charges related to the recently acquired spectrum. While it’s difficult to estimate the exact impact, it’s safe to say that reported profit will be far lower than current levels. Analysts at Nomura said in a note to clients last month that Idea Cellular’s earnings per share could end up being 20-40% lower than the Street’s estimates in fiscal years 2015-16 and 2016-17.
Despite all this, telecom stocks have been in great demand, with shares of Idea Cellular hovering near all-time highs. Investors have been enthused about the fact that incumbents have secured adequate spectrum for their operations, eliminating a major risk to operations. They are likely to be enthused by the company’s March quarter results as well, which are ahead of estimates. The company has continued to surprise on its ability to grow volumes far ahead of competition and also drive improvements in profit margins. On a y-o-y basis, Ebitda margins of Idea Cellular’s mobile operations have risen by as much as 485 basis points. A basis point is 0.01%.
Bharti Airtel’s results are less spectacular as far as volume and revenue growth are concerned; although even in its case, profit margins are up by 3.67 percentage points from a year ago. Besides, its Africa business continues to be a drag. Revenue and profit of the region were below estimates, dragged down by cross currency pressures. As a result, investors may well respond differently to the results of the two companies when trading resumes on Wednesday.
The writer doesn’t own shares in the above-mentioned companies.
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