Like Idea Cellular Ltd last week, Bharti Airtel Ltd’s December quarter results will disappoint investors. The main concern that stems from the results of both companies is the sustained pressure on both voice and data price realizations. Considering the enormous investments these companies have made in acquiring spectrum and sprucing up their networks, the drop in realizations is disheartening news for investors. While shares of these companies had already corrected sharply in the past six months, valuations and earnings estimates have been reset downwards this results season.
Voice realization per minute fell by 2.4% sequentially and by 10.4% year-on-year (y-o-y). The rate of decline has increased. But things are worse in the data segment, where realizations fell by 5.6% sequentially and 13.1% y-o-y. In the September quarter, data realizations were 5.6% lower y-o-y.
The saving grace for Bharti Airtel is that things are not as bad as they are for Idea Cellular. For the first time in seven quarters, it beat its otherwise nimble-footed competitor in terms of y-o-y growth in data revenue. Also, its incremental data revenue last quarter was fairly stable at Rs.1,070 crore. In Idea Cellular’s case, it fell.
Of course, on the flip side, Idea Cellular’s performance in the voice segment is far better. Its voice revenue rose 4.4% y-o-y in the December quarter, while Bharti Airtel’s voice revenue fell 2.7% thanks to the drop in realization.
Bharti Airtel’s Africa business, meanwhile, fared slightly better than expected last quarter. Its margins rose materially, although sequential revenue growth was slow at 0.9% in constant currency terms. Among its other businesses, profit of its enterprise services expectedly fell from a high base in the September quarter.
All told, the results reaffirm the concerns that had risen after Idea Cellular’s results announcement last Thursday. The fact that Bharti Airtel’s shares have already corrected by about 6.5% after Idea Cellular’s results announcement, however, means that it may not fall sharply again when markets resume trading on Friday.
In the midst of all the pressures telcos are facing, the government appears to be resolute on using spectrum sales as a revenue maximization tool. The telecom regulator has recommended that the government sell all available spectrum, including the hitherto unused 700 megahertz (MHz) spectrum. The reserve price set for the new spectrum is staggeringly high.
Analysts at Kotak Institutional Equities wrote in a note to clients, “Bidding for 700 MHz spectrum at these levels, even selectively, has the potential to cause irreparable damage to the industry. To illustrate with a specific example, let’s take the case of Idea: pan-India 5 MHz block of 700 would cost $8.5 billion at the reserve price; cost of a 5 MHz block in just its 8 leadership circles would be $4 billion.” Idea Cellular’s net debt is currently $5.5 billion. While hardly anyone expects the telcos to bid for 700 MHz spectrum if it’s auctioned, going by past experience, irrational bids can never be ruled out.
The writer does not own shares in the above-mentioned companies.