Idea Cellular Ltd’s results for the quarter ended 31 December had suggested that sustainable revenue growth has returned to Indian wireless industry. Bharti Airtel Ltd’s results for the same period, however, don’t confirm this trend.
While Idea’s revenue and operating profit grew by around 8% sequentially, Bharti’s growth was less than 4% in revenue and profit.
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Revenue from its mobile services in Africa grew by 8.7% and operating profit grew by as much as 13.7%, so it was the Indian mobile business that was the culprit.
Total minutes of usage on the company’s mobile network grew by only 4.4% sequentially last quarter, compared with a growth of 10.2% in Idea’s case. Average minutes of use per user fell by 1%, while for Idea it had risen by 1.8%.
Revenue from the mobile services business in India and South Asia, which is largely made of the Indian mobile business, grew by 3.9% last quarter and operating profit before accounting for Bharti’s rebranding exercise grew by 3.2%.
Note that the December quarter is a seasonally strong quarter, while the September quarter is seasonally weak. According to an analyst with a domestic broker, if the company is growing revenue by less than 4% under such favourable circumstances, it’s unlikely that growth would be any higher in subsequent quarters.
Worse, the coming quarters would also see margin pressures on account of mobile number portability (MNP) and the launch of high-speed third-generation services. Thus far, the correction in tariffs has been largely in the prepaid space. With MNP, post-paid tariffs are also expected to fall. Profit growth, therefore, could be muted in coming quarters.
While the performance of the Indian business disappointed, growth and margin improvement at the African business came as a pleasant surprise. But this shouldn’t alter Bharti’s valuations, since most analysts are already factoring in a sharp margin improvement in the next couple of years.
To add to all this, there continues to be a regulatory overhang on the stock and the sector, with issues such as additional payments for spectrum still being unresolved.
Also, with Bharti’s enterprise value to Ebitda (earnings before interest, tax, depreciation and amortization) ratio already over seven times based on next fiscal year’s estimated earnings, there’s hardly any scope for a re-rating.
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