Shares of India’s largest mobile phone services company Bharti Airtel Ltd have outperformed the Nifty by 17% in the past two weeks. But that’s just making up for massive underperformance in the preceding three months, when the controversy related to spectrum issuance caused a 24% drop in the company’s share price at a time when the markets rose 7%.
Bharti’s results for the quarter ended December, which were in line with market expectations, have helped matters further—its shares were flat post the results announcement, even though other large-cap shares that comprise the Nifty fell more than 2% cumulatively.
The company’s revenues grew by 9.9% sequentially and Ebitda (earnings before interest, tax, depreciation and amortization) rose by 9.4%. The mobile services business, which accounts for 81% of total revenues, grew both revenues and profit in double digits, after a drop in growth rates in the September quarter.
But note that on a year-on-year basis, growth rates have fallen sharply. For the company, revenues grew 41.8% year-on-year last quarter, down from 45.5% in the September quarter, and an average of 57.5% in the preceding five quarters. Similarly, Ebitda growth has fallen to 47.8% last quarter, from 59.2% in the September quarter and 68.7% in the previous five quarters.
Growth in mobile revenues has fallen from an average of about 70% to less than 50% last quarter. A drop in growth rates is to be expected since the company’s size has grown substantially—two years ago, Bharti reported quarterly revenues of Rs3,000 crore; last quarter, it grossed Rs7,000 crore in revenues.
The higher base hasn’t affected subscriber additions much. On its mobile network, subscribers have grown by 72.5% over the previous year. It’s the average amount subscribers are spending that has declined. Average revenue per user (Arpu) has declined by 16% year-on-year—even though the average rate realized per minute of traffic decreased by 17% year-on-year, usage by customers remained flat.
In the past, lower rates have induced greater usage and the fall in Arpu had been lower. In the previous two financial years, for instance, the average realized rate dropped by about 20% year-on-year in the December quarter. But usage increased by 14% in the third quarter of fiscal 2007 and by 16% in the third quarter of fiscal 2006, resulting in a smaller 9% fall in Arpu in those two periods.
A year ago, Bharti’s telecom network covered 54% of the country’s population. Last quarter, the reach expanded to 68%. As the company pushes more to rural areas and low-income users, usage and Arpus are bound to fall. Some industry analysts have been talking about this for a while, but this trend has been most pronounced this fiscal year.
Last quarter, the company slashed voice tariffs on its “lifetime” plans by half. As a result, the trend of falling Arpus may just accentuate, since almost all of the company’s new clients are pre-paid customers, many of whom opt for the “lifetime” plans. Some analysts and the company are hoping that reduced rates may lead to more customers, increased usage and, hence, better economies of scale.
The experience last quarter suggests that correlation is not a given. What’s more, Bharti would soon have to contend with a fourth private sector operator in the GSM space. This could well lead to another round of price cuts.
On the positive side, the company’s decision to hive-off its tower operations into a separate entity will significantly reduce its capital expenditure. This fiscal year, for instance, the company would spend about $1 billion (Rs3,940 crore) on tower infrastructure of its total estimated capex of $3.3-3.5 billion. This expense would now be borne by the tower subsidiary, which has recently raised funds through a private placement. In the near-term, this decision would lead to better free cash flow.
But what would weigh most on investors minds is the uncertainty related to spectrum issuance. Clubbed with the concerns about increased competition, Bharti’s enterprise valuation of 16 times trailing Ebitda is hardly cheap.
Most IT companies disappointed with their December quarter performance. At Infosys Technologies Ltd, volume growth dropped to slightly lower levels than even the low during the US recession in fiscal 2002.
Recently, Tata Consultancy Services Ltd sent an internal mail to employees that the company’s performance target (measured by economic value added) for the December quarter has not been met and that performance-linked compensation would take a slight hit.
Meanwhile, a look at the Nasdaq Composite Index for the last three months suggests that the outlook is very bleak for technology companies, especially those that cater to clients in the US.
Given this background, it’s interesting to note that foreign institutional investors have increased their stake marginally in large IT stocks the previous quarter. Their stake in Infosys, for instance, has increased by about 5% over the last two quarters and has been maintained at nearly the same levels as a year ago.
Domestic mutual funds, at the same time, have sold 25% of the shares they held six months ago. The jury is still out on whether it’s time for bottom-fishing yet.
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