Bharti Airtel Ltd’s shares have had a decent run prior to its results announcement for the March quarter. While the broader market has given up most of its gain made since mid-March, Bharti’s shares were still about 17% higher compared with their lows in March.
One of the main reasons for the rally in the company’s shares was the decrease in the competitive intensity in the industry and the expectation that pricing power would return to incumbent firms such as Bharti. New telecom operators, including Uninor and Tata DoCoMo, seem to have become less aggressive and Reliance Communications Ltd seems to be limited by its high leverage. In such a scenario, companies such as Bharti and Idea Cellular Ltd are expected to gain.
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Of course, no one was looking for evidence of this trend in the March quarter results. Even so, thanks to the rally in its shares in the past few weeks, Bharti had to contend with the weight of expectations. Even though the company’s operational performance was more or less in line, its net profit was lower than the Street expectations, mainly due to higher depreciation charges as well as higher provision for tax. As a result, Bharti’s shares fell by about 3.5% on Thursday.
Thanks to the roll-out of third-generation (3G) services, the capitalized expenses on this front started getting depreciated, leading to a 10% quarter-on-quarter increase in depreciation charges. Provision for tax rose by as much as 48% sequentially.
Needless to say, it’s more important to look at the operational performance. The mobile business in India did well in terms of traffic growth. Total minutes carried on the wireless network increased by 6.4% sequentially, much better than the 4.4% growth reported in the seasonally strong December quarter. Average revenue per minute fell by about 1 paisa to 43 paise. This is in line with the trend in the past few quarters where the rate at which tariffs fell has decelerated.
Revenue of the mobile business grew by 3.8%, but operating profit was flat due to a jump in network operating costs.
Profit margins of the African business jumped by 550 basis points to 26.4%, in line with the management and Street’s expectations that profitability will rise. One basis point is one-hundredth of a percentage point.
It’s important to note, however, that this has already been priced in, leaving little room for upside in estimates. In fact, revenue growth of just 1.4% in Africa was a disappointment. On the whole, the results provide little reason to change earnings estimates.
Though its operational performance was decent, considering that expectations were running high, the earnings miss could act as an overhang on the stock. Looking ahead, the performance of the stock would also depend on the upside from the 3G business, which will soon be rolled out in all circles. Besides, if pricing power indeed returns, it could drive earnings growth in the next fiscal.
Graphic by Sandeep Bhatnagar/Mint
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