Bharti net profit hit by tariff war5 min read . Updated: 28 Apr 2010, 11:39 PM IST
Bharti net profit hit by tariff war
Bharti net profit hit by tariff war
New Delhi: India’s largest telecom firm Bharti Airtel Ltd posted a second quarterly drop in profit in a row for the first time since its inception, amid a savage tariff war.
The non-voice business made a greater contribution to revenue as the company prepared to absorb Kuwaiti telecom firm Zain’s Africa operations—two avenues expected to make up for the shrinking of margins in the India voice business.
The net profit decline was ascribed to one-off acquisition-related costs of Rs97 crore as well as the deferred tax effect of forex gains or losses amounting to Rs171 crore. But for these two factors, net profit would have actually increased 4%.
The firm’s recent focus on the non-voice segment is paying off with its revenue from it growing 10.2%, contributing around 17% of the total. Within that, value-added services (VAS) contributed 12% of revenue, up from 9% in the previous fiscal.
Bharti and its rivals are pushing the non-voice, or telemedia, business as intense competition eats into profit from phone calls. The average revenue per user (Arpu) for the quarter from telemedia services was Rs950, while that from mobile services was Rs220.
Telemedia services includes broadband, data and fixed-line services that cover at least 3 million customers, including 1.3 million subscribing to DSL, or digital subscriber line, connections.
“In some circles, it seems that the telemedia services which are both voice and data is cannibalising the mobile revenues which are only voice," said a Mumbai-based analyst who spoke on the condition of anonymity as he is not authorised to speak to the media.
“The average revenue from data is far higher than that of voice," the analyst added. “Data can go up to 40% of total revenue and we expect to keep hearing about this in the quarters to come. That is where the margins are."
The telecom company added 8.7 million subscribers in the quarter, almost 15% of the total additions, taking mobile subscribers to 127.62 million at the end of the fourth quarter.
Also See Tracking the Numbers (Graphic)
“This is a result of us adding new verticals like entertainment and commerce," said Sanjay Kapoor, chief executive, South Asia. “The uptake of the app (applications) store has also done very well with 2.5 million downloads in the first 30 days."
Kapoor said the tariff war was the result of over-capacity in a market with more than a dozen operators. Tariffs are unlikely to continue to decline as sharply as they have done until now.
“The propensity for tariffs to fall in the same magnitude is not going to happen, but there may be marginal cuts in the tariffs," Kapoor said. “We did not match the least common denominator in the marketplace, but network usage has grown."
He does not favour regulatory intervention in pricing.
“In a 14-player scenario, the market mechanism determines price, and things will move towards an equilibrium," Kapoor said.
The tariff war has however helped the firm boost usage, “manufacturing" some 19.6 billion minutes, its highest ever number of minutes—up 13% over the previous quarter. Average minutes of use per subscriber also recovered, growing to 468 from 446 in the previous quarter.
Ebitda (earnings before interest, taxes, depreciation and amortization) margins remained at 39% while operating cash flows grew to just under Rs8,000 crore from above Rs1,100 crore last year.
Bharti, which has entered the Sri Lanka and Bangladesh markets, is in the process of finalizing a $9 billion (Rs40,140 crore) purchase of Kuwait-based Zain’s African operations in 15 countries as it seeks to move into new areas owing to the increasing competition and slowing growth at home.
The acquisitions demonstrate the company’s strategy for emerging markets, said Akhil Gupta, joint managing director.
Declining to give a time frame by which the Zain deal will be completed, Gupta said that regulatory approvals were awaited and the balance sheet will get consolidated soon as the deal was signed.
Bharti has borrowed around $9 billion from a consortium of international banks as well State Bank of India at an average rate of 2% above Libor for which it intends to de-leverage as soon as possible using revenue from domestic operations as well as the Africa business. Zain has revenue of around $3.6 billion and Ebitda of $1 billion.
“The peak capex for the India operations is behind us and the comfortable net debt position has helped us to borrow at very competitive rates and has also given us sustainable cash flows allowing us to de-leverage very fast," said Manik Jhangiani, chief financial officer of the Bharti group.
The telco has given a guidance of $1.5-1.8 billion capex for the India operations, excluding towers and third generation (3G) services. It also announced a dividend of Re1 per share.
“Last year, Zain spent $800 million as capex for its African operations. I do not expect this year we will spend significantly higher than this amount as capex for Zain Africa," Gupta said.
Bharti will also be revamping outsourcing contracts that Zain signed once the acquisition is complete.
On the complexity of the Zain deal, Gupta said that the challenge was not dealing with 15 regulators but the fact that Bharti will quickly need to learn about new markets. Regarding further expansion in Africa, Gupta said Bharti was currently focusing on the Zain integration.
Manoj Kohli, former chief executive and now head of the company’s international business, will manage Bharti’s Africa operations from Nairobi.
The company also has the option to sell shares in tower arms Bharti Infratel Ltd and Indus Towers Ltd to raise cash and is in the process of evaluating such a move, Jhangiani said.
“We are looking at equity-raising opportunities, which include an IPO (initial public offering) for our tower business," Gupta said, adding this could only be done once the full-year financial results of the tower business were known.
Bharti shares fell Rs3.75, or 1.26%, to Rs294.50 at the close of trading on the Bombay Stock Exchange on a day the benchmark Sensex dropped 310.54 points, or 1.9%, to 17,308.08.
Graphic by Ahmed Raza Khan/Mint