Bharti Airtel Ltd’s September quarter results reflected the full inaugural effect of the Zain Africa acquisition. The impact on revenue was as expected, but the effect on profitability was not quite what investors had hoped for, as lower profitability in its African business pulled down performance. This coincided with a seasonally dull quarter for the company’s domestic mobile business, and the effect of a competitive business environment. Thus, revenue rose by 24% quarter on quarter (q-o-q), but Ebidta (earnings before interest, depreciation, tax and amortization) margin fell by nearly 3 percentage points, while net profit fell by around 1%.

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That caused Bharti’s share price to fall by 1.8% on Wednesday compared with the market’s 0.3% decline.

Bharti is undertaking a series of steps to strengthen its African mobile business, which is spread across 16 countries. It has cut tariffs in certain geographies where the premium over competition was very high, nearly 30-40% in some cases. The average premium has now been brought down to around 5-10%. Thus, average rates fell by 9% sequentially. But usage went up by 9%, which is what Bharti wants to achieve, hoping that better usage will eventually lead to better average revenue per user (which also fell by 1% sequentially). It has also invested in improving the quality of service. The African mobile business’ Ebidta margin fell to 24% from 28%, and is much lower compared with the domestic business’ Ebidta margin of 37%.

But Bharti’s work at Zain has just begun. In the next two quarters, it will restructure operations in about eight key areas, aligning the African mobile operations to its style of functioning, characterized by a focus on the core business while outsourcing non-core operations and infrastructure management. Once its restructuring is completed and operations stabilize, the African business performance is expected to improve, but till then may inject some unpredictability into Bharti’s performance.

Bharti’s domestic mobile business did not do too badly, considering the second quarter is traditionally a weaker one. Both revenue and Ebidta were flat on a sequential basis. The company said it decided to hold on to tariffs rather than lower them to get more volumes. Total traffic rose by 1% on a sequential basis, but average rates fell by 1%, and average revenue per user fell by 6%. The next trigger for its domestic business is the roll-out for the third-generation (3G) business, an event which will determine whether the high price paid by operators to launch these services was justified.

The next few quarters appear to be a time for investors to wait and watch as its African business goes through a restructuring process and its domestic operations will see the impact of the 3G investments. The period is likely to see some volatility in the share price movement till its performance falls into a more predictable pattern of growth.

Graphic by Yogesh Kumar/Mint

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