India’s largest mobile phone company Bharti Airtel Ltd’s results for the September quarter confirm the pressure wireless operators are facing in growing revenues. Revenues from mobile services grew just 7.7% over the June quarter, compared with an average growth of 13.4% in the preceding four quarters. Last week, Idea Cellular Ltd had reported a mere 5.9% sequential growth in revenues, due to falling average revenue per user, on one hand, and lower average minutes of usage, on the other.

Bharti , too, witnessed pressure on both these counts, albeit to a lesser degree compared to Idea Cellular. Its Arpu,or average revenue per user, fell by 6.2% sequentially, and minutes of usage declined by 2%. The impact of having an increasing number of low-income users finally seems to be slowing down revenue growth. In the June quarter, the company lowered the entry barrier for first-time users, by halving the price of its ‘lifetime’ plan to 495. The full impact of this move was felt in the September quarter.

The recent practice of bundling phones with connections is also impacting revenues. Sales of such packages account for 22-25% of Bharti’s new customer adds, and although the company has stated that it does not offer any subsidy on the handsets, analysts point out that service fees are waived and free minutes of usage are provided, which, in turn, impacts revenue growth.

To Bharti’s credit, operating profit of the wireless business grow by 8.6%, thanks to a marginal increase in margins. Idea Cellular’s operating profit was flat last quarter, as margins fell by 200 basis points. While the pressure on revenues for all the above-mentioned reasons should normally have a commensurate impact on margins, Bharti seems to have benefited from its higher scale of operations. But it must be noted that there is a limit to margin expansion, and if profit growth rates have to revert to the higher levels in the past, revenue growth would have to catch up.

In a conference call with analysts, Bharti’s management said it has already put curbs on doling out free minutes to its customers. While revenue growth has slowed down, capital expenditure continues to grow—from around $900 million in the June quarter to $1 billion last quarter.

This is a worry for some analysts, since the return on incremental capital employed would be far lower. The positive surprise in Bharti’s results was the performance of the non-mobile business, which grew operating profit by 19.6% sequentially. These businesses now account for about 27% of the company’s total operating profit, but it’s still the wireless business that’s clearly the driver of growth.

The fact that growth has slowed down would be an additional worry for investors, who were already grappling with the industry regulator’s new policy decision to increase competition in the GSM-space. Since Bharti is the market leader in this segment, it could be hit the most from the higher competition. Also, the regulator plans to be extremely careful with spectrum allocation to incumbents such as Bharti, which means these companies would have to increase capital expenditure to optimise available spectrum. These worries have weighed on Bharti shares, which have underperformed the Nifty by over 17% since late-August.

Hindustan Unilever

If you had invested in the Hindustan Unilever Ltd (HUL) stock on the first trading day in 2006, your gain till Wednesday would have been all of 6.4%. Over the same period, the BSE FMCG Index, a very dismal performer compared with the Sensex, has given a return of 30%. HUL’s September quarter results underline the reasons for the underperformance.

Profit after tax and before exceptional items rose by a mere 6.9% (6.5%, after adjusting for the amalgamation with Modern Foods). Sales growth from continuing businesses was 9.7%, of which volume growth accounted for less than 3%, with the rest of the growth coming from price increases. The management says the deceleration has occurred in the personal products category, because of a 7-week lockout in a factory in Assam that affected stock availability. It limited sales in the category and squeezed margins.

But it’s not only the personal products category that saw lower sales growth. Growth in almost all categories was lower than that in the June quarter. For instance, soaps and detergent sales went up by 12.9% in the September quarter, compared with the year-ago period. In the June quarter, this growth was 14.6%, compared with the June quarter of the previous year. The same slowdown is observed in beverages and processed foods as well. The company’s market share has come down from the year ago period in the personal wash, hair care, toothpaste, tea and instant coffee categories, while it has gained share in the laundry and skin care businesses.

Nevertheless, margins have improved in the soaps and detergents business compared to the June quarter, while the processed foods segment has shown a profit, compared to the loss shown in the June quarter. Export profits too have been higher than in the June quarter. Overall PBIT margins, at 13.2% were a tad lower than the year ago period’s 13.5% and well below the June quarter’s 14.5%. Advertising and promotion expenses were 10.5% of net sales, above the June quarter’s 9.7%, and it’s unlikely that this cost will be lower in future. HUL needs to ask itself the question why its growth rate is so much lower than the growth in the country’s nominal GDP.

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