Revenues improved after nine quarters of consecutive declines. (Mint)
Revenues improved after nine quarters of consecutive declines. (Mint)

Airtel: Revenues stabilize in Q3, but earnings rebound is some time away

  • The company will have to make room from fresh funds through balance-sheet deleveraging and stake sales
  • While investors can celebrate the fact that revenues have stabilized, the excitement will be short-lived, given there is no reprieve as far as cash outflows go

After eight quarters of decline, Bharti Airtel Ltd reported a 1% rise in revenues. The growth comes on the back of easing deceleration in revenue in the mainstay India mobile services business and steady performance at its Africa operations.

Compared to the double-digit drop in the previous seven quarters, the India mobile services business reported a slower 4.9% drop in revenues last quarter. Revenues in Africa on the other hand grew 16%, making up for the revenue fall in India. Besides, healthy growth in earnings in Africa means Bharti Airtel reported a consolidated net profit of 86 crore in the December quarter, despite continuing heavy losses in the India mobile services business.

On the positive side, the India mobile services business began to derive higher revenues from customers. The average revenue per customer increased from 100 in the September quarter to 104 last quarter. Revenues improved after nine quarters of consecutive declines.

The improvement in realizations reflects the company’s strategy to weed out low-value subscribers. It introduced minimum recharge plans, and required subscribers to mandatorily recharge to stay active on the network. The impact is felt in the December quarter. Customer base shrank 14.6% on a sequential basis and 2% from a year ago. The customer base may continue to moderate as the full impact of the tariff hikes will be felt across the circles.

That said, the signs of stability in revenues did not result in better earnings. Rather, the operating profit of the India mobile services business continues to deteriorate. Elevated access charges and network operating costs resulted in losses at the Ebit (earnings before interest and tax) level. Ebit loss as a percentage of revenues rose from 15.5% in September to 18.7% last quarter.

The pressure on operating earnings is persisting at a time when the company is incurring high capital expenditure (capex) to enhance data services network. This is resulting in high cash burn. “During the quarter, the company has incurred a capex of 3,727.4 crore, primarily to enhance its data capacities. This capex investment along with decline in EBITDA has resulted into cash burn of 1,777.6 crore for the quarter as compared to cash burn of 1,426.6 crore in the corresponding quarter last year," Bharti Airtel said in a statement on the India mobile services business.

The investments are warranted especially given the company’s focus on revenue-generating customers. As analysts point out, data network and service quality will be a key differentiator in the current competitive environment. But elevated capex means Bharti Airtel will have to make room from fresh funds through balance- sheet deleveraging and stake sales. How it manages this will also be a key thing to watch out for. “Incrementally, the market structure for India wireless hinges on the ability of incumbents to bring down leverage rapidly," SBICAP Securities Ltd said in a note.

In sum, while investors can celebrate the fact that revenues have stabilized, the excitement will be short-lived, given there is no reprieve as far as cash outflows go.

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