Stock Review: BHARTI AIRTEL

BHARTI Airtel's September 2010 quarter numbers raise doubts over its ability to add new subscribers to the mobile network. The country's largest telecom operator continued to report decent user additions during the quarter but failed to show any meaningful addition to the minutes of usage on its mobile network.

   Telecom penetration in India has increased at a phenomenal pace over the past few quarters. Just from 49% a year ago, it now stands at close to 66%, largely fuelled by the entry of new players and the conscious attempt by existing operators to cover remote areas. But minutes of usage have either remained stagnant or fallen in some cases. This may cause some concern since minutes of use reflect how efficiently the network is utilised.

   For Bharti, minutes of usage remained more or less stagnant at 190.8 billion minutes during the September quarter from the previous quarter though it added 6.7 million new subscribers. According to Bharti's management, the second quarter is traditionally a weak quarter given the torrential rains and other seasonal factors. But historical data shows that the company's sequential rate of growth in network minutes during the September 2010 quarter was the lowest compared with figures in the corresponding period of the previous two years.

   This means that additional users may no more bring additional minutes to the network. It needs to be seen whether the trend continues in the coming quarters.

   Bharti's secondquarter numbers are not strictly comparable with its performance in the previous quarter since it has consolidated the full quarter results of its African venture. While this has boosted its topline significantly, its margin profile has eroded given the lower profitability of the African business. At 23.9%, the African business's operating margin before depreciation is way below the 35.2% margin of its mobile business in India and South Asia.

   Bharti has two operational levers to improve the profitability of its African operations. First is network utilisation. Currently, the number of customers per cell site is lower. Bharti has taken initiatives to improve the situation. The second is to improve operational efficiency by employing its famous outsourcing model. The company has entered into partnership with IT players, including IBM, Pinnacle and Tech Mahindra, to initiate outsourcing. This may help in offsetting the impact of high labour costs going ahead.

   So far, Bharti's stock has not participated in the broader stock market rally. It gained a meagre 2% in the past three months compared with the 14% gains in the benchmark Sensex. The benefits from the 3G launch expected in the next two quarters and a gradual turnaround in its African business are long term in nature. In the near term, however, the stock's movement may be restricted given the lack of any fresh triggers.