Stock Review: BHARTI Airtel

 

BHARTI Airtel has started showing early signs of the success of its strategy to tap the global telecom markets for growth. During the December 2010 quarter, its domestic business remained sluggish, but the African subsidiaries reported improved traction with a marginal increase in the revenue market share.

   The turnaround in Bharti's operations in the 16 African countries has begun. It reported streamlining of operations and improved volumes in the region during the December quarter. Operating margin before depreciation expanded by over 100 basis points sequentially to 25%, reflecting rationalisation of costs. This is expected to continue since in the next four quarters, the company will outsource peripheral services such as network management and customer care to other vendors. Bharti also reported a 7% sequential jump in the network minutes per subscriber (MoU) in Africa, which underlines the increasing awareness about the brand. By contrast, its Indian MoU slipped further during the quarter.

   While stability is returning to its domestic operations, the growth in total minutes on the network again lagged behind subscriber growth (see graph). This means mere subscriber additions will no longer ensure volume growth. Its smaller peer, Idea Cellular, on the contrary, reported an equal growth in the two parameters. It also shows that Bharti will have to keep a tight lid on operating costs to maintain margins in an environment of slow volume growth, which it has managed to do so far. Its margin on earnings before interest, depreciation, and tax sans one-time branding costs was stable at 33.8% on a sequential basis. The downward pressure on margins from hereon looks limited given the tapering decline in the domestic per minute revenue and rising profitability of its African venture.

   In the near term, the scheduled launch of 3G services and mobile number portability, which became active since January, will decide the course for domestic telecom operators. To begin with, mobile operators have reported higher subscriber churn in the December quarter. Both Bharti and Idea lost more subscribers on an average during the quarter than in any of the six previous quarters. This may further exacerbate once the number portability mechanism stabilises.

   On the positive side, operators have reported gradual increase in the share of non-voice or value-added services (VAS). These account for more than 13% of the revenue for Bharti and Idea, higher than 11% a year ago. These services face lesser tariff pressure and, hence, cushion overall profitability. The upward trend in the share of these services in the total revenue pie is likely to continue after the advent of 3G services.

   Analysts have maintained a 'buy' call on Bharti. The company is likely to benefit from tapering competitive pressure on the domestic front and improving prospects overseas.