Stock Review: BHARTI AIRTEL

Bharti Airtel's first quarter topline performance was a shade weaker than the impressive growth reported by its smaller peer Idea Cellular. A comparatively low momentum in the domestic business restricted Bharti's consolidated sequential revenue growth to 4.4% in the June quarter. Idea last week reported a 6.7% sequential revenue growth fueled by a strong momentum in a majority of its telecom circles.

While growth is a little sluggish on the home turf, Bharti's African business continues to show a sustained momentum and despite falling per-minute revenue, Bharti's profitability in the region is improving gradually. This and the reversal in the trend of falling tariff back home means the company may report a sustained growth in revenue at more stable margins in the coming quarters.

Bharti's African venture looks all geared up for growth. The business, which now forms over one-fourth of total group revenue, spans across 16 Afrcian nations. In the June 2011 quarter, it grew 6% sequentially, much faster than the 1.4% growth in the previous quarter.

Bharti, which leads the Indian telecom market, both in terms of revenue and subscriber base, has also started implementing its home-grown strategy to outsource network and applications maintenance in the African markets. This is reflected in a sharp fall of 350 basis points in operating expenses (excluding access charges and licence fees) relative to sales and a 17% drop in workforce.

But there are challenges. Bharti's African operations have started showing pressure on telecom tariffs owing to greater competition in most markets. Each minute on its African networks is now cheaper by nearly 17% on an average from a year-ago. However, this has not yet impacted its per-user revenue, which fell by just over 1%. This is because the company has so far been able to capture new subscribers at a more or less sustained rate in the African markets.

The competitive nature in the African operations pulled down the operating margin (before depreciation) by 80 basis points to 26.7% in the June quarter from the year ago. The fall could have been sharper had it not been for the lower cost of operations.

Bharti's stock currently trades at its 52-week high level. Its current valuations tend to fully reflect the possible uptick in its domestic business due to recent tariff hikes and, hence, a further increase in its stock price looks limited.