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Thursday, April 29, 2010

Bharti Airtel volumes up, but margins drop

Bharti Airtel Ltd’s results for the March quarter were a mixed bag, with high volume growth being largely offset by a sharp fall in tariffs. The company reported a strong growth in traffic carried on its mobile network. Traffic, measured in minutes of usage, rose 12.8% to 172.8 billion minutes. The incremental usage of 19.6 billion minutes is a record and is more than double the addition of 9.6 billion minutes in the December quarter. On the flip side, however, average revenue per minute of traffic carried fell 9.1% to 47 paise. This is higher than the 7.8% drop in revenue per minute in the December quarter and more than what analysts had estimated.

So although the traffic growth came as a pleasant surprise, this was largely offset by the sharper-than-expected drop in tariffs. Revenues of the mobile segment grew 3% after two successive quarters of decline, but margins continued to be under pressure, leading to a 1% drop in operating profit. The net result was that reported profit was almost exactly in line with Street estimates. Bharti’s shares, too, reflected that the results were a neutral event, falling by 1.5%, more or less in line with the broad market.

Average revenue per minute has fallen at an average rate of 7% in the past four quarters due to intense competition. There haven’t been any major cuts in tariffs in recent months and it seems like revenue per minute may not fall at such sharp rates in the coming quarters. At the same time, if traffic growth continues to be buoyant, the company may soon return to operating profit growth. It’s now been three successive quarters that operating profit has fallen on a sequential basis.

But even assuming that the current mobile business on the 2G platform is stabilizing, the current high bids for 3G (third generation) spectrum are a worry for the company and the sector. The cost for pan-India 3G spectrum is increasing every passing day. At current levels of over $2 billion (Rs8,920 crore), a pan-India bid (which the company is most likely to go for) will hurt its earnings in the near term.

Bharti shares have fallen 10% from their highs just prior to the start of the 3G auction process, reflecting the market concerns about the high bids. As far as the Zain Africa acquisition goes, the company told analysts on the earnings call that it plans to give updates once the acquisition formalities are completed. Further clarity on the company’s valuations and its plans to improve profitability of this business would have a role to play in valuations going forward.

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