Airtel: Cost reduction, higher digital recharges to help in coming quarters

In a quarter impacted by Covid-19, Bharti Airtel posted a better than expected performance. The beat on the consolidated revenue and operating profit fronts was driven by India wireless business which recorded a 0.6 per cent sequential fall in revenues, much lower than analyst estimates of a 3-6 per cent decline.

This was led by a 1.9 per cent increase in average revenue per user or ARPU to Rs 157, a 13-quarter high. The ARPU increase, driven by the residual impact of price hikes in December and improving customer mix, is important as it came amid falling subscriber levels, lack of a physical recharge option due to the lockdown and weak international roaming revenues.

Analysts at Jefferies point out while the overall subscriber base declined by 4 million over the March quarter in the midst of the lockdown, Bharti added 2 million 4G users which was ahead of estimates. They also point out that average data per user was up 11 per cent to 16.7 GB per month, the highest in the sector. The company indicated that the pace of customer erosion has reduced and going ahead there could be some growth in additions.

On ARPU trajectory, the company indicated that organic ARPU growth has been modest on the back of a shift by customers from 2G to 4G and upgrades to higher value plans. However, tariff hikes will have to be taken and ARPUs will need to increase to Rs 200 and then on to Rs 300 levels to sustain operations.

Despite the marginal fall in revenues, operating profit margins for the India business improved by 134 basis points q-o-q to 40.6 per cent. This was led by lower network and administration costs which fell in the 4-8 per cent range over the March quarter. Its free cash flow was healthy at Rs 4,600 crore due to the fall in capex in the quarter on account of the lockdown and higher operating cash flow. Net debt also reduced by Rs 2,320 crore to Rs 85,900 crore excluding lease liabilities.

While capex is likely to increase in the coming quarters, the company indicated that the benefits from higher digital recharges, reduction in rentals, sales and distribution costs would benefit the company in subsequent quarters. The disappointment was on the Africa business, which missed estimates both on the revenues and operating profit front and posted a muted addition to its subscriber base. At the consolidated level, the company posted a loss of Rs 15,900 crore on the back of Rs 11,700 crore of exceptional items largely the incremental provisions related to adjusted gross revenues.