Bharti Airtel: Eye on operational gains

Better quality and quantity of spectrum vis-a-vis competition must reflect on revenues, margins

The rally in frontline telecom stocks has seen the Bharti Airtel scrip gain 19 per cent over the past month. Analysts say telecom stocks are up as the spectrum overhang is over and valuations at six to seven times enterprise value to operating profit is in line with historic levels. This is not expensive compared to the broader markets, which have run up substantially, while the sector till recently had not participated much in the rally. Further, a large part of the stock run-up is premised on the faster growth of the data services. As far as spectrum wins is concerned, this is where Bharti has managed to score over rivals.

With the exception of circles such as Kerala, the firm has 3G (third generation) spectrum across 21 circles against 13 prior to the auction. Adequate spectrum will help gain market share and save on network expenditure. Analysts at IIFL Institutional Equities say high spectrum holding would also result in lower terminal base transceiver station count than earlier, leading to savings on capital and on operating expenditure. With average spectrum holdings over the past two auctions having gone up 50 per cent, the company should be able to offer data capacity with much better Ebidta (earnings before interest, depreciation, tax and amortisation).

The other positive for telecom stocks is the expectation that revenue per minute will increase, negating some of the impact from higher spectrum payment. Most analysts peg a five-paise-a-minute increase required to adjust for the higher spectrum costs. If Bharti’s voice revenue per minute of 37.7 for December quarter is taken as a base, the five-paise-a-minute rise translates to a 13 per cent increase, which, might not be feasible.

Companies might decide to increase the rate gradually. Analysts at CRISIL say there are offsets available for the top three operators, such as rapid growth in data revenues boosting cash accruals and equity infusion or divestment of non-core assets. Companies would need to look at these as the debt-to-Ebidta for the top three players is expected to move up to 3.9 at the end of FY15 against 3.3 at the end of FY14. The key danger in data services for Bharti and other incumbents is the launch of Reliance Jio’s service at prices that could disrupt the data market and can be a huge negative. It is in this regard that analysts are circumspect about the stock and the sector.

For the March quarter, while in the domestic business wireless revenues are expected to grow at a steady pace of 4.2% sequentially led by data growth, the Africa business could report another muted quarter with flattish revenues and margins. Analysts say the mark to market losses given depreciation of currencies could grow substantially higher for the March quarter as against Rs 290 crore in the December quarter.