Bharti: Prime candidate for earnings upgrades after strong Q2

In a seasonally weak quarter, company expands margins and grows data volumes

The ailing telecom sector seems to be coming out of the woods, if the consistent improvement in Bharti Airtel's operating metrics is anything to go by. The second quarter numbers of the country's largest telecom player suggests that competitive headwinds are down, which is driving both consumer stickiness and margin expansion. The company has reported a monthly churn rate of 3.2% (percentage of consumers leaving its network), which was 8.5% last September. Increased consumer stickiness and higher margins have helped the company report a 4.4% sequential and 20% annual growth in its consolidated operating profit to Rs 6,830 crore. 

 

This improvement is not a flash in the pan, as the operating metrics have been improving for its wireless business in India for the last three quarters. Even as revenues from its India wireless business declined by 2.1% sequentially to Rs 11,350 crore, operating profit rose 1.1% to Rs 3,800 crore quarter-on-quarter. This was largely driven by a 110 basis point improvement in margins in the domestic wireless business. Voice revenue per minute grew from 36.4 paise to 36.7 paise sequentially. The company believes voice realisations can improve further going forward, as there is a wide gap between the headline tariff of 75 paise for incoming calls and the realised tariff. 

 

Apart from the traditional voice business, the company's added 10 million new mobile internet users over the last one year. The total number of consumers using mobile internet on Airtel's network stood at 50.6 million, of which only four million use 3G. Data usage per customer went up from 133 MB in Q2 of FY13 to 231 MB this year. Kotak Institutional Equities believes the quarter provided ample data points to support a positive view on the India wireless business. Key metrics to note is the one% uptick in voice RPM (revenue per minute), margin expansion in a seasonally weak quarter and sustained growth in data volume and revenues. After three troubled quarters, Bharti's Africa business has seen revenue and margin growth in the second quarter. 

 

Despite operational gains, the company's net profit fell 27.5% sequentially and 29% annually to Rs 512 crore, largely due to forex losses of Rs 342 crore. However, the September 2012 quarter also saw an exceptional one-time income of Rs 586 crore, which was due to an order awarded by the TDSAT in respect of an outstanding dispute pertaining to inter-connect agreements. Of this, Rs 238 crore flowed into the net profit, which is why Bharti's drop in profit must also be seen in light of this one-time payout.