Bharti Airtel: Top line in trouble

Intense competition is pressuring revenues though profitability hasn’t yet been hurt

The Bharti Airtel stock dipped by about one per cent to Rs 814 on Thursday with the Street somewhat disappointed with the June 2009 quarter results. Even after adjusting for the downward revision in mobile telephony charges, the sequential growth in revenues is just 4.6 per cent.

That’s however significantly better than the 2 per cent increase reported in the March 2009 quarter. The average revenue per user (ARPU) is down somewhat sharply to Rs 278 from Rs 305 in the March 2009 quarter; again part of this, around Rs 12, can be attributed to termination charges being reduced and some part to competitive pressures — some players have been offering free minutes. Besides, the management says it is focusing on some customer segments that might not yield very high ARPUs, though it’s clear it won’t be throwing away free minutes.

That may be a good strategy to pursue to keep market share intact — currently, Bharti’s share of the subscriber base is 24 per cent — but it indicates that competitive pressures are intense and that profitability will be impacted at some point in the future. The good news is that traffic seems to be picking up because after a bit of a lull in the past few quarters, Bharti reported over 10 billion minutes of traffic in the June quarter.

However, minutes of usage per user has fallen by 7 minutes to 478 sequentially, which was perhaps to be expected given the company’s rural thrust — around 60 per cent of the net additions during the quarter came in from the hinterland. With rural focus to continue, Bharti’s minutes of usage can be expected to fall further.

What’s commendable is that the telco posted a strong operating profit margin of nearly 42 per cent with a tight leash on costs and wireless margins, at around 32 per cent, too were reasonably good. Bharti has the advantage of scale and should be able to sustain operating margins at around 40 per cent perhaps for another year. However, the stock may not do too much until the full impact of the MTN acquisition is clear.