Bharti Airtel: Tough times

It may not hurt for the operator to be a little more aggressive with its tariffs.

The Indian mobile telephony space is likely to remain intensely competitive for at least another year or so, as new entrants attempt to get a foothold and incumbents scramble to maintain market share. As such, mobile tariffs could drop further, putting pressure on the revenues and operating margins of telecom operators.

So, it’s possible that Bharti Airtel, which saw a sequential dip in revenues of about a per cent in the September 2009 quarter, may find it hard to grow revenues meaningfully for the next few quarters. While the Bharti management is clear that it will not price its services irrationally, perhaps the operator may want to relook its tariffs, because it needs to hold on to its customers and attract new users.

Even if the brand is strong, it may not hurt to be a little more aggressive on pricing in the current environment. The Bharti management, however, believes the market leader needn’t lead the price war.

The telco’s market share of net additions in the September 2009 quarter, at 18.6 per cent, was way below the 23.8 per cent it enjoyed in the June quarter.

Of course, it’s more important to have profitable customers and garner revenue market share and that’s where Bharti has been very successful; its revenue share is an enviable 32.7 per cent. Also, the volume of traffic increased sequentially by 2 per cent during the September quarter but the average rate per minute dropped by about 4 per cent. The weaker top line clearly hurt the operating profit margins for the wireless business, which dipped by about 100 basis points to a shade under 32 per cent.

The good news is that more than a third of the company’s revenues are now earned from non-mobile businesses, which is what has helped the company post an operating profit margin of 42.1 per cent.

What Bharti has going for it is a strong brand and balance sheet with a net debt of less than Rs 1,000 crore, which will help it bid for 3G licences, and puts it in a much stronger position vis-a-vis peers.

However, investors are concerned about the immediate future, which is why the Bharti stock lost just over 6 per cent on Friday and is unlikely to do much in the near term.