Bharti and RCom: Competition woes

Falling revenues and profitability will continue to be an overhang on the stocks.

Despite a rise in subscriber base, the country’s leading wireless service providers, Bharti Airtel (Bharti) and Reliance Communications (RCom), reported a fall in growth in consolidated revenue and earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins for the December quarter.

Competition and price war meant that the key profitability metrics — average revenue per user (Arpu) and revenues per minute — fell. Though Bharti’s subscriber base grew 7.4 per cent from the previous quarter, the 9 per cent decline in Arpu saw revenues drop one per cent to Rs 9,772 crore. Similarly, RCom’s subscriber base grew 9 per cent, but its Arpu fell 7.4 per cent, leading to a 7 per cent dip in revenues to Rs 5,309 crore.

Bharti’s Ebitda margins dipped 210 basis points (bps) to 40 per cent while RCom saw a 130 bps dip in Ebitda margins to 34.1 per cent. Expect these margins to be under pressure as new entrants — Uninor and STel and Tata Docomo — up the ante.

At the profit after tax (PAT) level, Bharti saw a fall of 5 per cent to Rs 2,209 crore from the previous quarter, though the same was offset to an extent by a forex gain of Rs 149 crore. Forex gains helped RCom report a 49.5 per cent jump in net profit to Rs 1,107 crore.

Increasing competition and one-off issues, such as ban on pre-paid connections in J&K and IMEI handsets, saw an increase in churn for Bharti from 4.6 per cent in the September quarter to 6.5 per cent in the December quarter. The churn for Rcom increased from 1.3 per cent to 2 per cent. Though Bharti and RCom continue to add around 3 million users a month, their market share is dipping as new players roll out their services.

Though valuations for Bharti (13.5 times FY11 earnings) and RCom (10.3 times) are not demanding, most analysts are underweight on these counters as they believe the price war will continue well into FY11.