Bharti's core cellular business surprises positively

Sequentially, minutes on network up 2.6%, revenue per minute up 3.6% and operating margins grow 180 bps to 32.1%

Bharti Airtel's first quarter numbers suggest its core cellular business in India is on track. While the rupee's fall has burnt a Rs 534-crore hole in its books, the company's domestic business has fared well.

For starters, total minutes on Bharti's network in the June quarter increased 2.6 per cent sequentially to 258 billion. Voice realisations improved to 36.4 paise/minute from 35 paise/minute in the previous quarter. Average revenue per user (ARPU) for data also increased 15 per cent sequentially to Rs 63, though the share of data in overall revenues declined to 17.3 per cent in Q1 from 17.4 per cent in Q4. That apart, fewer customers are leaving the Airtel network as the company's customer churn rate is down to 3.2 per cent from 8.8 per cent seen a year ago.

Over the past few years, profitability of most players have been under severe stress and revenue per minute (RPM) has consistently dropped but this quarter has expanded this by 3.6 per cent sequentially to 44 paise/minute. The company's operating margins for the domestic wireless business are up 180 basis points to 32.1 sequentially. After the cancellation of 122 licences last year by the Supreme Court, pricing discipline has returned to the industry and rates have started moving up as discounts and free minutes weeded out. According to Goldman Sachs, key performance indicators of Bharti's core cellular business implies larger players like Bharti/Idea are benefitting at a faster-than-expected pace from declining competitive intensity. Goldman Sachs expects Bharti to continue to gain momentum in the core business.

With competitive intensity coming down, the company's spends on sales and marketing are also coming down. In Q1, the company's general and administrative expenses fell to Rs 1,800 crore from Rs 2,000 crore in the corresponding quarter last year. Analysts believe the company has some more levers left that can help improve its margins. Given that Bharti's base rate is 90 paise/minute, there is enough headroom for further growth in its average RPM, believes Ankita Somani of Angel Broking.

While the Street believes operationally things may continue to improve for Bharti in India, its performance in Aftica continues to disappoint as revenues declined by 5.2 per cent sequentially to $1.06 billion. The negative impact was primarily due to regulatory intervention and political disturbance in some of African countries. The other area of worry comes in the form of rupee volatility, which has resulted in a forex loss of Rs 534 crore in Q1 and there is no clarity on whether this will continue for the rest of the year. While the company has hedges for its domestic dollar debt, a significant portion of its dollar exposure remains unhedged and remains a concern.