Bharti: Strong signals

Despite intensifying competition, Bharti should be able to bank on its strong balance sheet, scale and high revenue share.

If ever there has been an over-reaction to an event, it’s probably been the 20 per cent fall in the Bharti Airtel stock since the launch of rival Reliance Communications’ GSM network. A model that’s based on giving away free minutes, for whatever period of time, is hardly likely to succeed.

The Street has probably realised this and tried to make amends on Thursday when a sterling set of numbers from India’s leading telco drove up the stock by 6 per cent to Rs 620.

The highlight of the results was a strong growth in revenues from the wireless business –up 8.9 per cent sequentially—the growth in the earlier quarter had been 5.3 per cent. Brisk business in the wireless segment helped push up Bharti Airtel’s total revenues for the December 2008 quarter to Rs 9,633 crore.

The 6.8 per cent sequential rise in the top line would have been better but for a sequential decline in the company’s enterprise revenues, due to a high base effect in the September quarter.

However, thanks to some control over costs, Bharti was able to maintain its operating profit margins at 41 per cent, with wireless margins moving up more than 100 basis points to 31.4 per cent. India’s leading telco grew at a faster pace than the industry in the December 2008 quarter —-with its share inching up to 24.7 per cent ——though its share of net subscriber additions, at just under 26 per cent, was lower than that in the September quarter.

The biggest surprise was probably the limited fall in the average revenue per user(arpu) which came down just 2 per cent sequentially to Rs 324 —-with the telco expanding its network into smaller towns and villages, the Street had pencilled in a bigger fall. However, the expected price-elasticity didn’t come into play and there was a fairly sharp fall of 4 per cent in the minutes of usage (MoU) which dropped to 505.

The management explained that it had undertaken an exercise to weed out unremunerative or irrationally –priced minutes. Had it not done so, the MoUs would have remained the same as in the September quarter. However, the upshot of the exercise was a rise in the revenue per minute to 64 paise.

Bharti is clear that it is not getting into a price war with rivals and that strategy should stand it in good stead. While there could certainly be some damage to the company’s earnings in the future given that competition is intensifying, Bharti has the strongest balance sheet in the business and that together with scale and high revenue share should help it to keep posting good numbers.

The company is already seeing success in its DTH venture and its triple play gameplan of offering voice, data and video services by leveraging a common infrastructure and brand should pay off.