Bharti Airtel: Hang up

Regulatory changes and intense competition are weighing on the company

Bharti Airtel, a large telecom player with 23 per cent customer share, has been in a spot since last September. The entry of Reliance Jio has led to price pressure and industry consolidation. Additionally, regulatory changes have put pressure on revenue and earnings.

However, the company has been adapting reasonably well. It has the highest spectrum holdings (about 1,160 MHz.).

This helps the company to launch any advanced services swiftly — it is working to implement services such as VoLTE and 5G, pan-India.

It has also been strengthening its network through merger and acquisition deals — with companies such as Tikona Digital Networks and Telenor India to strengthen its presence in 4G services. It is also partnering with SK Telecom to improve network experience.

The stock has been on an uptrend, gaining 21 per cent over the last 12 months, boosted by new partnerships forged. At ₹388, it currently trades at 41 times its trailing 12-month earnings, compared with 32 times in the past three years.

This is pricey and there are looming near-term uncertainties. For one, the impact from Jio’s new feature phone launch remains to be seen.

Two, profit declined 75 per cent to ₹367 crore in the June quarter. This follows 72 and 54 per cent fall in the March and December quarters, respectively.

Also, there may be short-term pressure due to reduction of IUC and higher GST rate that may dent company earnings. Its interest cover has also slipped in the last few quarters.

Investors can, therefore, sell the stock and look for re-entry after there is more clarity.

Over the long term, the company’s leadership position, strategy to invest aggressively to increase market penetration, divestment strategy, expected growth in data demand and likely growth in average revenue per user bode well for the company.

Mobile pressure

Airtel provides 2G, 3G and 4G services in all 22 circles. While usage parameters are growing, mobile segment, which accounts for 77 per cent of revenue, has been under pressure.

The overall mobile data traffic in the industry increased nearly 70 per cent between June 2016 and June 2017. Airtel’s data customer base rose 6.2 per cent Y-o-Y in June 2017; the overall customer base increased 9.7 per cent Y-o-Y to about 26 crore; minutes on the network increased 34 per cent; data usage per customer jumped to 2,611 MB in June 2017 from 904 MB in June 2016.

Data usage per customer increased significantly — 189 per cent Y-o-Y. The data consumption has been on an uptrend for five years and is set to increase further. However, voice and data average revenue per user (ARPU) declined 20 per cent Y-o-Y and 23 per cent Y-o-Y, respectively, during the June quarter. For the same period, India’s mobile segment revenue witnessed a decline of 14 per cent Y-o-Y to ₹12,915 crore from ₹15,042 crore in the previous year.

Tepid growth

The company’s other revenue streams are picking up, but slowly. Business and tower infrastructure services contribute 11 per cent and 6 per cent of revenue, respectively, and these increased 10 and 4 per cent Y-o-Y, respectively. The tower segment will benefit from the constant demand to upgrade technology. However, the company has been selling its stake in this segment to improve cash flow.

Bharti Airtel also earns revenue from digital TV and home services. Digital TV service revenue increased 7 per cent Y-o-Y to ₹897 crore in the June quarter. The revenue growth of home services was 1 per cent. Increasing demand for data will aid growth in these segments, but how well it can compensate for the fall in mobile segment revenue remains to be seen.

Financials

The revenue downtrend seems to be accelerating. From 12 and 3 per cent Y-o-Y declines, respectively, in the March and December quarters, revenue declined 14 per cent Y-o-Y to about ₹21,958 crore in the June quarter. Sequentially, revenue improved 0.12 per cent, indicating a likely flattening of Jio impact.

For FY17, revenue declined 1 per cent to ₹95,468 crore. Profit decreased 38 per cent to ₹4,241compared to the same period previous year.

The recent regulation for reduction in the interconnection usage charge (IUC) can speed up the adoption of technology such as VoLTE but there are short-term concerns as profits may be dented. Debt-equity ratio has remained flat at about one time since FY15. Interest cover has however, slipped to 1.8 times, from 2.5 times in FY16.

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