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Thursday, 09 August 2012 00:48
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Lower returns from Bharti for 10th straight quarter

When a management, in this case Bharti Airtel’s, cites adverse regulatory and tax developments instead of the usual higher interest/depreciation costs, you know you’re in for some bad news. But in the June quarter, while depreciation rose R288.8 crore, interest costs fell R230.3 crore and tax liabilities also fell R209.8 crore. And since Bharti Airtel has not, as yet, been asked to fork out thousands of crore for the ‘extra’ spectrum it has, it’s difficult to fathom what the telco is talking about—if Bharti Airtel renews its licences for a full 20 years, the costs will be around R30,000 crore; if it pays for the residual period, the sum will be lower. Turns out the adverse regulatory development Bharti is talking about is the regulator saying telcos can’t bundle their offers to, in Bharti’s words, ‘augment customer value’. Instead, they have to allow new consumers the option of whether they want SMS services—given the razor-thin margins on voice calls, the money telcos make is on SMS. Since the total impact of this, the company says, is R250 crore, it wouldn’t matter when the going was good; today, however, things are quite bad. Indeed, margins are so thin, and customer acquisition so tough, Airtel is even complaining about the hike in service tax rates from 10.3% to 12.36%—normally customers pay for the service tax but market conditions are such that Bharti is absorbing the hit.

Unlike in the last quarter when things were looking up, customer acquisition is once again slowing, ARPUs are down from R189 in March to R185 in the June quarter, though minutes of usage are up marginally. Not surprisingly, while customer revenues are up 3.3% sequentially, EBITDA is down 6.2% and net profit a whopping 24%. EBITDA margins are down a whopping 3 ppt and this is the first time the telco’s net profits have slipped below the R1,000 crore mark. Things are worse in dollar terms, more so since 70% of Bharti Airtel’s debt is dollar-denominated—with 28% of Bharti’s debt of less than a year’s tenure, FY13 is going to be a tough year for the company. Contingent liabilities have also shot up. As a result, Bharti’s delivered worse RoCE and RoE for the tenth straight quarter—RoCE fell from 21.6% in Q4FY10 to 6.6% in Q1FY13; RoE fell from 25.1% to 7.7%. The only saving grace is the better debt position with net debt-to-EBITDA falling from its peak of 3.4 times in Q1FY11 to 2.5 times in Q1FY13. Though Bharti Airtel was confident this would be Africa’s year with FY13 declaring profits as opposed to the losses of R1,329 in FY12, Q1 saw Africa revenues fall just a bit, by $5mn; EBITDA fell to $275mn (margins fell 2 ppt in the quarter) after rising steadily for several quarters, losses at $108mn haven’t been higher in the last one year.

Going forward, the news is bad since the hyper-competition combined with the economic slowdown means Bharti Airtel will be badly hit by the one-time licence fees for either the ‘extra’ spectrum or for its license renewals. Raising equity to pare debt is an option, but investors will wait for the SC verdict as well as the 2G auction for clarity. More than Bharti, the government should be worried about the portents for the upcoming 2G auction.

 

 

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