Consumer space a bit better, policy still worrisome
Given that Bharti Airtel’s new India CEO Gopal Vittal has been with the company before—he was its marketing director in 2006—he’s familiar with the problems the country’s top telco faces, though it has to be said the operating environment then was nothing like what it is now. Customer churns were around 2-3% per month when Vittal looked after marketing for Bharti, they’re in the 9% range now; average revenues per user were around R450 per month in those days, this is down to a mere R177 today. The huge churn, of course, is why Bharti Airtel—all telcos for that matter—have to spend money to acquire 10 customers while just one eventually stays with the firm. It hasn’t helped that the policy environment is also dramatically worse—the government demand for payment for the ‘extra’ spectrum Bharti Airtel has, according to Kotak Institutional Equities, itself lowers the share price by R22 (yesterday’s share price was R342) and the proposal to refarm all 900 MHz spectrum with the older telcos will take away another R51. That is why Bharti Airtel’s share price has fallen from R347 on June 1, 2006, to R342 today while the Sensex rose from 10071 to 19804 during the same period.
Fortunately for Vittal, there has been some improvement in both the operating metrics as well as the policy environment, whether they hold and what he can do to improve things is the question. As far as the policy environment is concerned, the lack of bidders in the last auctions has forced the government to reduce the base price for 2G auctions by around a third already (as compared to what Trai had recommended)—a reduction of this nature means the drag on Bharti’s share price for the ‘extra’ spectrum, going by the Kotak estimates, could reduce by around R7. There is some rethinking on re-farming, but not much. Vittal’s, or Sunil Mittal’s, big call here will be whether to take the government to court on this, and then it depends on how things turn out.
On the operating metrics, while per user revenues continue to decline, monthly churn fell from 8.8% in Q1FY13 to 8.5% in Q2FY13 and, combined with overall consolidation in the industry after the Supreme Court cancelled 122 licences, selling expenses for Bharti Airtel fell more than 100 bps—as a result, Q2 ebitda margins rose 110 bps. The data piece looks much stronger with the share of such revenues in overall mobile revenues rising from 3.1% in Q2FY12 to 5.2% in Q2FY13. Rollout of Aadhar-based payments and money transfers within the country are a good source for bottom line enhancement, something Vittal will no doubt focus on. The niggardly 5 MHz of 3G spectrum is a dampener for data usage but Bharti’s BWA spectrum will make up for this.
The 800 pound gorilla will continue to be the regulatory overhang since Bharti can ill afford the costs of refarming given its debt-to-ebitda is already a high 2.8 times projected FY13 earnings. While markets may still give Bharti Airtel more debt if they see more consolidation in the market, the killer will be the government’s decision to charge high upfront auction-based entry fees while keeping unchanged the current 9-10% annual licence/spectrum charges—this means a 25-30% cut in current ebitda margins as the new system takes root over the next 5-7 years. Lobbying the government to change this will be Vittal/Mittal’s biggest challenge.