Thanks to the continuing pain from the Zain operations, Bharti Airtel’s net profits crashed 60% sequentially to R284 crore in the December quarter. This despite most of the telco’s India metrics looking up for some quarters now with the hyper-competition of the past dulling somewhat—ARPUs are up from R177 in Q2 to R185 in Q3 and the data piece of this is up from R43 to R47 while monthly churn is down from 8.5% to 5.9%. Apart from the $53 million December quarter loss for Africa, the biggest setback came from the sharp surge in financing costs, largely on account of the Zain purchase three years ago. Financing costs, up to 21.5% of ebitda as compared to 13.5% a year ago, were up 30% sequentially in December due to a R248 crore forex loss. ARPUs in Africa continue to fall, from $7.1 in December 2011 to $6.4 in September 2012 and to $6.2 in December 2012—monthly churns are down a bit to 5.1% in December 2012, but they’ve been at those levels for around a year now.
In other words, the Africa turnaround is taking longer than what was envisaged. A Citi research report points to Bharti Airtel’s attempt to replicate its minute factory approach is not working in Africa due to lower elasticities and unfriendly regulations on interconnect rates—the telco has now, Citi says, reversed some of the earlier tariff cuts and is now focusing on mobile money which it ignored earlier to its peril. While the telco’s management was looking at raising ebitda margins to 40% when it took over Zain, retaining the 25-26% margins looks tough enough for now—while Africa selling costs have fallen, network costs have risen over the year. India ebitda, despite the steep fall from 40% levels in 2010, were still at 30.6% in the December quarter.
If making money in even the medium term from the $10.7 billion Africa acquisition looks challenging, Indian operations look equally daunting from the point of view of the regulatory overhang—Bharti’s return on equity is down from 24.5% in 2010 to 5.6% in December. The telco needs to pay R5,200 crore on account of the ‘extra’ spectrum it holds, refarming costs for the 900 MHz spectrum are reckoned at R19,000 crore on an NPV basis and, if the government doesn’t quickly change its new policy of high auction-based entry fees combined with 10-12% annual licence/spectrum charges, telcos are in deep trouble. Considering Bharti Airtel already has a net debt of R64,282 crore, or 2.58 times ebitda, even a best-case scenario means earnings growth are going to be poor. Though both Citi and Kotak Institutional Equities have put a ‘buy’ on the stock, Kotak points out that incumbents like Bharti, Vodafone and Idea need a 20-25% increase in revenues per minute (RPM) over the next 3-5 years to mitigate the impact of just the base-case regulatory overhang—to put this in perspective, Bharti’s RPM fell marginally from 42.6 paise in the September quarter to 42.5 paise in December—in December last year, RPM was 44.6 paise. How consumers will react to hikes of this magnitude remains to be seen.