The Hindu Business Line : Bharti Tele-Ventures: Hold

Spurt in mobile connections and usage are encouraging. But any unfavourable reulatory moves, declining revenue per user and tariff wars may affect growth, says Krishnan Thiagarajan.

Regaining momentum in enlisting new customers for its mobile services.

DESPITE the sharp run-up in the Bharti Tele-Ventures stock recently, shareholders may hold onto their exposures.

However, shareholders need to impound the uncertainties surrounding the TDSAT ruling, the heightened competition and the slow pace of consolidation in the mobile market in their investment decision.

A creditable showing

Bharti Tele-Ventures (Bharti) has performed quite creditably in the first quarter ended June 30.

The challenges stemmed from the introduction of free incoming calls on the mobile platform, new interconnect regime from May 1 (which is under further review) and the stiff competition from limited mobility operators such as Reliance Infocomm and Tata Teleservices launching various schemes.

In this backdrop, on a consolidated basis, Bharti recorded total revenues of Rs 1,036.1 crore in the latest quarter up from Rs 538.7 crore in the corresponding previous period.

The post-tax earnings also moved up smartly to Rs 31.0 crore compared to a net loss of Rs 67.6 crore.

The performance on a sequential (quarter-on-quarter) basis was also fairly strong.

While Bharti's gross revenues inched up 3 per cent, its earnings (before tax and minority interest) rose 11 per cent and cash profit from operations by 8 per cent sequentially.

The operating margins also improved by about 2 percentage points to 27.9 per cent on a sequential basis.

The benefits of "economies of scale" in operations and lower operating expenses (down by 2.7 percentage points to 34.7 per cent of total revenues) have translated into improved operating margins.

The critical factors

The following are the key factors that will have a bearing on Bharti's performance:

Mobile net additions: Mobile services continue to dominate Bharti's revenue stream. Operating in 15 of the 22 circles in India, these services accounted for 63 per cent of the total revenues in 2003-04 first quarter.

As of June 30, Bharti had 3.75 million mobile customers, 22 per cent more than in the earlier quarter. More important, in the April-June quarter, the company managed to bring its net additions to all-India mobile subscribers in line with the trend in the past. Bharti had suffered on this score in the January-March quarter on account of a rapid headway made by BSNL (Bharat Sanchar Nigam) through its aggressive tariff packages.

Out of the all-India net additions in the latest quarter, Bharti walked away with 27.6 per cent.

This is significantly higher than 13.5 per cent net additions clocked by Bharti in the January-March quarter and the 25 per cent-plus addition in the October-December quarter of 2002-03.

Also, Bharti's market share, as a percentage of all-India mobile subscribers, went up to 24.8 per cent from 24.2 per cent on a sequential basis.

Rising minutes of usage: There has been a sharp rise in the average minutes of usage per customer among both post- and pre-paid categories.

While the minutes of usage (MoU) of the former went up by 15 per cent, that of the latter soared 53 per cent on a sequential basis.

This is partly attributable to the simple "Airtel 0,1,2 Plan" and partly to the free incoming call regime, which came into effect from May 1.

It may be interesting to see if this trend sustains over the next couple of quarters.

Tribunal ruling: The verdict of the Telecom Disputes Settlement Appellate Tribunal (TDSAT) on the question of limited mobility holds the key to the strategies of mobile players.

If the verdict paves the way for a level-playing field between mobile and fixed-line players, it will help bring greater stability to Bharti's revenues.

But if TDSAT allows full mobility to fixed-line players on terms unfavourable to mobile players, it may contribute to a slowdown in the subscriber base or quality of subscribers of the latter.

Declining ARPU: In the mobile arena, the declining average revenue per user (ARPU) is a cause for concern. Bharti's blended ARPU declined nearly 15 per cent to Rs 582 on a sequential basis.

Second, the rise in the percentage of prepaid subscribers to the total subscriber base to 81 per cent from 76 per cent in the previous quarter tends to raise questions on the stability of the subscriber base.

The so-called low tariff plans by Reliance Infocomm (such as its recent Hungama offer) is said to have garnered a million subscribers in ten days of its launch.

Similarly, the impact of the other aggressive launches by BSNL, MTNL, Tata Teleservices on the net additions of Bharti has to be seen in the next quarter or so.

Long-distance operations: The total revenues of Bharti's Infotel operations, comprising fixed-line, long distance and data/submarine cable operations, declined in the quarter ended June 30, 2003 partly on account of the introduction of the new interconnect usage charge regime.

In the coming quarter, both revenue and operating margin of the long-distance business of Infotel are likely to come under some pressure as Mobile First, an alliance consisting of BPL Mobile, Escotel, RPG Cellular and Spice Telecom, signed an agreement in mid-June to route national and international long-distance traffic through BSNL and VSNL.

This will impose pressure on Bharti to neutralise this impact through its fixed-line operations.

Consolidation: Unless policy changes pave the way for intra-circle (between operators in the same circle) mergers, further consolidation in the mobile sector may happen only at a slow pace.

Till then, players such as Bharti will have to make capital investments in network expansion and that may continue to exert pressure on the returns on capital employed on shareholder funds in the near term.

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